The Trump Effect: Small Business and Regulation with Mike Trabold
Mike Trabold, Compliance Director at Paychex, and Gene Marks take a look at how Trump administration policies may affect small-business issues such as employment law, taxes, retirement compliance, the Affordable Care Act (ACA), and financial compliance.
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Gene Marks: Hi, everybody. My name is Gene Marks. I write frequently for the Washington Post and a bunch of other publications. I run a small business outside of Philadelphia. And I'm here today with Mike Trabold. Mike is the director of compliance at Paychex, and we're talking a little bit about what's going on in Washington, D.C., and some of the big trends and issues and things that will be affecting us, our clients as well, you the viewer, and some of your thoughts on what's going on. So Mike, thanks for joining me.
Mike Trabold: It's great to be here.
GM: How long have you been at Paychex?
MT: I've been at Paychex, I just hit 11 years.
GM: No one stays at companies for 11 years. I was talking to people before, yesterday, and 11 years is a long time to be at one place.
MT: When I got there, I did not think I would still be there at this time, but it's been a great place to work. I've really enjoyed it, and it's new challenges every day, so it's worked out just great.
GM: How do you become director of compliance? What does there – is there a compliance major in college that one takes? Or it's probably a different route than that, right?
MT: Yeah, it's – not really. I actually started out in the banking industry in auditing, and was accounting grad, or an accounting major in college. Then just worked my way up through various auditing and risk management jobs. My last role at the bank that I worked at, they needed somebody to take over the compliance duties for the small business organization. It was very large. So I got into that aspect. It was a little bit different. Really enjoyed it. Both the compliance game, which was a little bit different, and in the small business aspect, which I found very, very intriguing, and just eventually had an opportunity to start at Paychex, and here I am.
GM: How many people report into you?
MT: There are just under 70 people in our compliance group here at Paychex.
GM: That's great. And they're all located primarily in the Rochester area?
MT: Most are. We have a couple scattered around that are supporting some of our larger sites out and about. One in Manhattan, Tampa, Chicago, Miami, but most are here in Rochester.
GM: Got it. So what does compliance mean? When you say you're director of compliance, how do you explain that?
MT: Well, in the context of Paychex, it's really got two general aspects of it. One is what most people would think is compliance, which is making sure that Paychex, the company, stays out of trouble, and that's kind of a frivolous way to say it, but it's making sure that all of the things we need to do as a large publicly traded company, we’re in line with. So certainly we're looking at that. Probably a bigger part, though, where we spend even more of our time, is in making sure that we're really abreast of all of the regulations, legislation, things that are impacting small business. Because at the end of the day, what Paychex really sells our clients, in many ways, is products and services to make sure they're meeting their regulatory obligations, whether it's paying their payroll taxes appropriately, meeting their employment law obligations, the whole range of things. So we really spend even more time looking at those aspects of regulation that support our products that we're providing our clients.
GM: So is it safe to say, I mean as a business, we're actually – my company's Paychex customers.
MT: Thank you.
GM: So – of course, and thank you. And we, I mean, we basically outsource our payroll and other HR needs to Paychex, and we're assuming that you're the guys that are staying up all night, being kept up at night with whatever issues are going on in Washington or around the country. It's your job to kind of keep up with that stuff so I don't have to. Is that a fair statement?
MT: It's a fair statement. If it makes you feel any better, I'm often not sleeping at night, because I'm thinking about these things.
GM: Well, then that leads me to my next question. So what is keeping you up at night here? I mean, we're here now and it's April is when we're talking, so mid-2017 is when things are going on. What kind of things are keeping you up at night?
MT: Well, I'd say generally, over the last couple years in particular, the complexity of the regulatory and the legislative environment has just been remarkable. It really has.
GM: But I've heard that – you hear that from everybody, right? Everybody talks about the big government and bureaucracy and all that. You think government has gotten more complex and more regulatory over the past few years?
MT: I'd say from our perspective, it has. And in many of the things that we're involved with, there's a federal aspect of it, and we'll touch on that in a second, because obviously, lots of movement there. States, we're finding, are being even more prescriptive in a lot of areas, and now, increasingly, even the localities, whether it's on the taxes at the local level that they need to make their budgets match, or even things, whether it's hiring, firing, different minimum wage routines at the local level, which, again, just in terms of volume, just really, really increasing.
GM: What do you think has been driving that? Why do you think – why are localities becoming more sort of regulatory, or even state governments, as well? What do you think is behind that?
MT: What we're finding, a lot of it is just, in many cases, just the politics. And one of the really interesting dynamics that we're seeing is if you have a state that tends to be a little bit more conservative, they'll have a particular regulatory regime, and something like minimum wage, states, or rather, cities, that sometimes tend to not be as conservative will say, hey, we want the flexibility to make a higher minimum wage. And then that triggers a little bit of controversy and friction at that level. So a lot of it's in that sense. The other interesting dynamic we're seeing a lot, even on the taxation side, where states and cities that didn't have taxes or didn't have income taxes previously are finding some of their traditional revenue streams dry up.
GM: Drying out, yeah.
MT: One of the things that's really interesting is when people used to smoke a lot more, a lot of states made a lot of money off cigarette taxes. That revenue stream dried up a lot when people just stopped smoking. So a lot of these states are saying, how do we get more revenue? How do we get things? Do we do, more sales taxes? Do we do more income taxes? So a lot of that is driving some of this, as we see in a lot of the states.
GM: How does – first of all, it seems like an enormous job to keep up with all that stuff. I mean, I realize you have 70 people, but even with that, all the different changes being done at all different levels, how do you sort of tackle that? I mean, what would make me sleep well at night as a Paychex customer that you guys are on top of the game?
MT: Well, I think one of the things I take great comfort in is I have just an awesome team. I really do. Tremendous tenure, tremendous expertise, I mean, I have folks, in terms of backgrounds, that run the gamut from actual lawyers on the team that bring a really good perspective on a lot of issues to people that were in the business and then decided to take a different path and really bring that business savvy and the real impacts. Actually people on the team that used to run small businesses at one point in time in their life, so they bring that to the game, as well. And actually, some people who used to work for government agencies. So I've got that depth of experience, tremendous tenure. A lot of people that have been with us for 15, 20, 25 years, that really have that expertise. Lot of certifications, very well-credentialed team. So it is challenging because the world's getting more complex and a lot of changes. But I think we do a really good job at being able to look at that and pick out what the more important things are and less important things are. There's a lot of things that come through that are, politically, not going to be viable. So when we track those, but we tend to really focus our time on things that we know have legs.
GM: Right now, there's a lot of things that are being talked about in Washington, from healthcare, tax reform, spending, as well, and spending cuts, as well. But what things right now, when we're looking into the future, do you think will have a big impact on your small business, medium-sized, and all of your clients, over the next year or two?
MT: Yeah, I think, obviously, healthcare reform is really significant. It seems like it changes almost on a –
GM: And I have to ask you, when you say healthcare reform, when people hear healthcare reform, you don't necessarily connect that to paying people. I mean, because it's the – but it does affect, right?
MT: Oh, it has a really big impact. One of the reasons why I think we had a really good solution to the previous ACA piece is so much of it is driven and an employer's obligations are very much driven on a lot of payroll-related factors, how many people you have working for you, part-time, full-time —
GM: Well, you have to calculate the number of full-time equivalent employees, right? So there is a whole calculation that went involved. And then, of course, you have you have companies that have seasonal workers versus those that don't and there's separate calculations for that, as well. So all of that has to be taken to consideration.
MT: Exactly, very complex. And again, what we have a luxury of is having both the payroll records and then the ability to handle healthcare that – the healthcare side of it as well, for our clients. So that, in terms of my travels, when we do webinars for clients and businesses and the CPA partners, that's probably, right now, the number one question, in terms of what's happening, how do we prepare. And again, it's obviously very much in flux.
GM: It almost seems like – and I hate to use profanity in an interview like this, it almost seems like Congress will be forced to do something bipartisan. Sorry.
MT: Oh, my god.
GM: Yeah, I know. So I mean, that might be the way that a bill might actually get shaped. I mean, do you hear much talk of that, in your travels of actual – hopefully some type of bipartisan agreement?
MT: With ACA?
GM: With ACA.
MT: Frankly, no.
MT: We really do not –
GM: I was kind of hoping you'd bring me good news today.
MT: We really do not, but then, in some ways, it's just one of those topics that something has to happen. Something has to break. So to date, we haven't heard much around it, other than maybe some nibbles around the corner. There's some things that I think both parties are enthusiastic about, when you talk about some things around health, Health Savings Accounts, aspects of FSAs and things like that everybody seems to agree on. The challenge continues to be the economics, because if we do a lot of these things, they're going to have to get paid for in some way, and there's a lot of folks in D.C. that are really focused on the budgetary aspects of that.
GM: It's funny. So as we speak now, and where we are, things are ever-changing. The Affordable Care Act lives, right? I mean, nothing has changed. That a year or two or, frankly, five years ago or six years ago, which means that, for employers that are subject to the employer mandate that still need to do those calculations of full-time equivalent employees and – none of that has changed right now, right? That's where that's where we are.
GM: OK. Let's move to tax reform. I mean, that is another big discussion that will be happening in D.C. throughout the year. How do you think that tax reform will impact your customers?
MT: Tax reform could have a significant impact. And again, it's not one of those things that I think –everybody hears about the Affordable Care Act and some of the other things. We're really advising people, keep your eye on tax reform, because based on how that plays out, could be significant impacts or opportunities for small businesses. If they go through and change some of the tax rates to make some of the pass-through rates more attractive, that could be a really, really good thing for small businesses.
GM: Now, by pass-through rates, what we mean by that is, like for example, I file an S corporation return. A lot of small business owners do that. So right now, whatever profits, whatever meager profits my company makes filters through my individual return, and then I get taxed at the individual rate. But what they're proposing, from pass-through means I would be taxed much lower hopeful corporate rate.
MT: Absolutely right, which would be really, really good for small businesses, since so many organize as S corps or partnerships or things like that. So we're telling people that's really optimistic news. But we're also saying, have your eyes open, because there presumably would have to be changes to pay for that. So what does that mean? Does that mean that some of the current tax benefits of contributions to retirement plans get changed? And there's a whole litany of things that could be impacted there. One of the other things that, again, we always tell people to be cognizant of, is the cause and effect between what will happen at the federal level and then what will happen at the state level.
GM: OK, so what do you mean by that?
MT: What we're already seeing is some of the states are seeing that an aspect of tax reform may be a rollback in some of the funding that the federal government provides to the states.
GM: Meaning that if the federal government is bringing in less tax revenues, which is increasing their deficits, that's a whole other huge issue. The states themselves might be seeing less funding and then they have to make adjustments.
MT: Exactly right. So we're seeing already some states that are proactively – and cities – that are proactively anticipating that to potentially be the case, that are already talking and starting to tee up legislation to increase tax rates or tax things, sales taxes, so forth, that weren't actually being thought of in the past. Really remarkable stuff. One of the things that's been interesting that we're watching closely to see how it progresses is some of the cities, San Francisco is the most the most prominent one, that have been designated as sanctuary cities, the president said, hey, we're going to cut funding for those in sanctuary cities. So San Francisco is already contemplating an additional payroll tax on businesses within city limits to compensate for that.
GM: Any of the other effects that you see when you talk about all the talk about immigration reform? You know, the potential – I mean, do you see that impacting your customers in any way? I mean, it has an impact on customers' ability to hire and retain talent. Does Paychex get involved in that area? Do you, from a compliance standpoint –
MT: Yeah, it's an area we're watching really closely. And it's interesting. It's one of the areas, and the President has made it very clear, again, he intends, generally, to ramp back a lot of the regulation. We're telling folks, keep your eye on immigration, because that's one of the areas –
GM: He's ramping up.
MT: He's ramping up. So he's talking about potentially mandatory e-verify, certainly more workplace audits, and so forth. So that's an area that we could certainly help our clients with, and we're making sure that they're aware of what the ramifications of that might be, if there's a move to mandatory e-verify and things along that line. There's also a lot of implications to a lot of our businesses. Like you said, we have a lot of agricultural clients, a lot of construction contractor clients. How this all plays out is without a doubt, we see it a little bit even in our index that we do, our jobs index, a lot of potential ramifications on the availability of labor in some geographies. And in certainly – certain industries, yeah. The other thing that we get a lot of questions on is we have quite a few clients in the Silicon Valley that bring in a lot of technology talent – STEM workers. And otherwise, STEM workers from overseas. So a lot of interest in where the President might go with H-1B visas and things like that.
MT: Because that's all things we can support as well. So the immigration is one of those areas that a lot of potential impacts to, in various ways, to our clients, especially some clients in various parts of the country.
GM: Overtime regulations, right? We knew at the end of 2016, they were supposed to go into effect in December, it was increasing the ceiling that you'd be paying for salaried employees that weren't supervising anybody. It was like $47,000 –
MT: And change, right.
GM: Right. And then a bunch of business groups contested that. The Obama administration appealed against them, but now that there's no more Obama administration, the Trump administration is not appealing to business groups. Basically, the overtime regulation is in flux. Where do you, what do you tell your clients about that? Do you expect to see those overtime rules actually passed, ever?
MT: We do.
GM: To that extent? To the – going to that –
MT: Not to that extent. What the imminent labor secretary, Acosta, said is he thinks that a higher threshold is appropriate, but not to that level. The $47,000 and change level that President Obama had proposed. He was thinking something that's a little more closely tied or indexed to inflation, $33,000 and change.
MT: So we –
GM: Right now it's like $24,000 is where the number is, right?
MT: $23,000 and change.
GM: $23,000 seems right.
MT: So I think what – I think everybody understands that it needs to be higher.
MT: I think what will probably play out there is that there'll be a change. It won't be as high as was proposed under the Obama administration, but somewhat higher. The dynamic there is a lot of employers already made that change. They've already made that change. So and we've heard – that, we get lots of questions on that. Should I go back and roll salaries back, or –
GM: What do you say to that? When someone says –
MT: That's a pretty challenging one. A lot of people change from exempt to nonexempt or vice versa, so but a lot of interest there. And again, another area where a lot of states have said, well, if that's not going to happen at the federal level –
GM: We'll do it at our level.
MT: We’ll do it at our level. So a lot of complexity, a lot of moving parts there.
GM: You speak of doing stuff at states and local level, minimum wage. There was – right now, it's $7.25 an hour. It's not very good. A lot of states have higher minimum wages. President Trump supports a minimum wage. I think he's been on record as saying $10 an hour- is what he supports. Do you foresee minimum wages going up for your customers sometime in the next year or two?
MT: We think that's very possible, again, because it is something that President Trump has been supportive of. And again, I think there's that recognition that the current federal level is too low. So you, again, who knows?
MT: And that's one of the things that we see every, is you never know how it's going to play out. But we're advising people that you should, when you're thinking about budgeting and those types of things, hiring, there's a likelihood that there will be a bump in the federal minimum wage.
GM: Minimum wage is interesting because it's even if you're paying your people more than $10 an hour, it's all sort of relative. So if a guy is making $14 now, he's making twice the minimum wage, just about. If the federal government increased the national giveaways to $10, now suddenly, that same person isn't making twice the minimum wage anymore. He might be saying, you know, I should be making twice the minimum wage. That's what I was making before, which I deserve. So it has an upward pressure, doesn't it, on all wages?
MT: It really does, and that was clearly a dynamic, with the overtime rule, even, was when you raise that up, everybody that's not quite at that level expects –
GM: They should get the same bump, yeah.
MT: Commensurate bump. So there's actually very, very much so ripple effects that could happen with that type of thing.
GM: Paid time off legislation as well. I mean, again, a lot of it is a big popular thing among employees. They want paid time off, but there's a lot of states and cities that have that sort of rules. But the federal government has no national paid time off legislation right now. President Trump has said that he supports, I think, six weeks paid time off. He wants to fund it through unemployment, which I'm not quite sure how that's going to go over with Representative Ryan or Mitch McConnell. But where you see paid time off going? What are you on your customers?
MT: We're telling them that's an area they really, really have to watch. That, and particularly, we have a lot – we hear a lot from clients and lots from businesses about how difficult that is, especially if you're a small business. It's one of those things that I think everybody agrees with the premise. It's the fair thing to do, but very disadvantageous if you run a small business, to help folks out. So that's an area that – and there's a lot of different ways that can happen. There's, in New York, there's a proposal to do it via an additional payroll tax on employees. Very many different ways that can occur. You're right, the President has been pretty clear, I think, even Ivanka is a big--
GM: She's the one that's been pushing that.
MT: At the federal level. But that, also, at the federal level, is one that we also would believe would get a lot of pushback from the GOP leadership in Congress around, again the, potential impact, negative impact, on small business and the economics. So that's one that we tend to think may be difficult to move in a practical way at the federal level, but one that will definitely be filled in at the state level.
GM: Fair enough. And, of course, at Paychex, you guys, it's unlimited paid time off at Paychex, right?
MT: Oh, I'm hardly ever in the office.
GM: Right, that's what I thought. That's what I hear. It's a lot of slackers in that company. Anything else, from what you talked about, just overall regulation, coming out the Department of Labor, even from states, reflecting employment law, any other things on your radar screen that you think your customers should be looking out for in the next year or two, safety, OSHA issues, anything? We're in an environment where the government is they say they're scaling back on the regulations, so does that mean that businesses are in the free and clear?
MT: OSHA's a really great example. There's already been movement to scale back some of the enhanced reporting and things like that the President was looking to do, President Obama had put in place. So OSHA's a great example of there will always be a baseline requirement there, but some of the things that had been put out there to kind of raise the bar will very likely get scaled back. So that's an area that I think a lot of businesses can take some comfort in. The two other areas we're really trying to advise our clients to keep an eye on is the whole area of retirement, what would that mean. I think there's an increasing awareness that Americans aren't saving enough for retirement.
GM: And are getting older.
MT: And they're getting older.
GM: Should I say we're getting older?
MT: We're getting older.
MT: So we're seeing not much movement at federal level, there's something there. It's been politically volatile. So we're seeing a lot of states saying, OK, if you're going to do that, we're going to do that. If you're a business that doesn't offer a 401(k) or a similar type product, where to start mandating workplace retirement programs.
GM: Wouldn't that kind of benefit a small business? If I'm not offering retirement plan to my employees, if the state's just going to do it through a mandatory payroll deduction, right, then – to a state retirement plan is what we're saying – I don't know. I mean, I always look back saying, OK, phew, that's a benefit that I don't even have to offer my people, because it's going to be taken care of through the – I mean, is that a fair position to take, or am I being –
MT: It's something we talk a lot about here Paychex, because we have a very active and robust 401(k) business. I think there's two ways to look at that. There's some employers who would say, well, that's easy. I'm just going to do that. There's, increasingly, a lot of employers, though, that as a really good benefit and a good way to recruit top talent. So what may happen is you could have a plan like that as kind of a starter plan, but then –
GM: They can add onto that.
MT: You'd have the opportunity to have a much more robust plan, a real 401(k) plan that would give your employees a much better way to build a legitimate nest egg.
GM: Got it.
MT: So a really interesting area. The other area that we're keeping an eye on, because of the potential ripple effects, maybe even more indirect effects to small businesses, is kind of in the whole banking realm, Dodd-Frank.
MT: I think that's one of the things that'll probably happen later, in terms of the –
GM: I think that's a 2018 thing, but I think it will happen.
MT: That's a down the road thing. But depending on how that plays out, a lot of things that could potentially fall down to a small business.
GM: Mike, what about the potential fiduciary rules that might impact 401(k)s?
MT: Yup, fiduciary rule, again, is one of those items that we're waiting to see, will the Trump administration make changes there? Impact on small business, if you have a 401(k) plan, that may impact the dynamics of how your people are getting investment advice, how your plan is actually being administered.
GM: Because you're as a business, you have a fiduciary responsibility over the plan, correct?
MT: You have a fiduciary responsibility over the plan, and they've broadened – the regulation would broaden the amount of people in that investment sphere, like investment advisers would have direct and fiduciary responsibility.
MT: So that's going to change the dynamic of the advice you're getting and how your plan's administered all those types of things.
GM: Got it. Mike, you've been awesome. Thank you very much. That was a great conversation.
MT: Thank you. Thanks, Gene.