SMBs See Hiring Increases, Salary Declines in 2008

Now that 2008 is officially over, SurePayroll has tallied up how the small business economy performed over the course of a year that many small to medium-size businesses are surely ready to be over with.

Throughout 2008, the Glenview, Ill.-based company helped more than 20,000 small businesses process payroll—$4.5 billion in payments to employees and contractors flowed through their payroll service in 2008.

SurePayroll’s Small Business Scorecard evaluates the trends in small business payrolls to determine whether small businesses are hiring or firing, whether salaries are going up or down, and if small businesses are becoming more or less reliant on independent contractors.

In short, SMBs increased hiring in 2008 but salaries fell, and the use of independent contractors increased the most since 2004.

Hiring Increases …

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Despite the economic woes of 2008, SurePayroll’s data showed small businesses managed to increase in size on average. For 2008, the company’s hiring index, a proxy for the average size of a small business in the United States, started the year at 10,893 and ended the year at 11,274 for a gain of 3.5 percent. Fourth-quarter hiring increases (growing 0.77 percent) slowed relative to the 1.1 percent hiring growth seen in the third quarter.

More troubling was that over the course of the fourth quarter of 2008, hiring increases declined with each passing month. October month-over-month growth was 0.28 percent, while November dipped to 0.26 percent. In December, SMBs posted the slowest growth rate of the quarter, at 0.22 percent.

Given this trend, SurePayroll President Michael Alter expects a further slowdown in hiring to continue in early 2009. “I don’t think we’ll see net declines, but for the first half of the year, the trend will probably be 1 or 1.5 percent,” he said. “The economy has not bottomed yet, but by that July time frame, we’ll start to see things happen that will allow a flip.”

… But Salaries Decline

The index found while hiring among SMBs grew marginally, salaries declined 3.1 percent in 2008. By breaking down statistics on a quarterly basis, acceleration in salary declines is apparent. Salaries declined 0.09 percent in the first quarter of 2008, but by the fourth quarter SMBs were showing a salary decline of 1.28 percent.

“It’s a classic case of supply and demand,” Alter said. “If you had asked me in 2006 or 2007 what was slowing SMB growth, it would be lack of supply of good workers. That part of the equation is gone now.”

Three factors are primarily increasing the supply of available workers, he said. One factor is the large number of enterprise-level companies laying off a considerable part of their work force. The second is the way the financial crisis has impacted retirees' or near-retirees' 401(k) packages, which has forced them to stay in the work force. Because of the number of baby boomers soon to be entering retirement, this population is larger than it would be otherwise.

The third factor is the percentage of working families that now need the other spouse to get a full- or part-time job. “That puts a whole other population of workers back in the work force,” Alter said.

While this has made life difficult for many small business employees, it has been good news for small business owners, who can pay less for talent now than they had to pay one year ago. At a time when many other business costs are rising, this is welcome relief, Alter said. “Any SMB owner who has the capacity to grow, this is a great time,” he said. “In a sense, we’re resetting wages, which is a big part of everybody’s cost.”

One thing that small businesses will do, however, is use more independent contractors, another trend Alter sees in the SMB marketplace in 2009.

Contracting Increases

In times of uncertainty, small businesses will hire human capital on a plug-and-play basis, Alter said. They will avoid bringing on full-time equivalents if they can avoid it. This is in part to avoid a longer-term liability of one extra full-timer on the payroll. But, it is also a way to lower expenses because employer payroll taxes and benefits costs are not required when a small business uses a contractor.

In 2008, use of contractors increased by 8.3 percent, the largest yearly increase since 2004. “A full-time employee is a much bigger commitment than a contractor. With a contractor, you don’t have to commit to health insurance, Social Security tax, all that stuff,” he said. “When you have so much uncertainly, you don’t commit to the future.”