Business owners call for direct wage subsidies to prevent a cascade of layoffs, bankruptcies

Some business owners are calling on the government to consider changing up one of the primary tools it's chosen to deliver money to Canadians facing hardship because of the COVID-19 pandemic.

They say the best way to inject money into the economy would be through a wage subsidy paid to employers so that they can keep staff employed — rather than an EI-based scheme that only helps individuals after they're out of work.

Dan Kelly of the Canadian Federation of Independent Business said the outlook for small- and medium-sized enterprises in Canada right now is bleak. Some CFIB members were in tears on a conference call yesterday — and the results of a new survey of business owners show why.

"A third of small business owners said that if sales dropped significantly they would be able to hang on for less than a month before the business is permanently closed," said Kelly, adding that CFIB defines a "significant" drop as less than 50 per cent.

"A third of small businesses have said that their income has dropped by 75 per cent or more, with a fairly large number saying that their business income has dropped to zero. And that was before Ontario and Quebec took additional steps to close another swath of the business community."

A drop in the bucket

The government of Canada has offered businesses a 10 per cent wage subsidy, up to a maximum of $25,000 per company, to help them retain their employees.

Kelly calls that sum "a drop in the bucket of what is absolutely necessary right now, and certainly a fraction of what is happening in Western Europe."

"That wage subsidy doesn't even really cover the cost of the payroll taxes of Employment Insurance and CPP at this time," he added. "Similar programs in England, Denmark and elsewhere in Western Europe subsidize employers that are able to keep their staff on to 75 per cent, 80 per cent, even 90 per cent of their wages. That's the kind of approach Canada desperately needs."

In Britain, employers can receive up to 80 per cent of the cost of wages for any employee they keep on, up to a maximum of £2500 per month (Cdn$4250).

Carolyn Fairbairn, head of the Confederation of British Industry, welcomed the move as "the start of the U.K'.s economic fightback — an unparalleled joint effort by enterprise and government to help our country emerge from this crisis with the minimum possible damage."

Ireland today also announced a wage subsidy of up to 70 per cent. Kelly says Canada should follow the European example.

"One of the reasons we like the wage subsidy approach that's being used in Europe is that the employee doesn't lose their job," he said. "Their pay also will come to them an awful lot more quickly.

"Employees need these dollars today. If we keep the employer-employee relationship intact, the employer can then keep the money funnelled to the employee, and the employee won't have the stress of losing their job."

Not all businesses can get the subsidy

Many Canadian business owners find the 10 per cent subsidy insufficient — while some have been dismayed to learn that they're barred from receiving it.

The published guidelines say only companies that are incorporated can apply to have their payrolls subsidized. Toronto tax advisor Gerry Campbell says of the roughly 500 small businesses he has as clients, only about 50 are corporations.

The same is true of his own business, which is a sole proprietorship.

"Most small businesses in this country are not incorporated. When announced by [Canada Revenue Agency], I was willing to support our staff to continue to receive their wages — we are working in two groups each doing 14 days on and 14 days off — during this COVID-19 epidemic.

"Today, as a result of no subsidy, I am looking to lay 11 of my 13 employees off, effective end of next week, if there is no financial help for sole proprietorships."

On Tuesday, Prime Minister Justin Trudeau acknowledged the desperate situation some businesses now find themselves in. "Small businesses are temporarily closing up shop," he said. "Hotels and restaurants can no longer accept guests. Some people are not getting paid. Others are worried about their job."

When asked why he chose to put payments through the EI system, or through the parallel Emergency Support Program, Trudeau said his government felt impelled to act quickly to forestall an economic implosion.

"When you're trying to help get money out to people, speed is of the essence, especially in an unprecedented situation like this one," he said.

But the union that represents Service Canada workers is warning of lengthy backlogs in processing nearly 930,000 new claims that entered the EI system in one unprecedented week.

And economists question whether using the EI system actually would be as fast as, or faster than, simply helping employers to make payroll.

Pedro Antunes, chief economist of the Conference Board of Canada, said he hopes the government will make changes to the system in its next wave of pandemic measures.

"The government has talked about phase one in terms of this first set of measures at the federal level. We may have another phase where we see more of an approach where we try to get away from it being the government that transfers the money, to motivating employers to keep their staff and keep paying them through their own payroll," he said.

"We'll see how that evolves, but I think we're probably going to see more before this is over."

Trust is an issue

One problem small businesses face in making their case is that big businesses have already squandered a lot of public trust by misdirecting public subsidies in the past.

The 2008-2009 financial crisis produced many stories of big corporations using taxpayer bailouts not to preserve jobs, but to buy back stock or line the pockets of executives and shareholders.

Canada also has examples like Bombardier, which in 2017 gave over US$32 million in bonuses to half a dozen senior executives after receiving billions in loans from the federal and Quebec governments, and after announcing that it would lay off 14,000 workers.

"Here's a company that basically went begging to the province and the federal government for money, saying that if you don't give us all this money, we're going to lay off all these workers," David Baskin, president of Bay Street investment firm Baskin Wealth Management, told CBC News.

The executives' behaviour embarrassed the very politicians who had signed off on the bailouts. Quebec Finance Minister Carlos Leitao declared himself "shocked." Bombardier's top brass ended up having to defer the bonuses to 2020.

A risk of fraud

In order to avoid that kind of situation, some European economists have argued that wage subsidy plans there will need tight controls to prove that the money is actually going to payroll. There is a risk of fraud — of small business owners creating "ghost" employees, or simply pocketing the money and laying people off anyway.

But the government of Canada has made it clear that it is not overly concerned about fraud in EI claims at the moment, and most economists agree that speed is more important than tight accounting controls right now.

"That's the kind of approach Canada desperately needs," said Kelly.

"I think if the government does that as a temporary measure, it will in fact be temporary. What worries me is that the only option that employers right now have is to lay off staff, and once those employees are put on Employment Insurance, a good chunk of those employees are not going to come back or are going to come back to employers really slowly, as we try to put the puzzle back together."