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The High Cost Of Legislation

The new administration of Gov. Sila Calderon must face the dilemma of balancing fair and just employee benefits with reasonable transaction and operating costs that will allow small businesses to survive.


February 2, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

Small business owners peeking through a crystal ball can look forward to pledges by the Calderon administration to boost their bottom line, as they adapt to higher costs resulting from measures approved in the closing days of the administration of former Gov. Pedro Rossello.

Although no specific legislation addressing small businesses has been announced as of press time, CARIBBEAN BUSINESS reviewed the Popular Democratic Party (PDP) platform presented during last year’s election campaign and discussed it with the new executive and legislative leadership seeking clues as to what this important sector of the economy can expect.

CARIBBEAN BUSINESS also analyzed legislation approved in the last months of the Rossello administration–such as the breastfeeding law–that directly affects small businesses.

Puerto Rico boasts more than 100,000 small businesses, which generate 63% of all new jobs and account for 48% of the economy (CB, July 13, 2000). The concerns of small businesses include competition against mega-stores, better access to municipal town centers, and economic incentives to keep them afloat in competitive financial waters.

"We will introduce legislation to provide municipalities with additional tools to improve and develop our traditional urban centers," said Sen. Juan Cancel Alegria (PDP-Carolina), chairman of the Infrastructure, Technology and Commerce Development Committee. "We are working on a series of initiatives which we will introduce in the next few weeks."

A peek at the future

One measure expected to be included in the current legislative session is Senate Bill 193 of March 7, 1997, which was filed by then- minority PDP Sen. Antonio Fas Alzamora, who is now Senate president.

The bill–which never made it to the floor under the New Progressive Party (NPP)-controlled Senate–amends the Commercial and Agriculture Credit and Development Corporation Law to create the Family-Owned Business Program. The program is aimed at helping to establish and develop family-owned businesses in Puerto Rico.

Another initiative included in the PDP platform that directly affects small businesses is the Urban Centers Reconstruction Law. This law seeks to repopulate and revitalize traditional urban centers with housing developments, community, parks, and recreational areas.

This would entail the implementation of tax credits, exemptions, pre-approved permits and other incentives for developers as well as buyers of these housing developments.

Calderon also has promised to create Commercial Improvement Districts to support business owners in their efforts to revitalize commercial areas in urban centers.

"Legislation will be promoted to review and improve the use of such mechanisms, as well as provide orientation, support, and technical assistance aimed at their implementation," the PDP platform said.

To ease the problem of access to town centers, making them more attractive to consumers, Calderon has vowed to promote construction of multi-level parking structures.

"We have to find ways to attract businesses and industries to our traditional urban centers," said Alegria, who is in his first term as senator. "But at the same time, we must provide the infrastructure needed to repopulate urban centers so that businesses can prosper."

Promoting small businesses

The job of improving the lot of small businesses in Puerto Rico falls squarely on the shoulders of the Commerce Development Administration (CDA) now headed by Carlos Santiago.

"One of my priorities is to strengthen the agency," Santiago said, adding that the perception of the small business sector in recent years was that the CDA was not doing enough to develop this key economic sector.

Corazon de Pueblo (heart of the town)–the agency’s traditional urban center redevelopment program, equivalent to the Main Street program in the U.S.–operated with a $500,000 annual budget for the entire island. "That, obviously, is not enough," said Santiago.

Santiago compared what the CDA’s budget did for the entire island and what the Corporation for the Economic Development of the Capital City (COFECC by it Spanish acronym) accomplished for the city of San Juan.

"Last year alone, COFECC paid over $1 million in micro-loans used in the traditional urban centers of Rio Piedras and Santurce. And that doesn’t even touch the tip of the iceberg," said Santiago.

Santiago was COFECC’s executive director during Calderon’s four-year term as mayor of San Juan.

Calderon has promised to file legislation that will give the CDA Cabinet-level standing and hike its budget. Originally a department provided for in the Commonwealth constitution, the agency was restyled as an administration under the Economic Development and Commerce umbrella department following the government reform of 1994.

Corazon de Pueblo and other CDA programs such as the entrepreneurial school, Valempleo (a wage subsidy program), and Informercio (a statistical database of all businesses in Puerto Rico) are being re-evaluated by the new CDA administrator, to ensure that they respond to the needs of the small business sector.

"We are undergoing an evaluation of all administrative processes, including those involved with the agency’s budget, accounting, and legal aspects, which are very important for the management of an agency such as this one," said Santiago.

Both Alegria and Santiago want to strengthen ties with the various professional and merchants associations, and have already planned a series of meetings to listen to their concerns.

A mixed bag

As the new administration determines what does and doesn’t work, and as it moves to implement its own agenda, small businesses will have to sort through a mixed bag of new laws left by the outgoing Rossello that directly affect small businesses.

Two of them, will represent higher operating costs that will hit harder small businesses’ bottom lines.

One such law is the amendment to the Puerto Rico Maternity Leave Act, increasing the eight-week maternity leave compensation for female employees from 50% to 100% of her pay. The other is the Breastfeeding Leave Law provides female employees a total of 30 minutes per day to breastfeed or extract breast milk during working hours.

Ironically, a third law–the Regulatory and Administrative Flexibility Law for Small Businesses–created the position of Small Business Ombudsman and its bylaws.

The first two new laws increased employee benefits–placing a heavier burden on employers –while the third creates a "defender of small businesses" to make sure small businesses are not overly regulated by government agencies, among other things.

A study made by the Puerto Rico Chamber of Commerce (PRCC) revealed that the average annual cost per employee will increase from $1,530 to $3,060 with implementation of the law that provides payment of 100% of salary during maternity leave.

That represents an additional $16.7 million a year that must be doled out by the private sector. Another study by the Estudios Tecnicos research firm places that figure as high as $45 million to $50 million.

Despite its questionable economic impact to the private sector–and especially on small businesses, which have less leeway to accommodate to such hikes in expenses–the measure was approved and signed into law.

"In addition to the added costs associated with the amendment to the Maternity Leave Act, many female employees take their vacations along with their maternity leave, creating additional expenses and challenges for small business owners. This affects a business’ operation and workflow," said Jose Reyes, technical and legislative vice president of the PRCC.

When it comes to the breastfeeding law, employers who comply with the legislation, and give female workers the benefit, are entitled to a tax credit equal to one month of the employee’s salary.

But when the employer refuses to allow an employee to breastfeed or extract breast milk at the workplace, the worker can sue to guarantee her rights. The employer then can be fined up to three times the employee’s salary for each day she is refused the right provided under the law.

"This act will definitely impact small businesses, especially those with one or two employees. The larger businesses will be less impacted, because they probably have the facilities and the manpower to upset any inconveniences," said Reyes.

The high costs of legislation

For Estudios Tecnicos President Jose Joaquin Villamil, laws such as the maternity leave pay and breastfeeding ones should be assessed on their costs and implications to local business and Puerto Rico’s competitiveness before they’re approved.

"This type of legislation increases what economists call transaction costs," said Villamil. "And transaction costs in Puerto Rico are already very high."

Transaction costs refer specifically to costs that businesses incur, but that are not directly associated with their operation. Some examples of transaction costs, which affect a company’s total cost structure, include employee benefits, permits, regulations, and access to infrastructure access (electric, water, phone, and telecommunications).

"Large corporations in Puerto Rico have very high value added components–pharmaceutical, electronics and so on–and are thus better prepared to absorb higher transaction costs," said Villamil. "But when you’re operating with very low profit margins, like most small businesses are, the increase in transaction costs is more significant. And the damage to our competitiveness is also there."

The problem is that adding all the different pieces of legislation and regulations together hikes already high transaction costs and hikes the economic activity costs of a particular location, he added.

When a country has higher costs, then it becomes business unfriendly, said Villamil. "One of the reasons companies may shut down operations or decide not to establish on the island is the fact that costs here are much higher than in other places. Puerto Rico has a very competitive environment."

According to Villamil, reviewing the high transaction costs in Puerto Rico should be a priority, if we want to remain competitive. "We will have to deal with that," he said.

A matter of perception

For Dunia Macgregor, president of the Small and Medium Size Business Committee of the PRCC, the problem is largely one of perception and experience.

"Most legislators are not business owners and although well intentioned, they often end up approving legislation that when looked at in the business owner’s perspective, may create more harm than good," said Macgregor, who also is managing partner of Macgregor Electric, an electrical engineering contracting firm.

Macgregor believes this happens because legislators are not aware of what most small business owners must do to survive. "Being a business owner involves a lot of risk and sacrifice. And now we have more self employed individuals that are starting their own businesses."

The strong economy the island has enjoyed during the past eight years–combined with recent advances in information technology and the Internet–has created a fertile environment for more people to start their own businesses. Individuals have walked out of their office jobs to start up a business at home.

"This group of self employed individuals–usually a husband and wife team–are creating jobs by leaving their office positions, and at the same time opening job opportunities as their home-based businesses expand," said Luis Cruz, president of the PRCC’s Legislation Subcommittee. "We must help–not hurt–the sector that is generating most of the island’s new jobs and economic activity."

A costly protectionist mentality

Thus, approval of labor legislation that places a heavier burden on employers and their businesses–whether small or large–worries the private business sector, including PRCC members. The roots of the problem, however, are not new.

"This dates back to the 1940’s, when a lot of pro-labor legislation was passed," said Reyes. "Back then it was justified. But that paternalistic, protectionist mentality has continued in our legislative chambers–despite the fact that we live in the fast-paced world of the Internet and globalization."

A study performed some 20 years ago indicated that employee benefits in Puerto Rico represented 22% of the payroll, while in the continental U.S. that percentage ranged from 8% to 10%. "And that study is still current," said Reyes.

"When you add legislated costs to fringe benefits paid by the employer, it represents 22% or more of the payroll. That’s a disadvantage, and with the newly enacted legislation, that percentage will increase. There is no entrepreneurial mentality in our legislative chambers," said Reyes.

Already local private sector employees enjoy far more legislated benefits than our stateside counterparts, added Reyes. "Mandated benefits have the effect of increasing production costs, reducing the capacity and the opportunity of local businesses to compete in the global market," he said.

Puerto Rico workers already benefit from maternity leave, sick leave, vacation leave, jury duty leave, double time for overtime, and termination leave–far more than most states, Reyes said.

Needs of children and women prevail

In explaining the reasons for approving the controversial legislation, legislators of the past NPP administration said the needs of children and women weighed more in the end.

"When the moment came to choose who to benefit the most, the needs of children and women prevailed," said Rep. Jose Chico (NPP-at large), former chairman of the House Commerce Committee.

In the case of the Breastfeeding Leave Act, legislators thought it would benefit society to allow working women to breastfeed, because of its medically proven benefits to the child, he said.

"But we also took businesses into account, imposing only a short 30-minute period, instead of what was originally proposed, which was a one-hour period," said Chico. "We also took into account the fact that mothers don’t have kids every year."

According to Chico, the average number of children in a household has dropped throughout the years, standing currently at 2.5. When the moment came to decide, legislators weighed all factors, and decided in favor of children’s health, Chico added.

As for the Maternity Leave Act, Chico said it was approved to provide social justice to women working in the private sector, who were expecting a child, so that they could receive their full salary when they needed it most.

"There was an inequality between the maternity benefits enjoyed by women in the private and public sectors," said Chico. "The amendment resolved that inequality, providing working women in the private sector their full salary during their maternity leave, just like female employees in the public sector did."

The problem with fast-track legislation

One of the biggest problems small businesses face with the approval of such legislated benefit is that when these are implemented immediately they place businesses in a difficult situation. For one, they must deal with unexpected additional costs not included in their budgets.

"Many legislators don’t realize the problems small businesses face when they mandate additional costs to small businesses not envisioned in the budget," said Macgregor. "Our budgets get out of whack and many times we end up with losses."

Cruz, who also runs his own CPA firm, said if legislation will add costs to small businesses, then laws should take effect in a reasonable time, not immediately. "That way, small businesses can be better prepared to implement the new laws."

We must create awareness among our legislators on how the small businesses and the private sector work, so that they can better understand the implications of their actions, Cruz added.

Laws may hurt female employees

Some business owners said the increase in labor costs related to female employees–resulting from the maternity leave and breastfeeding laws–could discourage the hiring of young female workers when compared to other equally qualified candidates.

"What these laws do in the long run is to become counterproductive to those who it aims to benefit," said Cruz. "If you have two equally qualified candidates–a man and a woman–the man will come out winning based on labor costs." Local and federal laws prohibit discrimination based on gender.

Employers do want benefits for their employees, because happier employees are more productive, but there must be a balance, said Macgregor. "We don’t want to give the impression that the private sector is against employees obtaining more rights and better benefits. But we must reach a balance that is fair for both sides."

. Details On Maternity Leave And Breastfeeding Laws

Following are the details of the laws approved under the prior administration of Gov. Pedro Rossello that have to do with maternity leave, breastfeeding and the creation of a Small Business Ombudsman.

The Maternity Leave Act

Commonwealth Law No. 425 of October 28, 2000 amends Puerto Rico’s Maternity Leave Act (Law No. 3 of March 13, 1942, as amended) to increase the eight-week maternity leave compensation for female employees from 50% to 100% of her pay.

If due to a miscalculation in the delivery date, a working mother has not yet given birth after four weeks of maternity leave, the amended law provides that full maternity leave benefits shall be extended once the working mother gives birth.

If post delivery complications arise that prevent the working mother from returning to work four weeks after giving birth, the amended law orders the employer to extend the resting period to a maximum of 12 additional weeks, as long as she presents a medical statement to that effect. In such cases, the working mother does not receive monetary compensation for the additional time, although her job is secure.

The law became effective immediately.

Prior to approval of Law 425, the Maternity Leave Act was amended to extend its benefits to adoptive mothers (Law No. 54 of March 10, 2000), which extended the benefits to more female employees.

The Breastfeeding Leave Act

Commonwealth Law No. 427 of December 16, 2000–the Law for the Regulation for Breastfeeding and Breast Milk Extraction Period–regulates the amount of time that full-time working mothers are allowed for breastfeeding at a nearby or in-house day care facility.

It also regulates the extraction of breast milk at the workplace, providing 30 minutes, or two 15-minute periods during each work day for such purposes.

The law became effective immediately.

The breastfeeding period is valid for 12 months from the moment the mother returns to work, usually right after her maternity leave. When the child is four months old, and again when it is eight months old, the mother must provide her employer with a medical statement certifying that she has been breastfeeding in order for her to continue taking the benefits as provided by law.

The law also provides a tax credit for employers to extend the benefit to their employees. The credit is equal to one month of the employee’s salary. If the employer refuses to allow an employee to breastfeed or extract breast milk at the workplace, the worker can sue to enforce her rights. The employer then may have to pay a fine up to three times the employee’s salary for each day she is refused the rights provided by the law.

In some ways, the tax credit that Law 427 provides minimizes the blow to small businesses, but does not eliminate it entirely, said Jose Reyes, technical and legislative vice president of the Puerto Rico Chamber of Commerce (PRCC).

"Who’s going to run the cash register or wait on customers at your business when your only employee needs to breastfeed or extract her breast milk? It does place a burden on small business owners," said Reyes.

Reyes complained that Law 427 was approved without public hearings or studies to analyze its impact.

Regulatory and Administrative Flexibility Law for Small Businesses

Under Commonwealth Law No. 454 of Dec. 28, 2000, government agencies must revise their regulations to prevent small businesses from being over-regulated.

This law will become effective 90 days after its approval, that is, in March.

Law 454 also allows penalties imposed on small businesses to be adjusted according to their business size. The law also creates the position of Small Businesses Ombudsman, who will be appointed by the Citizens’ Ombudsman.

Each government agency must make available to the public, as well as register with the State Department and with the Small Business Ombudsman, all the regulations under its jurisdiction, plus those it plans to establish in the future.

At the same time, Law 454 requires government agencies to reduce the frequency and the amount of reports they require from small businesses, unless these are of vital importance for the protection of health, security, and the environment, or prevent the agency from implementing its programs.

The agencies must send a report to both the governor and the Small Business Ombudsman, detailing how they plan to reduce the amount of reports they require from small businesses.

Law 454 also establishes a mechanism through which small business owners can voice their opinion on possible regulations that might affect them, and even contribute to improving such regulations. This will be done through public hearings.

Under the new law, government agencies must prepare an economic study on the effects that new regulations might have on small businesses and make them available to the public. Law 454 also requires government agencies to revise their regulations every five years. That way, agencies can determine whether existing regulations need to be changed or eliminated to minimize any significant economic impact they might have on small businesses.

The Small Business Ombudsman (SBO) will be responsible for implementing the new law. The Citizens’ Ombudsman is responsible for providing the required financial and administrative resources so that the SBO can perform his or her duties.

This Caribbean Business article appears courtesy of Casiano Communications.
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