Wednesday, October 13, 2004

Entrepreneurial rise-and-fall story of the week:

NYC's "Bill Gates of Bathroom Attendants" Brought Down by Justice

This is an interesting tale with I think more to it than first meets the eye of those who've read about it in the local tabloids. If I had more free time than I do, I'd think about it more and look up what's behind it. But here it is as it is...

First, the local "exploited worker" scandal of the week:

Talk about a job that stinks: Bathroom attendants at some swank city eateries take home less than $2 an hour in tips after paying for the privilege to clean up after patrons and dispense mints, a state study found.

Attorney General Eliot Spitzer yesterday said more than 40 well-known hotspots - including Tavern on the Green - work or have worked with bathroom-concession firms that illegally skim from tips and do not pay attendants an hourly wage.

After announcing settlements with Tavern and BR Guest, the owner of Ruby Foo's and Blue Water Grill, Spitzer yesterday filed a $4 million lawsuit against top bathroom-concession firm Royal Flush. Royal Flush supplies attendants to Balthazar, Tao and Planet Hollywood, among other restaurants, Spitzer's office said.

The company does not pay an hourly wage and charges attendants 25% to 30% of their tips just to get in the bathroom door, the lawsuit said. "The idea of people working without wages and having to pay a fee to stand and wait for tips is unconscionable," Spitzer said...

Under the settlement with Spitzer, Tavern has hired its 14 attendants and promised to pay minimum wage and ensure workers keep all their tips. The iconic restaurant will also pay $175,000 to compensate about 20 employees for lost wages over the past five years.

"We were happy to cooperate with the attorney general's office once we were made aware of this practice," said Tavern spokeswoman Shelley Clark. [The other restaurants are doing same.] (NYDN)
OK, so yet another damn greedy middleman corporation exploited disadvantaged workers -- but it's now been put out of business, the workers will get more, the corporation faces mllions in penalties, justice has triumphed, and the world is a better place.

Or maybe not ... there's more to the story:


Bathroom baron Leroy Porter, accused of making $500,000 a year by skimming his workers' wages, started his empire by moving himself and his family into rest rooms.

Porter, 61, [pictured] learned his trade as a valet to big-name performers - including Sam and Dave, the Drifters and Jackie Wilson, court documents say. But faced with unemployment, the Harlem native and his immediate family spent two years handing out towels in city loos, according to the documents.

The modest beginnings grew into Royal Flush Bathroom Attendants, which was incorporated seven years ago out of a Harlem apartment. The Manhattan company was serving nearly 40 of New York's toniest restaurants and clubs and employing 75 attendants before investigators accused him last week of stiffing his workers for years.

State Attorney General Eliot Spitzer accused Porter and his business partner and stepdaughter, Donna Williams, of paying workers as little as $2 an hour - well below the minimum hourly wage of at least $3.50 such workers must get by law. Prosecutors claim he paid no salary, offered no benefits, made workers supply their own uniform and even took at least 25% of the tips they received as "lease fees" for their space in bathrooms.

Meanwhile, Porter was flush...

"The idea of people working without wages and having to pay a fee to stand in a bathroom and wait for tips is unconscionable," said Spitzer, who filed a $4 million suit against the business Thursday.

But in an interview earlier this year, Porter criticized workers who were unhappy with the arrangement. "Some stick, but more go than stick," he told Time Out New York in July. "A lot of them still have an attitude. They don't last. I'm sure they can do just as good as they could at McDonald's."

Porter has not been to his two-room, W. 45th St. offices since the lawsuit was filed, workers said ...

But a woman working there, who refused to give her name, said, "He's being made out to be a fat cat businessman who robs his workers, but that's nothing like what he is. Leroy started out from very hard beginnings and he had to work hard to build up this business."

Though the business was still supplying attendants on Friday night, New York restaurants were beginning to drop Royal Flush after hearing the accusations...

In what they said was an effort to keep the attendants from being turned out on the street, Spitzer's office sent a letter to every restaurant and club on the list, asking them to either hire the workers directly or hire a staffing service to handle it.... (NYDN)

So let's recap this situation as I understand it from these and other reports...

An unemployed valet aged in his 50s literally keeps himself off the street and off welfare by handing out towels in bathrooms himself, for tips.

Then he exercises some entrepreneurial spirit and starts working out of his home to place other people like him in similar jobs. Now, this is a job that is so low-value in the market that it commands no salary from employers, just tips from customers.

So how is he to be paid for his work in getting others' their work? By getting a share of their tips. Is any other way possible?

The arrangement is completely voluntary for all parties -- the workers are free to leave for a better job at any time (and many do). It follows that all the parties are benefiting by it:

* The attendants have better jobs than they would have otherwise (or they'd leave for the other better jobs -- which they do when they find one).

* Leroy makes more money by working to recruit attendants and using his skills to place, train and manage them than he would by still being one.

* The eateries that sublet their bathroom space to Leroy now are able to provide attendants' services to patrons -- which they wouldn't do if they had to incur the money and management costs of doing so themselves, as evidenced by the fact that they didn't.


And note that it is not just Leroy's firm that operates this way -- the AG's study found this is the industry norm that has developed in the market. Leroy's firm is the one being targeted by the AG and singled out by the newspapers because of its success.

So what happens next? The state Attorney General steps in to break up this arrangement as illegal. Leroy gets labeled in the newspapers an exploiter of "Bathroom Slaves", is put out of business, and faces a multi-million dollar lawsuit brought by the government to protect workers.

And how are those workers formerly employed under the arrangement going to be protected by the government that just ended it? By the government's writing letters to these eateries asking them to keep on the workers at a multiple of their former pay (as evidenced by the $175,000 for back pay being paid by Tavern of the Green) while also taking on the additional costs of training and supervising them and recruiting their replacements, tasks formerly performed by Leroy.

Now, it's easy for me to believe that these eateries will keep on these workers even at their higher pay for a while, especially while the newspapers and AG are looking.

But this is a high-turnover job. As attendants leave are these eateries going to take on the cost of recruiting substitutes, training and supervising them -- and of paying them an above-market wage too?

I don't know, but I can guess. And my guess is the result is going to be lose, lose, lose, LOSE, and win, for the workers, eateries, eateries' customers, Leroy, and the Attorney General (a politician now hailed in the press for 'Freeing the Bathroom Slaves') respectively.

Being an entrepreneur is dangerous, Leroy has learned.

And was Leroy ever really a "mogul" actually clearing $500,000 per year from "bathroom slave" labor as alleged in the story?

I doubt it. Let's look at the other numbers in the story: It says he employed 75 attendants who received as little as $2 an hour after remitting 25% to him. Assume each worked a full 40-hour week. That's 3,000 work hours per week giving them $6,000 and Leroy $2,000. That, over a 50-week year, gives Leroy income of $100,000 per year gross, before paying the rent on a 45th-street office and all other business expenses. That's not quite being a "mogul" in my experience.

For Leroy to gross five times as much, $500,000, the attendants would have to net five times as much, $10 an hour, well above the minimum wage. And for him to clear $500,000 profit as claimed, they'd have to be making even more.

So it seems that if the attendants were really nettting $2 an hour as claimed, Leroy was no mogul -- and if Leroy was really clearing $500,000 per year as claimed by taking 25% from 75 attendants, then they were netting more than $10 an hour and were far from the condition of slaves.

What's really going on here? I don't know, but can make a guess based on experience with simular situations. That guess is that the government wasn't getting its payroll taxes, insurance premiums and other payroll-related charges because the attendants weren't reporting their tips. Whenever it's tax time and the government asks tip-compensated workers how much they've made, the answer always is "next to nothing", of course. (Do the famous and mighty who patronize Tavern on the Green really tip only $2 an hour?)

What's the government supposed to do about this illegality? "Attorney General Cracks Down on Bathroom Attendants Making $2 An Hour" is a headline that's unlikely to get Elliot any votes in his coming run against Chuck for governor. But if we find a "mogul" exploiting "bathroom slaves", well, then with the reported pay rate of $2 an hour (whether that's real or not) there's a way to break up this arrangement industry-wide (other firms will learn from Leroy being made an example) with career-enhancing publicity spin.

What will be the final effect on employment? No doubt there will be less of it - but more of what's left will be on the books and the tax rolls, which is what the government wants.

"A higher minimum wage does not seem a particularly useful way to help the poor" -- Joseph Stiglitz, Nobel laureate in economics.