AS THE GOVERNMENT bails out one big company after another, leaving small businesses to grudgingly fend for themselves, new legislation may make their survival even more of a challenge.

Introduced in both houses of Congress last week, the Employee Free Choice Act, or EFCA, represents the most sweeping change in labor laws since the passing of the National Labor Relations Act in 1935. If signed into law, EFCA would not only make it easier for workers to join unions, but would also allow government intervention should labor disputes arise.

“Anybody looking at this [legislation] from a small-business standpoint has got to be very concerned if this radical proposal passes,” says Raymond J. Keating, chief economist at the Small Business & Entrepreneurship Council, a lobbying group in Oakton, Va.

Under EFCA, workers would get to choose whether to organize with a majority sign-up system known as “card check” or through an election process certified by the National Labor Relations Board (NLRB). (Under the current law, employers can choose which voting method is used, which can draw out the voting process and give employers time to launch campaigns against unionizing.)

And if the employer can’t negotiate a contract agreement with the newly-certified union within 120 days, a government-appointed arbitrator would step in and ultimately rule on conditions like benefits, compensation and work hours. Once that ruling is made, the employer must adhere to the contract for two years. The bill would also increase penalties against employers who participate in unfair labor practices, such as firing or discriminating against organizers during union drives.

But while small businesses may suffer in the short term, economists argue that over the long term EFCA will lead to workplace improvements that benefit small-business owners and their employees alike.

Here's the good and the bad about what the card-check legislation will mean for small businesses:

Cons

Added costs: The U.S. Chamber of Commerce, which represents three million businesses across the U.S., calls EFCA “big labor's new assault.” Their biggest gripe? Businesses could get socked with added costs. Apart from the obvious hit of paying higher wages and benefits, small businesses may have to hire pricey attorneys when negotiating with unions and, potentially, a government arbitrator, according to the Chamber of Commerce.

Tighter labor restrictions: Jerry Gorski, president of Gorski Engineering, a small construction firm in Collegeville, Pa., worries about the more restrictive work rules that are often sought by unions. Instead of being able to hire multiskilled workers who can perform many tasks in a single day, he says, “if I need union workers to do an hour of specialized work, they can’t chip in elsewhere [according to union rules], yet they get paid for the whole day.”

Fewer jobs: Job creation and overall employment could also suffer because cash-strapped employers would presumably be unable to afford hiring people, says Anne Layne-Farrar, an economist and director of LECG (XPRT), a consulting firm in Emeryville, Calif. She predicts that for every three percentage points gained in union membership (as a result of passing this legislation), the following year’s unemployment rate could edge up by one percentage point. Job creation could also fall by around 1.5 million jobs, she says.

Pros

Productivity gains: While the expectation is that workers who unionize will demand higher wages and benefits, “those costs could soon be offset with higher productivity gains,” says Dean Baker, a co-director at the nonpartisan Center for Economic and Policy Research in Washington, D.C. The thinking behind this theory is that employees who are offered better benefits and wages have fewer reasons to leave their job so employers will want to hire better and potentially more productive workers. And to offset higher costs, business owners will also be more inclined to replace outdated equipment with more efficient tools and improve business processes, he says.

Cheaper benefits: Unionized workplaces can often gain access to lower-cost benefits, says Mark A. Price, a labor economist at the Keystone Research Center, a think tank in Harrisburg, Pa. By joining forces, smaller companies participating in the same union can negotiate lower prices. After all, “the more buying power, the better the deal you can get,” Price says.

Product innovations: The chief advantage of this legislation, Price says, is giving labor a voice. Getting feedback and constructive criticism from employees could actually help small businesses identify and combat new challenges.

Write to Diana Ransom at dransom@smartmoney.com

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