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The Lady in Red Tape

Sunday, September 1, 1996

Judy Hooper has two passions in life: doughnuts and the Occupational Safety and Health Administration (OSHA). Hooper loves doughnuts. That's one of the reasons she opened a bakery in Evanston, Illinois. It's a small shop, bringing in about $50,000 in profits annually. That's not enough to make her rich, but the challenge of running a small business and her talent for baking keep this 35-year-old Chicago native busy.

          Ask Hooper about OSHA, however, and her face glazes over with disdain. A 1994 inspection of her 30-person bakery by OSHA officials left Hooper with $13,000 in frivolous fines. Her infractions included a failure to warn employees of the hazards of household dishwashing liquid. To recoup the cost of the fines, she would have to sell 260,000 doughnuts, or 10,400 cakes, or 1,040,000 cookies.

          The national news media picked up her story, but OSHA refused to back down. So has Hooper. Though she paid the fine, she hopes to file a class-action suit against the federal agency, and is trying to enlist other OSHA victims to help her cause.

          She will find plenty of recruits. The bakery owner joins millions of women entrepreneurs across the country who are finding out just how intrusive Big Government can be. Indeed, one of the most overlooked issues in this campaign season is how the rising number of women business owners -- a third of all U.S. firms -- are being beaten down by Washington's overbearing laws, inflexible regulations, and arcane tax policies.

          If they mobilized, these women could be a potent force. The National Foundation for Women Business Owners (NFWBO) reports that the number of women-owned businesses in the United States will reach 8 million this year, employing more than 18.5 million people and generating more than $2.28 trillion in gross sales. Over the last nine years, NFWBO estimates, the number of women-owned firms has increased 78 percent. "The growth in the number of women-owned businesses continues to be dramatic across the nation," says Julie R. Weeks, NFWBO's director of research. But Sue Myrick, a first-term Republican congresswoman from North Carolina and a former small-business owner, knows first-hand how Big Government threatens this growth: "Most government-imposed regulations are duplicative, expensive, and time-consuming," she says. "If not checked, regulations can cripple a small-business owner's ability to compete in the marketplace."

A rising number of women business owners suffer from Washington's overbearing laws, inflexible regulations, and arcane tax policies

Attack on Nurses

          Consider Arlene Kaplan's Heart to Home, Inc., a New York company that provides skilled nurses for patients needing home health care. To accommodate their unpredictable hours, Heart to Home hires nurses as independent contractors. That means the nurses pay their own state, federal, and Social Security taxes.

          For the 70 nurses working for Kaplan -- and the thousands of others who labor as independent contractors in health care -- their employment status buys them flexibility. They are free to schedule their work around their families and other commitments, working anywhere from 5-hour to 60-hour weeks as needed. For the home health-care industry, independent contractors deliver affordable, quality care on demand.

          But to the IRS, the independent contractors who find jobs through Kaplan's company aren't independent enough. Based on a 20-point litmus test, IRS officials determined in a 1990 audit that Heart to Home's nurses legally were not independent contractors, but employees. Kaplan's business was assessed $250,000 in back taxes and fines for misrepresenting her workers to the IRS.

In the last seven years, the IRS reclassified 439,000 independent contractors as employees and collected more than $750 million in fines

          According to Sandra Abalos, a CPA, the test is "so vague and so subjective" that even tax law practitioners cannot determine who is an employee and who is an independent contractor. Heart to Home's lawyer Barry Frank believes the IRS is "targeting small businesses" by frequently auditing those who hire independent contractors. In the last seven years, the IRS reclassified 439,000 independent contractors as employees and collected more than $750 million in fines.

          So far Kaplan's business has accrued $20,000 in legal fees and expects another $40,000 in court costs when she goes up against the IRS later this year. Unlike most people engaged in legal jousting with this federal agency, however, Kaplan is the plaintiff: Through a complicated financial maneuver, she managed to sue the IRS.

          "If the government wins, they put me out of business," Kaplan says. "I don't own enough things in this entire world to pay off what they want from me." Even if Kaplan is successful, there is little hope she'll be reimbursed by the IRS for her legal fees. But forcing the agency to retreat would be a moral victory for her, and might make IRS agents a little less eager the next time around. Says Kaplan, "Maybe they will get off someone else's back in this business."

Tripping up Toddlers

          The IRS, of course, retains no monopoly on crippling regulation. A few years ago, Virginia resident Tanya Wallace started a small business called Toddlin' Time, a playgroup for stay-at-home moms and their kids. When she decided to franchise her idea, however, she ran up against Federal Trade Commission (FTC) regulations intended for larger companies.

          The FTC's "franchise rule" requires all companies, regardless of their size, to meet the same franchising requirements. So Toddlin' Time, which simply brings mothers and children together at dance studios and karate centers to play games, must meet the same auditing requirements as McDonald's, a company with billions of dollars in sales and operating costs, expensive equipment, and trained staff.

It's just easier to walk away from the business, says Tanya Wallace, than to deal with all the government regulations

          With just a few hours a week in administrative work, Toddlin' Time franchise owners can earn around $14,000 per year by enrolling 50 kids for six-week sessions at $36 per child. Wallace sees her idea as an excellent opportunity to combine family and business in a way that "feels comfortable to home-based women." The business gives kids a regular time and place to play together while stay-at-home moms get to know each other.

          It's an easy concept to market. But FTC franchising rules have stopped Wallace cold. To comply, she had to expend $15,000 in auditing and lawyers' fees just to become a licensed franchiser. But Wallace couldn't pass these high start-up costs along to the moms interested in Toddlin' Time, so she marketed her franchise below cost. That meant selling four franchising chains just to break even. Yet the fees did not end when her start-up was complete. The FTC requires franchise operators to update their financial statements every year and demands yearly audits to verify the changes.

          "We're not a big company," Wallace explains. "We can't afford the two or three or four thousand dollars each year to [prepare] FTC financial statements."

          After six years and 10 successful Toddlin' Time franchises, Wallace is putting the brakes on further expansion. She says she simply can't afford the fees and regulations. Despite these setbacks, Wallace has not totally given up on the idea of Toddlin' Time. She is pursuing a consulting practice to spread her idea, though not her logo, to moms around the nation.

          "There is little that you can do when you're up against Big Government and government regulations," she says. "It's easier to walk away, unfortunately, than to deal with all the regulations and expectations they have for you."

The Disablers

          When it comes to federal regulations like the Americans with Disabilities Act, however, walking away is not an option. Ask Karla Hauk.

          She and her husband and business partner, Richard Hauk, opened a 32-room Days Inn franchise in Wall, South Dakota. That was on July 1, 1993, about six months after the ADA went into effect. They thought they were ready: Following their franchiser-approved plans, they made two of their 32 rooms accessible to handicapped patrons and made the entrance of their motel accessible to wheelchairs. When they opened their doors, they became the first motel in Wall to provide rooms with accommodations for the handicapped.

          Their reward? Karla, Richard, their architect, their contractor, and their franchiser all are being sued by the U.S. Justice Department for failure to comply with ADA regulations. They are charged with "unlawful discrimination" toward individuals with disabilities.

          It all started with a whirlpool. According to the Justice Department's suit, the Hauks' two-story motel became a three-story facility when they installed a whirlpool in the basement. ADA regulations require that their motel have an elevator so that handicapped customers can reach every floor, as well as a ramp leading to the whirlpool. According to Karla Hauk, installing the elevator alone would cost more than $100,000, not including the increase in property taxes. Even if the owners removed the whirlpool and left the basement empty, they would still be required to build an elevator for handicapped access, because the Justice Department has declared the basement "occupiable space."

          In addition to the elevator, the ADA requires the Hauks to widen all of the bathroom doors in the nonhandicapped rooms. "If someone who uses a wheelchair . . . visits another guest in a non-accessible guest room, he or she will not be able even to enter the bathroom in that room," according to the suit.

          Changing the building's design after the fact looks nearly impossible. "Structurally we don't know how you can do it," says Hauks' lawyer Kim Ruckdaschel-Haley. "What do you do, just knock the place down and start over?"

          Karla Hauk says she believes there should be provisions for the handicapped, but that "a lot of this is unreasonable." She says if they had known then what they know now, they never would have built the motel. "We wish to God we never had. They will bankrupt us."

          Because the Hauks' business is dependent upon the seasonal tourist traffic at nearby Badlands National Park, they bring in profits of only $20,000 to $25,000 a year. "If Karla and Richard have to fight this, they'll have to go out of business," says their lawyer. In addition to substantial costs to comply with the ADA regulations, the co-owners could each be fined $50,000 by the Justice Department. When the ADA went into effect, it was unclear how the law would be implemented, says Ruckdaschel-Haley. "Karla and Richard in good faith thought they were doing everything they could."

          For ADA bureaucrats, it seems, everything is not enough. So says Debbie Shaffer, owner of an interior design firm in Walla Walla, Washington. Shaffer wanted to move her eight-year-old company, DGS Interiors, out of her home and into a downtown storefront to expand her business. The proposed Main Street site consisted of a 1,500 square-foot main floor for retail sales, with a raised mezzanine to serve as both a design studio and an administrative office.

          The problem? Contractors familiar with ADA regulations informed Shaffer that she had two options in bringing the bi-level facility up to code: either build an elevator to make the second floor accessible to the handicapped, or illogically and wastefully duplicate the design studio on the showroom floor.

          If a handicapped client wanted a design consultation, Shaffer says, she could easily accommodate their needs by bringing her portable decorating samples down to the lower level. But this was not good enough: According to the ADA, this special treatment would unfairly discriminate against the handicapped.

          To comply with the ADA codes, Shaffer would have to spend $150,000 to install an elevator, build handicapped bathrooms, and widen all of the building entrances and doorways. These costs were in addition to her other remodeling expenses. "I have a great amount of support for people with any kind of disability," she says, having grown up with a sister who is deaf. "But the government steps in and takes it too far."

          The results? "As a small business owner, it was black and white," Shaffer explains. "I couldn't afford it." Shaffer believes the downtown location could have increased her business by 50 percent, but because the regulations were "too overwhelming, with too many hoops to jump through," she was forced to scrap her plans to expand.

Doughnut Holes

          If the ADA's regulatory reach can be breathtakingly broad and intrusive, its rival in the universe of federal agencies is OSHA. Over the last two fiscal years, OSHA has recorded 234,409 violations and assessed over $158 million in fines.

          Responding to complaints by a disgruntled employee, OSHA held a three-hour inspection of Judy's Bakery, the Illinois mom-and-pop operation cited above. Nothing could have prepared Judy Hooper for OSHA's report, which cited her for, among other things:

  1. Failing to have a written "Material Safety Data Sheet" for "hazardous" chemicals used at the bakery. The only chemicals used at Judy's Bakery are household bleach and the sort of pink dishwashing liquid used in many homes. Both "chemicals" have clearly marked warning labels. OSHA was unmoved. Fine: $2,500.
  2. Failing to have a written plan for emergencies such as a fire. Hooper's shop, which is on the first floor and has four clearly marked exits, is inspected twice a year by the Evanston fire department. Local fire officials had never found any potential safety problems. Fine: $2,500.
  3. Failing to have an accident log on the shop's wall. At the time, her company had never had an accident requiring a workmen's compensation claim. The officials said this was irrelevant and argued that even if the log contained all zeroes (one for each day without accidents), it must still be hung on the wall. Fine: $500.

          At her informal settlement hearing with OSHA officials, Hooper was able to negotiate the fines down from $13,000 to $5,450. The catch was that Hooper was required to spend the balance of the fines due--approximately $7,500--on safety and health programs for her employees and to present proof that she had complied. Ironically, none of the citations was related to the employee's complaints, which were found to be baseless.

The Gentle Scrub Jay

          It was not the safety of employees that concerned the government officials who intruded into Anita Cragg's business, but the safety of the Florida scrub jay.

          Cragg, the owner and president of Space Coast Management Services, Inc., bought an existing subdivision in Country Cove, Florida, in 1992, with plans to expand and build new homes adjacent the previously developed site. Cragg's permits were in order and some buyers were waiting to build and settle in.

          Enter the scrub jay. While surveying for waterline extensions in 1993, officials from the U.S. Fish and Wildlife Service (USFWS) noted two jays flying onto Cragg's lots. Under the Endangered Species Act, the scrub jay, a 12-inch-long, blue and gray crested jay, is listed as threatened. The officials claimed that Cragg's planned development posed a potential hazard to land "suitable for occupation by scrub jays" and suspended construction on the site.

          According to Cragg, neither the USFWS, nor an independent environmental engineer hired by Cragg, could locate any scrub jay nests on her property. Her four-person company fought with officials from the USFWS for 18 months. Construction was frozen in the meantime, while Cragg's buyers had to continue paying real-estate taxes on the land.

          The Fish and Wildlife Service pushed Cragg into a corner. The agency forced her firm to purchase four acres off-site for every one on-site to compensate for the loss of potential scrub jay habitat. That little bargain cost her more than $100,000. It "didn't really help the scrub jay," she says, "because we really weren't hurting it in the first place."

An Irresistible Offer

          From 1964 until 1979, most of the commercial garbage in Seattle was hauled to one landfill located on the Tulalip Indian reservation. The site was closed and cleaned up in 1979, getting a clean bill of health from the Environmental Protection Agency. For the next 16 years, there wasn't a whiff of trouble from Seattle's former commercial dump.

          And then the EPA started talkin' trash: In 1995, the agency placed the Tulalip Landfill on the Superfund's National Priority List, a list reserved for the country's most serious hazardous waste sites. EPA Project Manager Cindy Colgate admitted that "sometimes we think a problem is taken care of when it's not."

          Apparently, this was one of those times. Superfund legislation allows the EPA to retroactively assess liability for environmental clean-ups. So the agency is asking Seattle's commercial businesses for approximately $40 million to clean up the landfill a second time.

          The EPA has made what it calls "settlement offers" to 208 Seattle companies, each of which hauled more than 200 tons of waste to the site. These offers allow companies the chance to "resolve their liability" by making payments of $11,070 to $185,497 to the EPA, according to Colgate. The official insists this "is not a fine," but instead an "agreement between the EPA and the parties which says we won't sue them regarding the site." It also protects the firms from third-party suits. Many attorneys are advising firms to pay the EPA and move on. So far, 187 parties have decided to settle rather than face EPA lawsuits.

          For some women-owned firms, the experience has been a primer on the power of federal agencies to impose their will. One such firm in Seattle, an import-export company whose owners asked not to be identified, agreed to pay their $11,070 fine. In total, Seattle's business owners are forking over $8,130,610 to the EPA--at least $30 million short of its goal. Suzanne Burke, the president of the Fremont Dock Co., which was not named in the settlement, says she believes the 208 letters are "just the beginning," and fears her company may be next on the list. She says the $40 million Superfund cleanup is "an absolute horror for small businesses."

Fighting Back

          There may be some legislative help on the way for business owners. Congress is seeking to clarify the ambiguity over the tax status of independent contractors versus employees, which bedeviled business owner Arlene Kaplan. Congressman Jon Christensen, a Nebraska Republican, is sponsoring a bill to simplify IRS rules for independent contractors. A spokesman for Christensen says the bipartisan bill could pass this year. Oklahoma Republican Don Nickles has introduced similar legislation in the Senate because, according to his spokesman, "hassle from the IRS" is the principal complaint from his constituents.

Nearly half of businesswomen surveyed believe that government policies make things "a little worse or much worse" for their firms

          But as more women start their own businesses, they are becoming more cynical about government's helping hand. Forty-seven percent of the women business owners surveyed in 1995 by the United States Trust Company believed that government policies had made things "a little worse or much worse" for their businesses. When asked to rate specific government policies, almost all of the female respondents (91 percent) said they feel most threatened by government-required paperwork, while 90 percent feel threatened by taxes on businesses, raw materials, final products, or services.

          The bureaucrats contend they're changing the system. Several officials separately claimed OSHA's new and improved agency has purged archaic enforcement procedures, yet all cited the same case to prove their reform: "Instead of fining someone for not hanging one of our posters about workers' rights," they say, "we offer them a poster to hang." While this may be a first step in dismantling the adversarial relationship between employers and OSHA, it demonstrates how federal agencies are not getting the message from business owners across the country. What happens, one might ask, if they don't hang the poster?

          Women business owners are bumping against a ceiling all right. But it isn't made of glass -- it's made of red tape.

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