Do Your Employees Have Value?

Bruce Vanderlaan, JD, Managing Director, Mertz Taggart, LLC

January 29, 2020

Do your employees have value? The short answer, of course, is yes.  The underlying questions are determining the value, along with the typical, “who, what, when, where, why, and how” of trying to figure out this critical component of your agency.  In over 27 years of legal practice advising companies and agencies on their employees, I have encountered many situations where employees added great value and were critical to the success of their employer, as well as some where they did, or almost did, cost the employer the business.

Throughout my practice, many clients have wanted to utilize workers as independent contractors instead of employees.  There are a variety of reasons they’ve supplied for doing so, from saving the cost of employment taxes to protection from Employer/Employee liability.  I would caution anyone from doing so, both from a legal perspective and from a value perspective.  Legally, many states and the federal Department of Labor are stepping up enforcement and claims against such companies, which can lead to not only paying what they claim should have been paid in the first place, eating up any cost savings, but adding penalties and interest on top.  In addition, if you exercise a certain level of control, they can be determined to be employees anyway.  I have often heard the term “1099 Employee” used.  These are really mutually exclusive things. Even calling your independent contractor a “1099 Employee” could lead to re-classification, and the penalties and paybacks mentioned.

From a value perspective

An independent contractor has even less motivation to support and help grow your business.  Being an independent contractor is a sign to many that they are not part of the team, and they are not valued, and that’s true for those looking at your agency as well.  I would encourage anyone who is using independent contractors to consult with their attorney and really consider whether it makes sense for them.  There may be situations where it does, but it can be risky.

I have had discussions with both Strategic buyers — existing home care companies with either similar operations looking for a geographic hole to fill, or a service to provide in an area, and Private Equity Groups who have money to invest in agencies that have significant growth potential about what they look for in evaluating an agency.  One of the top factors is the agency’s employees.

The cost of employees

We have all heard about, and probably experienced, the difficulty in getting good employees.  A recent report suggested an 82% turnover rate industry-wide.  That’s simply not sustainable.  There are many costs associated with hiring new employees, including training, and even the cost of the time it takes to think about the job duties and post an advertisement for the job.  The Society for Human Resource Management has studied the problem and estimates that it costs about 38 percent of an employee’s annual earnings to replace her, which includes training and recruitment as well as the costs of the separation process and losses in productivity because of the disruption in workflow.[1]

Even relatively low wage earners have significant cost to replace.  Stephen Tweed, of Leading Home Care, recently told me that the last time they used their “Bad Hire Calculator” to report using real numbers from a member agency, they came up with a cost to replace home care aides for that agency was $1,575.00 per employee.  The Home Care Pulse Caregiver Turnover Calculator can also be used to give you an idea of what your costs might be.  The Sasha Corporation averaged the results of 15 studies that determined average costs to replace lower-cost employees, determining an average cost of $9,444.47 per turnover. Even when the 33 percent of estimates with the highest prices were removed from calculations, replacement costs were $5,505.80 per turnover, including lost productivity, administrative costs, training, and money out of pocket. Chartcourse estimates it costs $40,000 on average to replace a nurse.[2]

Estimating costs to replace a home health aide on the low end, using a cost estimate of just $1,500, shows it does not take long to significantly affect the bottom line of any agency.  Consider that if you have 100 caregivers and 50% turnover, it is costing you about $75,000 per year to replace the ones who leave.  Cutting that to 30% saves $30,000 per year and adds directly to your bottom line, puts more money in your pocket, and dramatically affects your enterprise value at transition.  If you were to take your agency to market, using a 5x multiple, that savings alone would increase your agency’s value by $150,000.

Couple that with the fact that not having the employee who left means not being able to provide services to your clients and patients and it’s a double whammy of reduced revenue as well.  Not only can it be expensive to replace employees, it takes a significant amount of effort on the part of management as well.  That effort could and should be spent on growing the agency and increasing its value, rather than scrambling to keep up and keep jobs filled.

There are several important ways this can affect an agency’s value.  The factors that strategic buyers and private equity groups consider when evaluating agencies provide good guidance to agency owners, even if there is no desire to sell.  In evaluating an agency for purchase, both strategics and PEGs want to reduce their risks and to add growth opportunities.  An agency with high employee turnover is risky.  It’s also hard to grow when you’re spending so much time, money, and effort on replacing the people who are supposed to be helping you succeed.

 

So, how can your employees increase your value?

I frequently talk with successful agency owners about what works for them; what makes them special; and, what they have done to drive a higher value for their agency.  First, it actually seems to help to set high expectations for your employees, so long as they are communicated clearly and followed consistently.  Like the old saying “kids want boundaries,” employees want to know they are part of a team that has high standards.  Sports teams use slogans like “A Tradition of Excellence,” and “Play Like a Champion” and they do tie new players to strong traditions and make them want to support their fellow players.

Outside activities bring people together, whether it’s a regular Friday afternoon meet-up at a restaurant, a “paint night,” or a quarterly movie night, these types of activities let everyone get to know each other better, in a non-work pressure setting.  If your employees like to be together, they are much more likely to want to help each other.  Fun, friendly competitions work well too.  Decorating competitions at holidays are enjoyed by many.  Tying competitions to job duties can provide both motivation and improvement.  Things like awards for accuracy or speed of turning in client paperwork help focus everyone on the critical tasks.  The expense can be small, but if it’s done consistently and in a good spirit they are very motivating.

Paying for training and strongly encouraging certification tells your employees you value them and want them around for the long haul.  Bonuses for bringing in new business, new employees, or ideas that make the agency better encourage the type of engagement you want from them too.  Some agencies have moved toward daily pay, recognizing that they sometimes can’t make it to work if they don’t.

Even cost-saving employment-related actions can have a dramatic impact.  One agency I  spoke with changed their retirement benefit plan, which resulted in a significant savings to the agency and they passed a significant part of that savings on to the employees.  The fact that the agency communicated that they were looking for ways to benefit the employees, and did something concrete about it, generated a great deal of long-term goodwill from the employee toward the employer.  We often talk about “revenue neutral” actions because of the language our regulatory agencies use, but this move was both revenue and employee positive.

At Mertz Taggart we are obsessed with maximizing value for our clients, not only in getting the “best deal” in a merger or acquisition, but also in strategies for growth, value, and operations.   Leaders in the industry, strategic buyers, and private equity groups all value employee retention.  Having and keeping good employees makes your agency better for you as an operating business, and increases its value.

[1] SHRM’s Jim Dooney in an interview with Entrepreneur Magazine
[2] Whilhelm Shnotz, Small Business Chronicle, 2019