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Current and expected legislation at the federal, state, and municipal levels could mean higher pay for employees, including an increased minimum wage and expanded overtime pay. As a result, small businesses, especially those that are heavily dependent on labor, such as building service contractors (BSCs), will need to think creatively about ways to restructure, engage employees, and manage contracts and bids in order to account for these changes.
“Between 85 and 95 percent of the cost of cleaning is related to labor,” says Bill Balek, ISSA’s director of legislative and environmental services. “So any time that the cost of labor is affected, it will have a significant impact on those businesses.”
The minimum wage has been in the limelight lately, as some cities and even some states are choosing to raise it to as much as US$15 an hour.
According to the U.S. Department of Labor’s Bureau of Labor Statistics, the median hourly wage for janitors and custodial workers in 2014 was US$10.98. While that number is above current federal standards (currently $7.25), it is below the new minimum wage in cities like Los Angeles, San Francisco, Seattle, and Chicago. Altogether, 29 states (including Washington, D.C.) have raised their minimum wages to above the federal amount. Both the state of New York and Washington, D.C. have proposed an increase to $15 an hour. In addition, a few bills have recently come before Congress that propose to raise the federal minimum wage.
In the cleaning industry, affording a raise in wages for employees doesn’t have a clear solution because it’s not always feasible for an organization to raise prices. Perhaps a contract is already in place, competitors are keeping their prices low, or clients are laser-focused on the bottom line.
“Contractors don’t always have the opportunity to pass those costs on to customers, especially in this competitive environment,” Balek says. “Those who consume these services are very price sensitive and there’s downward pressure. And that’s a double squeeze.”
Still, many in the commercial cleaning and facilities management industries have found the raise in the minimum wage to have a positive impact on their business model.
Tim Conn, president and founder of Image One Facility Solutions—a cleaning and maintenance company that conducts business in Chicago, IL, where the minimum wage is currently $10 and will increase to $13 by 2019—pays his employees a higher rate than the federal minimum wage, but still doesn't think a mandated increase would be beneficial for the industry.
“Although I believe … in paying higher wages, I don't believe that a mandated increase in the minimum wage is necessary,” Conn says. “The less that government regulates business on these types of matters, the better off small businesses will be.” Conn is concerned about how a $15 minimum wage could hurt jobs by forcing small business owners to cut benefits elsewhere, lay off workers, and hire fewer people.
For Laurie Sewell, president and CEO at Servicon Sytems, Inc. in Culver City, CA, a higher minimum wage is helping to level the playing field with her nonunion competitors.
“We’re a union contractor in certain areas, which is where the wage impact of state and federal agencies doesn’t have an effect because union wages are almost always higher than the minimum wage,” Sewell says. At Servicon, the lowest even a nonunion employee would make is 30 cents above minimum wage.
For Sewell, the key to remaining competitive is avoiding contracts that can’t cover her company’s higher wages. “We’ve started not bidding [on] things when we didn’t feel we could pay a decent wage,” she says. “It’s not fair to the clients if you have turnover and you can’t deliver a quality product.”
The way Sewell sees it, the money spent managing quality because of turnover or training new employees exceeds what would actually be saved if her company paid minimum wage.
Other regulatory changes—including new health care mandates and changes to the way overtime is paid out—also impact the cost of labor.
The U.S. Department of Labor has proposed some changes to its overtime rules. It expects to raise the income threshold—the amount of money an employee can make before becoming exempt from overtime pay—to $50,440 from $23,600. This will have a significant effect on the way that cleaning businesses pay any of their employees who make less than $50,440 (or $970 a week) and work more than 40 hours a week. "I encourage employers to review this rule and understand how it will affect their workforce and wages, and begin contemplating how they may adapt the structuring of their workforce, Balek says. The impact of the proposed overtime rule can be managed by adapting and creatively restructuring—or finding new ways—to manage time. For example, Conn has implemented an online time clock system at Image One that even salaried employees are required to use to track their time.
Staying informed is key to remaining ahead of the game when it comes to regulatory changes that will affect your company’s labor costs. There are many ways to make sure you keep your own staff informed and educate your clients about what to expect.
Sewell recommends designating somebody on staff to look years ahead at what the regulatory cycle will bring and include that in your company’s dialog with clients. “I find that most people will be reasonable if you have that dialog with them six months out,” she says.
Sewell points out that August and September are budget seasons for commercial properties. This is the time when you should be showing your clients the regulation changes for the next year and discussing any anticipated labor and project cost increases.
Money is not the only driver for employee satisfaction, although it is the baseline. For example, Balek says, “A lot of these employees [who] are considered managerial are working flexible hours and working from home, and those things can be very valuable.”
While companies may be required to raise wages or pay more in overtime, they can also come up with creative ways to manage their overhead. Flexible work hours could give companies a better way to limit overtime while keeping employees happy.
Sewell advises as these increases in labor costs take hold, companies should take precautions to avoid getting locked into contracts at a price that is not sustainable for their bottom line. “In this business, a small increase in wages can put you upside down on your profits,” Sewell says. “Making sure you have that opener in your contract is crucial.”
One way to do that is by making sure your contracts have language in them that would allow you to reopen the contract if state or federal regulations take effect.
Conn advises that BSCs make sure they aren’t locked into long-term agreements that don’t allow for price increases. “When signing an agreement, make sure that there is a provision for a rate increase,” he says, “especially if there is concern that the wages and benefits are expected to increase as a result of a government requirement.”