Council fast-tracking hazard pay for grocery workers in Seattle

The Seattle City Council is fast-tracking an emergency ordinance that would require large grocery store companies to pay their Seattle-based retail workers an extra $4 per hour hazard pay through the end of the COVID-19 emergency.

Passing progressive, labor-friendly legislation is their strong suit. Doing the math and working out all the details… not so much.

 

Let’s cover the nuts and bolts of what this legislation does.

It applies to all grocery stores in Seattle that are owned by a company with at least 500 employees worldwide, and where the store is either greater than 10,000 square feet and mainly sells groceries (like a Safeway or QFC) or greater than 85,000 square feet and at least 30% of the square footage is dedicated to groceries. It does not cover convenience stores, food marts, drug stores, or farmers markets. All employees of such a store who are covered by the city’s minimum wage ordinance must be given an additional $4 per hour; that would include a bookkeeper working in the back office (with the not-unreasonable logic that they share a break room with the other store employees, and are equally exposed to COVID).

The ordinance contains most of the usual rules and regulations in the Council’s labor ordinances:

• There are record-keeping and notice requirements that the employer must follow;
• The hazard pay must be listed as a separate line-item on an employee’s paystub, so it’s clear that they are getting it;
• Employers may not game it by reducing employees’ regular pay;
• The Office of Labor Standards will be tasked with enforcing it, with no budget increase for additional staff (OLS seems to be ok with this, because it overlaps at some level with the minimum wage and secure scheduling enforcement work);
• Employers may not retaliate against employees who take action to ensure that they are getting paid the extra hazard pay;
• The ordinance will stay on the books for three years after the hazard pay is no longer required, to allow for employees to file complaints for back pay they did not receive;
• Employees have a private right of action to sue their employer if the hazard pay is not paid.

There are also some special aspects of this ordinance:

• The ordinance specifies that the Council intends to review it after it has been in effect for four months, to see what the impact has been;
• Employers who have already been giving their employees hazard pay or “appreciation pay” get credit for that against the $4 per hour — though they need to carefully document it all.
• This is emergency legislation, so it would go into effect as soon as the Mayor signs it — and according to the sponsor, Councilmember Mosqueda, the Mayor has signaled her support for it.

Mosqueda is moving this bill through quickly. It had its one and only hearing last Friday, where the other four members of Mosqueda’s Finance and Housing Committee enthusiastically signed on as co-sponsors and quickly voted it out of committee. Normally any bill passed out of committee after noon on Thursday must wait an extra week before going on the agenda for final passage at a Monday afternoon Full Council meeting, but the committee and Council President Gonzalez suspended that rule so that it can be adopted Monday afternoon.

The 42-page bill begins with ten full pages of recitals and findings related to all of the context of COVID-19, Seattle’s labor laws, and the fact that several other cities (mostly in California) are contemplating similar bills right now. That last point is one that Mosqueda has repeatedly hammered on, naming Long Beach, Los Angeles, San Francisco, Berkeley and Oakland as some of the other jurisdictions working along the same path. And in case you’re wondering, it is no coincidence that suddenly several cities are working on this; the efforts tie back to a report published last November by the Brookings Institution’s Metropolitan Policy Program called “Windfall profits and deadly risks: How the biggest retail companies are compensating essential workers during the COVID-19 pandemic.” The abstract for the report speaks for itself:

The conclusion from the report is that all retail companies should be paying their frontline workers at least $2 per hour in hazard pay during the COVID pandemic, and preferably considerably more. It provides no hard data to support a specific per-hour rate, just a few quotes from retail workers who feel that their employers are raking in billions while they take all the risks, and that $2 an hour isn’t nearly enough.  Mosqueda’s bill, for that matter, provides no data or math to justify a $4 per hour hazard pay increase, though she has mentioned several times that the other jurisdictions are contemplating either $4 or $5. After several days of trying to get an answer from Mosqueda as to how she arrived at $4, she finally dropped into my Twitter DM’s Friday night with the following response:

I think the answer is a few things:

1) early on lots of folks did hazard pay differently anywhere between $2-5. $4 is somewhere in between.

2) if average grocery wage is somewhere between 16-20 and average shift is 4-6 hours. Getting an extra $4 per hour roughly leaves you with an extra hour to hour and a half of pay added to each work shift. Like other cities have concluded, this seems like right compensation for extra donning a doffing time, sanitizing etc. that grocery workers have had to do in pandemic.

This seems like a stretch — other than donning and doffing masks and gloves to go to and from work at the beginning and ends of shifts, changing masks and gloves during a shift is time that employees are already being paid for. And this demonstrates the difficulty in this conversation: the more compelling argument for hazard pay is the hazard itself and the accompanying risk that retail workers face, but it’s challenging to put a dollar figure on that.

The Brookings report, on the other hand, spends almost all of its time trying to make the argument that retail companies are  rapacious corporate monsters taking advantage of their employees while raking in billions and profiteering from the pandemic.  To do so it leans on mid-2020 corporate earnings statements and stock prices, as well as potential stock buybacks, to paint a negative picture of the companies. But there are several reasons why the report’s analysis doesn’t hold up well under scrutiny, especially when trying to decide on a hazard-pay rate for grocery workers in Seattle:

• The report relies on figures for the entire retail sector, not just grocery stores. And as we’ll review later, the grocery sector is one of the lowest-profit segments of the retail business.
• As mentioned earlier, it uses mid-year figures. 2020 was quite the roller-coaster ride, and some of the mid-year highs turned out to be short-term anomalies.
• Stock prices are a poor indicator of profitability, especially during an economic upheaval when investors look for safe harbors more than profits.
• Likewise, in an economic upheaval, stock buybacks mean something different. When companies are looking for good liquid investments for their cash (and 2020 was a great time to have cash on hand), but other short-term cash investments like money-market accounts have rock-bottom interest rates (because everyone wants to be in cash), your own company looks like a great investment. The company can either retire the shares and thus increase the value of the remaining outstanding shares, or keep them around, use them for acquisition deals, or sell them off to raise raise cash later. Anyone who thinks that companies do stock buybacks only to artificially inflate their stock price doesn’t understand how public corporations work.
• The report’s authors clearly haven’t done the full math on how much a $4/hour hazard pay increase will cost — and how that compares to the company’s profits.
• The report uses national wage figures, when in fact Seattle already has a much higher minimum wage in place — higher than any of the other cities that Mosqueda cites as contemplating a new hazard pay requirement.

So let’s dive in.

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There are three major retail grocery chains operating in Seattle:

• Kroger, which owns Fred Meyer and QFC;
• Albertsons, which owns Safeway and Albertsons;
• Costco.

These are the ones who would end up paying the hazard pay, so we’ll focus on them. I also pulled up data on Wal-Mart; while they don’t operate in Seattle, they do in smaller cities and towns in western Washington, and they are by far the largest retail grocery chain in the country (and the world) so they are an interesting data point for many of the assertions that the Brookings report makes (which is why they are included in their tables and charts). We could potentially include Amazon since they own Whole Foods and a handful of Amazon-branded grocery storefronts, but their retail reporting is so completely dominated by their e-commerce activities that it is essentially impossible to get accurate, comparable numbers.

Let’s start with stock prices. It was a crazy year for the stock market as a whole, with big crashes, big rebounds, and flight to the safety of the few businesses that seemed to be less affected by the COVID pandemic, including groceries. Here are how the publicly-traded grocery stocks did over the past year (roughly mid-January 2020 to mid-January 2021):

• Albertsons: up 13.2%
• Kroger: up 18%
• Costco: up 15.8%
• Wal-mart: up 26.3%

But as a point of comparison, the S&P 500 was up 16.5% over the same period. So at the end of the day, Wal-Mart outperformed by a fair bit, but the other three big grocery chains with footprints in Seattle ended the year right around the market index. Nothing spectacular here (and in fact if you put money in an index fund you probably would have done better).

What is more interesting is the underlying quarter-by-quarter performance of the companies, and the Brookings report tries to claim a huge surge in retail sales last year powering unprecedented profitability for the companies. But the truth is not nearly so exciting. Here’s a chart of quarterly revenues for the two companies over 2019 and 2020:

All three companies get a big seasonal bump each summer (Costco a little later, which may be in part a factor of their different quarterly calendar). The bump was slightly bigger in 2020, and overall Costco did better last year, but all three basically follow the same pattern in both years — and Kroger and Albertsons’ numbers really don’t look that different. This is one of the deceptive things about quoting revenue and profit numbers for these companies: so much of their revenues go right back out the door as the cost of goods. Here are their operating expenses:

No, it’s not the same chart, but it’s awfully close. In the retail business, operating expenses closely track revenues — and especially for commodity businesses like groceries — because price markups are so small and the cost of goods is just below the retail price. After expenses, here’s what their operating income looks like:

We see a lot of volatility, mostly because the numbers are so small in comparison to the revenues. The Brookings report tries to make a big deal out of the increased profits:

But keep in mind that Brookings used mid-year figures (it included the mid-year seasonal bump up, but not the end-of-year swing back down) and they give no indication of how these figures relate to revenues.  The traditional way to look at that is by “operating margin,” which is the operating income as a fraction of total revenues. Here is the quarterly operating margin for the three companies:

Kroger’s operating margins improved slightly in the second half of 2020, but overall all three companies have tiny margins. By comparison, the quarterly operating margin for the S&P 500 as a whole last year ranged from 9.5% to 13.5%. You can visit this site and look up the margins for other industry sectors; what you will find is that grocery stores are at the lowest end of the range: very few businesses run with lower margins. Retail groceries is a bad business, with extremely low profitability; the only way to make any sizable profit is to be a huge company. These companies didn’t really get more profitable in 2020; their business just got bigger. And Wal-Mart is really the epitome of this sad fact: it is much larger than any other grocery chain out there, and its operating margin is only slightly better than the others.

This is all relevant to our discussion of hazard pay because retail grocery businesses are very employee-intensive: as the revenues scale up, the number of employees must also. These are massive companies, as are many of the other large U.S. retailers. Kroger had 435,000 employees worldwide in 2019, and added another 100,000 in 2020 when the pandemic hit. Costco had 201,500; Albertsons had 267,000 in 2019, and 287,000 last year, and Wal-Mart had 1.5 million worldwide in 2019 and added another 500,000 in 2020.

The full impact of that is seen when we look at operating income per employee for these companies:

• Kroger:  $4,839 per employee in 2019, $6,495 in 2020
• Albertsons: $5,239 per employee in 2019, $7,386 in 2020
• Costco:  $24,064 per employee in 2019, $28,803 in 2020

(As an aside, you can clearly see the difference in Costco’s business model: minimize the number of employees, make razor-thin markups on prices, and make it up in volume. Think about that the next time you’re standing in a long line at Costco. Though to be fair, Costco has implemented a nationwide $15 minimum wage, well above the federal and state minimum wage standards in much of the country.)

And so here is where the rubber meets the road: for a Kroger worker on a 40-hour weekly schedule, last year that worked out to $3.12 of operating income for the company per hour worked. For Albertsons, it’s $3.55. And for Costco, it’s $13.84. If it costs an additional $4 per hour of hazard pay to retain each employee, then Kroger and Albertsons are losing money: the employee is costing them more than the income he or she is bringing in.

Of course, the companies won’t actually lose money; they will make decisions on a store-by-store basis to stay profitable. They will raise prices where the local market can absorb it, they will cut some staff where they can, and where those actions don’t put them back in the black they will close stores — most likely in the places where the community can’t afford to pay higher prices.

Local minimum wages will certainly factor into the companies’ decision-making. Seattle’s minimum wage, now $16.69 per hour for large employers, is well above the average wage for Albertsons and Kroger nationally:

Wal-Mart’s starting hourly wage is $11, and Costco’s is $15. Costco is of course a local Seattle-area company and is unlikely to disappear, especially since they can afford to pay their employees more, as we saw above, and they only have one store in Seattle. But Kroger and Albertsons should be of great concern to us: their Seattle employees are some of their most expensive in the nation already. Adding $4 per hour could push those stores into the red, particularly the ones in lower-income neighborhoods that can’t absorb price increases.

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None of this implies that grocery workers don’t deserve hazard pay; they surely do. Our heartfelt appreciation is not enough. In Seattle, $16.69 per hour is not a living wage — not even close. Paying $20.69 through the end of the pandemic is a bit closer, but still well below the median household income in the city. But choosing an arbitrary $4 per hour for hazard pay without understanding the economic implications on the businesses that will be forced to pay it is reckless public policy, and it will have its own economic consequences. Progressives in Seattle like to heap scorn upon “big business” and to find ways to try to make it pay to fix every problem the city faces. That’s not entirely unfair, given local businesses’ propensity to believe that they are fulfilling their civic duty solely by creating jobs and enjoying the (until recently) business-friendly tax regime here. But particularly at a moment in our city’s history when brick-and-mortar retail is having an existential crisis, it’s irresponsible for elected officials not even to try to understand the full impact of new business regulations on the retail sector before they rush them through. When Seattle’s minimum wage law was passed, there was substantial debate of the pro’s and con’s, including whether companies could afford it. And there was credible economic research explaining why increasing the minimum wage in steps over time was unlikely to have a significant economic impact. There has been none of that — at least none publicly — this time, and at the pace it has been rushed through from introduction to final passage, it at least appears that the Council doesn’t want there to be any debate.  Nor has there been debate of other relevant issues, such as why grocery workers have been singled out for this benefit. Why not restaurant workers handling take-out orders, or the workers at large drug-store chains, or postal workers, or bus drivers, or any of the other workers that we have deemed essential? This ordinance, while obviously well-intentioned, seems arbitrary and poorly-researched in its decisions about who pays, and how much.

And there’s more. The Council will pass this legislation Monday afternoon. Later this week, the Mayor will sign it, and as emergency legislation it will immediately go into effect. As currently written, employers will immediately be responsible for accruing and paying the additional hazard pay to eligible employees. There is no provision in the ordinance for a period of time to educate employers as to their new responsibility, or for them to change their payroll systems and records to implement the change.  There is nothing in the ordinance requiring the Office of Labor Standards to take any action to educate Seattle employers who will be subject to the requirements of the ordinance, nor is there the provision of any resources for them to do so, let alone a time buffer for the education effort to take place. Those employers will have thirty days to post a “notice of rights” for their employees that explains their rights under the ordinance, but the Office of Labor Standards is not even required to create a model version of a notice of rights for them to use or copy. The entire burden of this ordinance — learning about it, understanding and meeting all the paperwork requirements, and paying employees an extra $4 per hour — falls squarely on the employers. OLS will almost certainly try to help, but they are overworked and if they fail the employers, and not OLS, will be held responsible.

The five Council members now signed on as co-sponsors to this bill all seem to mean well, but they are once again demonstrating this Council’s propensity for impulsive action paired with a lack of interest in getting the details right.

 

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