Race to the Bottom: How Low‐Road Subcontracting Affects Working Conditions in California’s Property Services Industry

Press Coverage

Executive Summary

As economic inequality takes center stage in the public debate, policymakers are increasingly asking whether subcontracting has contributed to the problem of low-wage work. This report analyzes the substantial growth over the past 25 years in one of the key sectors of subcontracted work in California: janitorial and security services. We find that:

Trends in subcontracting

  • Of the 220,130 janitors working in California in 2014, 38 percent were employed by contractors. Of the 148,740 security officers in the state, 70 percent were employed by contractors.
  • The contractor industries employing these workers have grown significantly faster than the rest of the private sector in California. Between 1990 and 2014, employment in the janitorial services industry grew by 44 percent and in the security services industry by 83 percent, compared to 20 percent for all private industries.
  • The share of California janitors employed by contractors more than doubled from 1980 to 2014, while the share of California security officers employed by contractors increased by 50 percent over the same period.

Job quality outcomes

  • Janitors and security officers in California are subject to a significant wage penalty when working for contractor companies. Contracted janitors earned 20 percent less than non-contracted janitors ($10.31 compared to $12.85 an hour) in 2012-2014. Contracted security officers earned 18 percent less than non-contracted security officers ($11.91 compared to $14.48 an hour, all in 2014 dollars).
  • Not all workers suffer from this wage penalty, especially those in unionized contractor firms. For example, our analysis of ACS data shows that a quarter of contracted janitors earned more than $13.94 an hour and a quarter of contracted security officers earned more than $16.33 an hour.
  • Fully 45 percent of contracted janitors and 32 percent of contracted security officers had no health insurance coverage in 2012-2014. This is largely because of low rates of employer-provided health benefits—only 35 percent for contracted janitors and 49 percent for contracted security officers. For unionized property services workers, however, health benefits are substantial: in most major downtown areas, most full-time workers receive full family coverage after 90 days.
  • A comprehensive 2008 survey in Los Angeles found that 32 percent of workers in the property services industry were paid less than minimum wage, and 80 percent were not paid the legally required overtime when they worked more than 40 hours a week.
  • Research statistics and in-depth interviews suggest that women janitors are at risk of sexual harassment and assault in what are often isolated working conditions.
  • Federal government statistics indicate that being a security officer is a dangerous occupation, with high rates of workplace violence and fatal injuries.

The workers and their families

  • Janitors and security officers are disproportionately workers of color and immigrants; more than 70 percent of contracted janitors were born outside the U.S.
  • The median household income of contracted janitors ($39,570) and security officers ($41,120) was about half the statewide median ($78,521) in 2014.
  • Fully 53 percent of contracted janitors and 36 percent of contracted security officers live in families that fall below 200 percent of the federal poverty level, a common benchmark of economic distress.
  • Women are generally under-represented in the property services industry, but almost half (45 percent) of contracted janitors are women.

The race to the bottom
Industry research and interviews with experts suggest that the property services industry is currently driven by a highly competitive race to the bottom that results in lower wages and inferior working conditions. Key factors include:

  • For both janitorial and security contractors, labor costs make up the main cost of providing services; as a result, wages, benefits, and other employment costs are the primary basis on which they compete, not innovation or productivity. Profit margins are typically thin (5.5 percent for the janitorial services industry and 4.3 percent for the security services industry).
  • Multiple and complex layers of contracting further reduce labor costs, shifting employment to smaller, off-the-books and unlicensed employers where workers are particularly vulnerable to workplace violations.
  • For client firms—including major high-tech, retail, and commercial real estate firms—cost savings (23 percent on average) are one of the main motivations for contracting out.
  • Responsible contractors who pay fair wages do exist. Unionization of these contractor firms has grown over the last 30 years in California, especially in major metropolitan areas and for commercial buildings. The collective bargaining agreements typically set wages, annual increases, and health benefits above levels that prevail in the non-union property services sector.
  • Unionized firms and other responsible contractors are, however, subject to significant pricing pressure from unscrupulous contractors—limiting their ability to shift the competitive equilibrium of the industry toward a high-road model based on providing quality services rather than on cutting labor costs.

The public costs of low-road subcontracting

  • Low-wage workers and their families are often forced to rely on public assistance in order to make ends meet. We estimate that 48 percent of janitors and security officers in California have at least one family member who receives support from one or more public assistance programs.
  • The total cost to the federal and California governments of this assistance averaged $228 million per year between 2009 and 2014.
  • The public also bears the costs of lost tax revenue when workers are illegally classified as independent contractors, are paid in cash, or are paid less than their actual earnings. Each minimum wage worker misclassified or paid off the books represents about $2,957 in lost revenues per year, not including losses in state and income tax revenue.