Financial

Successfully Coping with Worker Costs

by Mark E. Battersby / Published April 2021

The inclusion of a $15 per hour minimum wage in the proposed COVID-19 relief measure may or may not become a reality. However, it does illustrate an increasing trend of increased labor costs faced by many pressure cleaning businesses, even in these trying economic times. 

     The government has employed several tactics to help struggling businesses cope with the pandemic, including payroll tax deferrals, forgivable loans, and refundable tax credits to help employers cope with labor costs. But what happens as these incentives expire and the $15 per hour minimum wage becomes the norm?

Helping Hands

     On the legislative front, last December’s COVID Relief Act of 2020 contained a number of tax benefits aimed at small businesses, including the following:

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• The Employee Retention Tax Credit, extended through June 30, 2021, means pressure washing businesses with fewer than 500 employees (it was previously 100) that suspended operations or suffered a 20 percent dip in revenue can claim a tax credit equal to 70 percent of each employee’s wages, up to $10,000 per worker. The credit is used to cut the employer’s portion of Social Security taxes (FICA) and, best of all, the credit is “refundable,” which means if the credit is larger than the pressure cleaning operation’s tax bill, the difference is a cash refund.
• With the Families First virus tax credit, although employers are no longer required to pay employees forced to miss work due to COVID-19, the credit has been extended—but only until March 31, 2021. The tax credit is now for employers that voluntarily choose to continue paying employees, including those staying at home with children while schools or daycare are closed.
• Deferring the employer’s portion of Social Security withholding was also extended by last December’s stimulus bill but, once again, only until March 31. This is not a tax credit or forgiveness, only a deferral of an employer’s Social Security (FICA) taxes for the first quarter of the year, with one-half due by the end of 2021 and the balance by the end of 2022. In effect, it is an interest-free loan.
• Through the Work Opportunity Tax Credit (WOTC), the tax credit (not a deduction but, rather a direct reduction of the operation’s tax bill) is available to employers hiring individuals from targeted groups who have faced significant barriers in employment. The credit amount for the WOTC can be up to $9,600 for each qualified new hire, depending on the targeted group the new hire is drawn from. The WOTC has been extended through 2025.

Salary and Benefit Costs

     Salary cuts among the rank-and-file workers are rare because of the potential impact on productivity or customer service. However, some business owners believe salary cuts, despite the potentially expensive severance costs, are a way to spread the pain of reducing salary costs across a broad spectrum of workers.

     Unfortunately, whether temporary or permanent, a major consequence of salary cuts is that the pressure washing operation’s best people, the ones with the most work options, may choose to leave. Instead of salary cuts, many business owners are striving to maintain a healthy balance of full-time employees and less costly part-time workers. 

     Cross-training is another effective measure to combat layoffs. Yet another way to achieve greater productivity is to upgrade, renovate, and purchase labor-saving equipment. Other, potentially expensive options include the following:

• Furloughs—A furlough is a mandated leave of absence, where workers usually keep their benefits, such as health insurance, while remaining eligible to file for unemployment and search for another job.
• Layoffs—Every employer con-templating laying off workers should take care to follow all legal requirements, especially those created to combat the hardship of workers during the coronavirus pandemic.

The Skyrocketing Costs of COVID-19

     There is no question COVID-19 is already costing pressure washing and other businesses money. Generally, these costs can be broken down into two groups. First, there is the physical cost, such as providing PPE, disposal services, cleaning tools/services, and more. Second, depending on the job, there is the reduction in productivity, especially in operations where remote workers are not feasible. Factor in temporary closings with the often-required severance pay and labor-related costs, hidden and visible, and costs escalate.

     According to OSHA regulations, employers are responsible for employee protective equipment. What’s more, OSHA recently released guidelines to prepare workplaces in the face of COVID-19, and although not legally binding, these guidelines reinforce the employer’s responsibility for providing a safe work environment.

     Also, don’t forget the cost of that all-important health care demanded by and/or provided to so many workers. According to a study by the nonprofit Business Group on Health (BGH), health benefit costs are expected to rise a whopping 5.3 percent in 2021. While that survey was taken among large employers, even smaller employers could see a similar increase in cost per worker hit the $15,500 figure estimated for their larger cousins.

     However, in the face of steadily escalating labor costs, many experts are predicting that a 25 percent cut in wages for work-from-home workers could become the new normal.

Remote Workers

     Reportedly, a number of employers have begun evaluating salary reductions for employees who opt to move to smaller towns indexed with a lower cost-of-living. While this is not-so-good news for workers who have moved to less expensive locales, those businesses where working remotely for some or all employees is an option may want to think about pay reductions.

     Not too surprisingly, currently remote workers can be both troublesome and expensive. Consider a few potential trouble spots:

• Significant liability can be a factor, particularly since there is less control and/or monitoring of remote worker hours. Don’t forget, some jurisdictions have strict rules for when employers must provide meals and rest breaks to workers, including remote workers.
• Certain states and cities have wage-and-hour laws that can apply to an employee working remotely in their jurisdiction, including higher minimum wage rates, daily overtime limits, and laws that prohibit last-minute schedule changes or require mandatory rest days.
• An increasing number of jurisdictions have regulations requiring employers to reimburse employees for workplace expenses, frequently including phone and internet connections for remote workers.
• Many taxing jurisdictions have specific requirements for the information that needs to be included on employee wage statements or pay stubs and substantial penalties for failing to provide this information.

About That $15 Per Hour

     By January 1, 2021, 20 states and 32 cities and counties had already passed increases to the minimum wage. Most of those increases, along with the federal increase initially contained in the proposed stimulus bill, raised the minimum wage to $15 per hour. However, not only do those changes affect the bottom-line of pressure washing contractors and businesses paying minimum wage, but they will also force many businesses to increase wages across the board in order to stay competitive when attracting or retaining workers even in this economy.

     A higher minimum wage will cause a significant bump in every operation’s overall compensation costs. It won’t just be entry level because, when the minimum wage is increased, all wages eventually need to be increased correspondingly.

     Hard-pressed employers will, no doubt, scour their operations for ways to reduce their payrolls to help offset these increases, real and proposed. In addition to layoffs, some will switch to part-time or “on-call” employees. A higher minimum wage may mean getting rid of unskilled hourly employees and replacing them with technology. Mechanization and automation, which eliminate jobs, will obviously become more attractive.

The Formula

     There is not one formula that fits all that can be used for combatting higher labor costs. There is, however, a methodology that can help those pressure cleaning business owners attempting to cope with the all-too-real threat of a $15 per hour minimum wage or escalating labor cost in general.

• The workforce. Now might be a good time to re-evaluate staffing levels.
• The wage increase. What effect will the wage increase or already rising labor costs have on the entire operation?
• Pricing. Is now the time to raise prices?
• Reality. Only by actually doing the math will it be possible to fully assess the impact of either those steadily increasing labor costs or a higher minimum wage.

     Typically, the higher the average wage paid by a pressure cleaning business, the less effect a minimum wage increase should have. Furthermore, even if the minimum wage increases from the current $7.25 per hour to the proposed $15 per hour, it doesn’t mean every worker gets a $7.75 per hour increase. The higher the wage, the smaller the increase, with no increase at the maximum break point.

     How will your business respond to a real or planned mandatory $15 per hour minimum wages or the skyrocketing cost of workers? Will the business operate at a lower income level? Shut down? Most will respond by innovating. 

     They will find a way to perform less expensively and more profitably. They will do it with technology that already exists and that will come down in price as demand skyrockets. Will your pressure cleaning operation be among those that succeed in battling those inevitable higher worker costs?