Small Business Exemptions in Labor Law: Necessity, Economic Analysis and Legal Structure

By Stöhr, Alexander | Labor Law Journal, Summer 2018 | Go to article overview

Small Business Exemptions in Labor Law: Necessity, Economic Analysis and Legal Structure


Stöhr, Alexander, Labor Law Journal


I.Introduction

Due to their sheer number, small businesses play an important role in the economy. In the European Union, there are almost 23 million small companies as defined by the European Commission, i.e., companies with not more than nine employees. That equates to 92.8 percent of all companies.1 These companies employ more than 66 percent of all employees, which equates to 90 million people.2 With the structural change of traditional industrial countries, the economic importance of small businesses is rising.3 This structural change is characterized by three tendencies: (1) a change in the economic structure from the industrial sector to service sector, creating new corporate size categories and probably also more small companies; (2) a concentration within the companies, creating new structures with small companies (decentralization, outsourcing, downsizing); and (3) the increasing technical sophistication and computerization, with redundant workers finding alternatives often only in the small business sector.4 Small businesses also include start-ups, which usually start small. As is well known, several famous companies started in garages, among them Harley-Davidson, Apple, Microsoft, and Google.

However, small businesses are particularly prone to fail. Empirical data clearly demonstrate that age and size of companies have an influence on the likelihood that they will survive.5 Less than half of all start-ups do not survive the first five years. The number of failed start-ups is estimated at 40,000 to 90,000 per year.6 In Germany, small businesses dominate the insolvency situation; in the first half of 2017, 52.9 percent of companies affected by insolvency has generated sales of less than 250,000 Euro per year,7 and four out of five companies which have been declared insolvent in 2015 employed no more than five employees.8 This indicates that small businesses require special legal protection.

Size dependent exemptions are a common way to protect small businesses from cost burdens in many legal systems. In Germany, for example, protection against dismissal is only applicable in establishments with more than ten employees (? 23 Employment Protection Legislation), the right to work part-time requires more than 15 employees (? 8 Part-Time Work and Fixed-Term Employment Contracts Law) and the obligation to employ severely disabled employees requires at least 20 employees. This article first deals with the economic and legal necessity of small business exemptions. Thereafter, small business exemptions shall be analyzed economically.

At the core is the question whether they create incentives to dispense with hiring in order to stay below the thresholds. That would be awkward, since the employment potential of firms would not be fully exploited. In this context, several studies from different countries will be assessed in order to determine whether employers actually behave in this way. On the basis of the research findings, the legal structure of thresholds shall be debated. This will involve questions whether thresholds should refer to the establishment or to the business, or whether thresholds should be reduced to a few central numbers of employees or should be more wide-spread.

II.Necessity of Small Business Exemptions

When evaluating small businesses, one must have in mind that they are not a separate species.9 Despite many substantial differences from larger companies, there are also similarities. Small businesses are not a homogeneous group, but rather quite heterogeneous with regard to the specific size class, industrial sector, country, legal form and other features.10 Hence, general statements about small businesses are always somewhat imprecise. Nevertheless, there are a lot of common structural features which are described herein.

Small businesses and their owners are worthy of protection for several reasons. From an economic point of view, the cost burden hits them proportionally harder than larger businesses (sub 1. …

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