Policies to Temper a Harsh Business Climate: Unscrupulous Labour Practices Undermine Operational Efficiency
By Bill Garland
This winter, several groups with an interest in the concept of responsible contractor policies (RCPs) gathered for the release of a discussion paper, Responsible Property Investing and Property Management: Exploring the Impacts of Good Labour Practices on Property Performance. The crowd included representatives from property management firms, labour unions, pension trusts and investment funds concerned with how their investments affect a range of employees.
The paper’s authors maintain that responsible investors should consider environmental, social and governance factors (ESG) in their investment decision-making process. They agree that property managers in Canada have done a good job of addressing environmental aspects through a focus on green real estate and energy efficiency, but suggest these companies have not strongly addressed the social aspects of responsible real estate, particularly as it relates to labour and employment practices. However, it should be noted that two of Canada’s largest real estate management firms, Bentall and Great West Life Realty Advisors, have been active in incorporating this type of policy into their service contract documents.
The idea of creating policies for fair working conditions and wages for workers has been around for more than 100 years. The City of Toronto introduced a fair wage policy in 1893, and the United Nations has its own Principles for Responsible Investing (UNPRI) with signatories representing more than $13 trillion of assets under management.
CLEANING INDUSTRY GARNERS CRITICAL ATTENTION
There is an increasing push by social groups to see these policies entrenched in service contracts in the property management industry. It has been promoted as an initiative that could have a positive impact on the value of the real estate and the performance of the investment through improved quality of service. Advocates also maintain that it will build productive, long-term relationships and sustainable financial returns, and will be consistent with fiduciary duty.
The paper identifies the Canadian cleaning industry as a sector where such policies are needed – perhaps because the contract cleaning industry has historically been one of the most competitive businesses. Relatively little initial investment is needed for company set-up, while the services provided are labour intensive but not particularly dependent on a skilled workforce. Furthermore, cleaning services tend to be sold with abstract promises rather than tangibly demonstrated returns for a prospective buyer.
Up until the 1980s, the contract cleaning industry was a high-margin business with gross profits often exceeding 40% after all direct expenses. The industry then began to get more competitive as onetime employees launched their own firms. Still, many of these newer firms, with Principals simply focused on earning a good living, weren’t necessarily pursuing a strong corporate rate of return and, gradually, gross profits declined to 15% or lower in today’s market.
LOW MARGINS SHAPE WORKFORCE
These low margins forced some companies to start looking for other means of getting the return they needed to stay in business. These low rates of return could explain why there are currently only two publicly held cleaning companies out of the more than 6,000 operating in Canada.
Due to high profit margins in the earlier era, property managers became accustomed to a marketplace where it was easy enough to get good service, yet still secure lower prices when they went out to bid. The economics of today’s market don’t work so well, and one of the biggest problems then becomes cleaning contractors who win contracts by assuring the purchaser that they can do the job for less, but then have to figure out how to accomplish what they’ve promised.
A combination of demand for low prices by managers and reasonable profits by contractors underpins much of what is perceived as neglect of responsible labour practices. This is certainly not the case with all companies, but the many companies that strive to conduct business reputably and treat employees fairly also increasingly face competition from the trend toward sub-contracting and franchising.
In those scenarios, prime contractors avoid paying employee taxes and benefits such as employment insurance, health tax, and Canada Pension Plan because their cleaners are not direct employees. That approach can save a company almost 20% on labour costs, and the sub-contractor can write off some costs such as vehicles and housing costs.
At one time, this type of sub-contracting still provided a reasonable living for both parties. Now, new market dynamics mean that many of those working in such sub arrangements are making less than minimum wage.
DOOR OPENS FOR UNIONS
Most building owners and managers want to do the right thing by all employees and would be appalled by exploitative practices. Unfortunately, the cleaning industry’s entrepreneurial nature makes it very difficult to police, and very few organizations have the budget and/or resources to audit the cleaning contractor, which is one of the few ways to prevent abuse.
As a consequence, unions have increasingly moved into the vacuum and are looking for a more prominent role in protecting cleaning industry workers. Unions were certainly a prominent presence at the release of the discussion paper on responsible contractor policies, while union drives are apparent in cities like Toronto and Ottawa – joining cities like Montreal and Vancouver that already have a strong union presence.
A strong argument can be made for responsible contractor policies. Namely, paying higher, but fair, wages can ultimately offset or reduce other operating costs like customer and employee turnover, training, quality assurance and supervision. Nevertheless, that doesn’t solve the problem of shortsighted companies that undercut market prices in order to obtain management contracts.
The discussion paper cited in this article was produced by Tessa Hebb, Director of the Centre for Community Innovation, at Carleton University, David Wood, Director of the Institute for Responsible Investment at Boston College and Ashley Hamilton, Research Analyst for SHARE (Shareholder Association for Research and Education). For more information, see the web site at www.share.ca/property. Bill Garland is Managing Director of Daniels Associates Inc., a consulting firm specializing in building operations and cleaning services. For more information, see the web site at www.danielsww.com.