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As the holiday season approaches, early predictions are in: For many businesses, it won’t be the most wonderful time of year. Continued labor shortages are expected to plague businesses during their busiest season, most notably in retail but also in the restaurant, tourism and hospitality industries. Combined with delivery delays and supply chain bottlenecks, job openings have reached an all-time high of 10 million in the U.S., according to the Department of Labor. These are positions businesses desperately need filled and have placed added pressure. And for some, it’s not only pressure but an ability to maintain critical operations necessary to drive much-needed revenue. This is alarming since even prior to the holiday season businesses have experienced the fallout.
The NFIB Small Business Economic Trends Survey found that over 60 percent of business owners reported a shortage of labor with over 20 percent characterizing the shortage as “critical” to business operations. Also, over 80 percent reported a loss of sales due to the shortage with 19 percent of those being serious losses. Recent headlines have communicated the impact on large companies. Chic-fil-a restaurants in Alabama have closed early or closed their dining rooms amid the crisis while other fast-food chains have pivoted to drive-in only. 7-Eleven Franchises National Coalition, representing about 7,200 U.S. locations, warned that the shortage may make 24-hour operations impossible. In addition to closures or reduced hours, some businesses, like CVS and Walmart, have increased their wages or provided bonuses. It’s small businesses, however, that are struggling the most.
The release of a U.S. labor market report in August showed workers quitting at a historic level, but that the rates were much higher among small businesses with fewer than 50 employees. While larger businesses can offer robust benefits and higher wages, their smaller counterparts don’t always have the resources to do so—or the financial foundation to withstand decreased operations, closures or a revenue reduction for a sustained period.
The Problem with Labor Shortage Solutions
When it comes to solving the conundrum, resources such as the Workforce Institute have provided recommendations to procure workers including:
- Increasing wages
- Increasing employee hours and/or productivity
- Scaling back operations
The problem with these solutions is that in many cases (particularly with small businesses), even at an increased wage, businesses still report a struggle to recruit and retain employees—or to compete with the sign-on bonuses of larger companies. While increasing employee hours and productivity could help cover shortages, this will create a strain on current employees who are already feeling the stress of being understaffed. And scaling back operations will only further impact businesses’ bottom lines.
A labor shortage is tricky when it comes to insurance policies. A business can insure against the loss of key personnel, but that typically applies only to central decision makers, chief executives or highly skilled individuals. There is also business interruption insurance that can help sustain a business when it’s unable to operate, however, for most businesses, the labor shortage hasn’t created an inability to operate—but a detrimental revenue or profit loss due to decreased hours or higher wages. Also, for an insurance claim to be paid, there must be a “triggering event” which is difficult to pinpoint with the current labor challenges.
Relying on a Stronger Financial Structure
Between tactics that fall short and the inability to insure against a labor shortage, it may seem impossible to solve or even mitigate the fallout of this threat. However, whether large or small, it’s businesses with strong financial posture are better equipped to navigate and remain viable during crises whether it’s a pandemic, natural disaster, supply chain disruption, litigation, or in this case, a lack of workers.
A survey of over 1,100 small businesses by Goldman Sachs found that 44 percent of small businesses have less than three months of cash reserves, leaving them vulnerable to risks. The other culprit preventing a stronger posture is too much debt in addition to an inability to access funding or capital, especially for small businesses. What’s worse is that many small businesses experience all three missteps which leads to a perfect storm during a crisis, and all too often leads to a failure in remaining viable.
A Captivating Solution
There are certainly strategies and steps businesses can take to be better equipped for survival, but one financial strategy that addresses this while also providing a robust approach to risk management and a valuable second profit center is captive insurance. It was once considered an opportunity only for Fortune 1000 companies, but today, many mid-market and small businesses alike can benefit from this strategy. With captive insurance, businesses own their own insurance company which turns insurance premiums that would otherwise be a sunk cost into profit once claims are paid. This profit accumulates over time and can serve as a critical lifeline during a difficult period of time.
In the past, businesses have been deterred from pursuing captive insurance due to potential (and illegal) backlash from the Internal Revenue Service. The unfortunate outcome was it led to businesses forgoing captive insurance when it could have enabled them to survive the challenges of the COVID-19 pandemic. Thus, captive insurance management firm, CIC Services, fought the IRS in the Supreme Court of the United States and won in May of this year—a victory for taxpayers and businesses that proved the IRS could not utilize unlawful for abusive tactics. More recently, CIC Services’ injunction against the IRS was upheld in district court in September. The outcome is improved peace of mind for businesses pursuing captive insurance and that businesses will thus have access to a stronger business model and risk management that will enable them to mitigate risks and survive through crises.
What the Future Holds
It’s late in the game now for businesses to pursue stronger financial strategies, like captive insurance ownership, prior to the 2021 holiday shopping season and to reap the benefits and address the labor shortage. However, as history has proven, the next crisis awaits. It’s nearly impossible to foresee what that crisis may be. After all, that’s the nature of “Black Swan” events like the pandemic and ensuing supply chain and labor challenges—they’re unpredictable, severe and have widespread consequences. Before the next one hits, whether it’s a labor shortage or the unknown, it behooves businesses to review their risk management approach, business contingency plan and insurance policies while also assessing financial statements to ensure a solid foundation that will withstand next plight, whatever it will be.
About the Author
Randy Sadler started his career in risk management as an officer in the U.S. Army, where he was responsible for the training and safety of hundreds of soldiers and over 150 wheeled and tracked vehicles. He graduated from the U.S. Military Academy at West Point with a Bachelor of Science degree in International and Strategic History with a focus on U.S. – Chinese Relations in the 20th century. He has been a Principal with CIC Services, LLC for 7 years and consults directly with business owners, CEOs and CFOs in the formation of captive insurance programs for their respective businesses. CIC Services, LLC manages over 100 captives.
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