Council struggles with how to pay for Office of Labor Standards

The City Council has put in a lot of worthwhile hours working on labor regulations to protect vulnerable workers — most recently on “secure scheduling” and paid family leave. They have also clarified that the Office of Labor Standards (OLS) is on point to enforce them. But the laws are meaningless if OLS doesn’t have the manpower to enforce them — and that means finding money.

This is a problem that’s been well known for a while; earlier this year the Mayor proposed an expansion of the department’s staff accompanied by an increase in the B&O tax and business license fees to find the $4.8 million that would be required to fund his plan. Since then two thing have happened: the price tag went up to $6 million (as disclosed in the Council’s CRUEDA committee meeting yesterday morning) and the Mayor decided to use those funding sources to help pay for expanding the police force.

The other funding alternatives that had been proposed involved increasing the business license fee by an additional $.01 per employee-hour, or a separate employee-hours tax levied on employers with 5 or more employees. But the complexity involved in calculating employee-hours makes those options prohibitive, so committee chair Lisa Herbold asked the Council’s own staff to look for another way to fund OLS.

Yesterday they came back with a new proposal: a regulatory fee on businesses. Fees are in some ways similar to taxes, but are tied to the city’s authority to recover the cost of regulation and must be directed at paying for those costs. In this case, it makes sense for a fee on businesses to be charged in order to pay for labor law enforcement. So then the question becomes how to structure it to raise $6 million in the least painful manner (understanding that B&O taxes and business license fees will also go up next year).

That would be a relatively straightforward  modeling exercise, except for one problem: the city doesn’t have accurate, up-to-date data on the number of employees per business within the city. The last reliable data set dates back to 2009, squarely in the middle of a huge recession, and it’s highly debatable how much it represents the employment situation today. But despite the caveat, the Council staff used that data to get a starting point for looking at different models.

In 2009, there were slightly over 67,000 businesses in Seattle, of which just under 63,000 had four or fewer employees. So there are around 5,000 businesses upon which the fee could be assessed.  $6 million works out to $22.47 per employee (by 2009 count; assume it’s different today, but in the same ballpark).  So a basic fee structure could be simply a company’s employee count multiplied by $22.47.  A 5-person company would pay $112 annually; a 50-person company would pay $1,123; a 250-person company would pay $5,617; and  a 20,000-person company (i.e. Amazon) would pay $449,341.

But tracking the exact headcount for each company is a bunch of work, and committee chair Herbold is interested in seeing if something even  simpler can be arranged just to keep the overhead down. For starters, they discussed using “headcount” instead of “full-time employees” or “equivalent full-time employees” because it eliminates a bunch of math — a good start. Then they looked at whether to have a flat fee for each “tier” of companies grouped by size. In a simple 3-tier model where the fee is based on the midpoint of the tier, it looks like this:

ols tier 1

The problem with this model is how it handles the extremes: it’s very expensive for small companies (and the bottom end of the range for each tier), and it’s super cheap for Amazon and the other large employers in Seattle.  So they also looked at a variation, in which the $22.47 per-employee figure is discounted at the low end and increased at the top end, to re-distribute the burden to the companies that can afford it.

ols tier 2

That looks much better for 5-person companies, a little better for 50-person companies, slightly more fair for Amazon, but awful for a 250-person company. And that of course is the problem with flat fee for tiers; there are weird artifacts. If this were codified into law, I suspect there would be a lot of 249-person companies in Seattle because that 250th employee is awfully expensive. The tiers are also a little arbitrary and  goofy as they are currently proposed above: the largest Tier 1 company is 10 times larger than the smallest; the largest Tier 2 company is five times larger than the smallest; and the largest Tier 3 company is at least 80 times larger than the smallest. The tiers could of course be split further to try to make the steps more incremental. In the meeting, there seemed to be a sentiment that basing it on exact headcount, rather than tiers, would be a better approach if the right data can be collected — despite the extra work involved in calculating fees.

Herbold asked the Council’s staff to follow up with the Department of Financial and Administrative Services (FAS), the keeper of all good data sets in city government, to look into getting 2016 data to validate these models. That’s complicated by the fact that business licenses are renewed annually in December, so it might be a while before accurate data could be obtained (though the State of Washington might already have it). That doesn’t actually prevent Seattle from implementing this kind of system, but they would be guessing at the amount of revenues it would produce and would need to adjust the rates for future years. By law the city is not allowed to over-collect and spend the excess on other needs, but they believe a good-faith effort to collect the right amount and tune it from year to year is legal and proper.

Beyond attempting to get accurate data, Herbold plans to circulate the policy options both internally and externally to gather feedback. The business community is sure to hate the idea; they have already stated their opposition to raising the B&O tax and the business license fee, so they will no doubt quickly voice their opposition to a new regulatory fee.

One last note: it’s curious that the Mayor hasn’t come forward with a funding proposal for OLS expansion, since the expansion itself was a proposal from his office. The Council is doing that on their own right now, which might lead to conflicting proposals when the 2017-2018 budget development begins in earnest later this summer. UPDATE 6-17: the Mayor’s Office reached out to me to point out the Mayor’s press release on April 25 saying that he intends to fund OLS from the General Subfund; however, he didn’t specify where cuts in expenses would be made, or additional revenues found, to balance that out. So it isn’t a plan yet, just a vague promise for one.