How to Start and Grow Your Own Cleaning Business
 

Coming Clean: Turning Your “Underground” Business Legitimate!
By Gary Goranson

During the course of a year, I talk to a lot of people about the cleaning business. These discussions take place with people already in the business as well as with people wanting to start a new venture. Here are some examples of questions and comments raised by a large number of them:

•"I want to hire (or, I have hired) my workers as independent contractors. I don't want to get involved with deducting and submitting income tax, contributing to FICA, paying unemployment insurance or dealing with Workers' Compensation Insurance."

•"I don't want to (or I don't intend to) conduct background checks on new hires. It's too expensive and time consuming. I'll take my chances."

•"Liability Insurance? What for? That's just another expense that I can't afford. And bonding my employees? Can't be bothered and the insurance company won't pay a client's claim without a conviction anyhow."

•"I don't bother (or won't bother) checking employment references because past employers won't give me much information, other than confirming whether the candidate actually worked there or not. And as far as personal references - well, it's obvious to me that friends, neighbors and relatives aren't going to say anything derogatory about them."

•"All my clients care about (or will care about when I start my business) is a cheap price. I have to keep my costs down to make any money, and I won't incur any expenses that I can get away without."

This article is directed at individuals in (or entering) the residential cleaning business who may share one or more of the above sentiments. Having said that, the intent here is not to chastise or belittle anyone. Rather, it's to inspire those individuals to rethink their point of view after digesting the following information.

SUB-CONTRACTORS VS. EMPLOYEES
To begin with, let's look at the legal status of hiring people as independent contractors. Whether people you hire are independent contractors or employees is not something you define; rather, how the Internal Revenue Service determines what legally constitutes the difference between the two. Note the following excerpts from the IRS publication 15-A.

Common-Law Rules
To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. These facts are discussed below.

Behavioral control
Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:

Instructions that the business gives to the worker
An employee is generally subject to the business' instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.
•When and where to do the work.
•What tools or equipment to use.
•What workers to hire or to assist with the work.
•Where to purchase supplies and services.
•What work must be performed by a specified individual.
•What order or sequence to follow.

The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.

Training that the business gives to the worker
An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial control
Facts that show whether the business has a right to control the business aspects of the worker's job include:

The extent to which the worker has none reimbursed business expenses<
Independent contractors are more likely to have none reimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur none reimbursed expenses in connection with the services that they perform for their business.

The extent of the worker's investment
An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.

The extent to which the worker makes his or her services available to the relevant market.

An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

How the business pays the worker
An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

The extent to which the worker can realize a profit or loss
An independent contractor can make a profit or loss.

Type of relationship
Facts that show the parties' type of relationship include:
•Written contracts describing the relationship the parties intended to create.
•Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.

The permanency of the relationship
If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.

The extent to which services performed by the worker are a key aspect of the regular business of the company
If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

IRS help
If you want the IRS to determine whether or not a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

Read the above information from IRS publication 15-A again and we think you'll realize that regardless of what you call your workers, if you're going to run your business as you want to and exercise the type of management over your people that you need to - they are going to be classified by the IRS as "Employees" and not Independent Contractors.

BACKGROUND AND REFERENCE CHECKS
We advocate a very extensive five-step selection process that begins with the initial phone call you receive from an applicant and proceeds through the Application and Personal Interview, followed by Reference and Background Checks. Yes, it is time consuming and driving and criminal background checks cost a few dollars. But, and this is a big BUT - the alternative can be devastatingly expensive, even fatal to your business. When you have workers going into people's homes, usually without the owners being present, you have a moral and legal obligation to check their criminal history. And when you have individuals working on your behalf and driving themselves and others in connection with their work, you also have the responsibility to check their driving history.

While it's true that many employers like to limit their responses to requests for references to whether or not the employee worked there, you can learn a great deal more by asking the right questions. It's important to find out if the person has a history of short tenure on the job. One question that can be very enlightening is, "If you had the opportunity, would you rehire this person again?" If you talk to three past employers and they all say "no" that should raise a red flag. It's also helpful to find out if they left on their own accord or were terminated by the employer. If you learn they had a consistent record of tardiness or absenteeism, this should also raise a red flag.

As for Personal References, it is factual that friends and relatives are not likely to volunteer negative information about your candidate. Again, by asking the right questions, you can often gain insight into whether or not the job you're offering is a right or wrong fit. You can ask if the person knows what the candidate liked the most in a past or present job. Just as important, ask what they liked least. You can also say, "Everyone has their strong points and weak points; what would you say is Helen's strongest attribute?" You can also ask, "We all have areas that could stand improvement. In what area could Helen use the most help?"

Regardless of what you do in the recruiting process, you will hire people who don't work out. However, by being religious about conducting background and reference checks, you will make much better hiring decisions. The better the potential fit between your worker and the job, the more likely it is they'll retain tenure longer than will occur through haphazard hiring practices. High turnover and poor-fit workers are far more costly and time consuming than spending a little time and money upfront to weed out those less likely to be a good fit for your company.

INSURANCE
Plainly stated, if you can't afford general liability or workers' compensation insurance, you can't afford to be in business. Accidents can and do happen both at your office, driving to and from your clients' homes and while working in a client's house. Yet many, many people operate their cleaning businesses with no insurance or inadequate coverage. This is a disaster waiting to happen!

One major injury incurred by someone working on your behalf as an employee (or independent contractor for that matter), could not only decimate your business financially, it could result in substantial fines and penalties for you personally. One claim for carpal tunnel syndrome, not an uncommon injury in our profession, can result in $25,000 in medical expenses. A serious back injury can rack up medical costs of $150,000. Workers' Compensation Insurance is not an option; it's a necessity. Cleaning companies who do not have their workers covered are also putting their clients at substantial financial risk.

Many owners who do carry insurance do not have a provision which is called "Care, Custody and Control." This protects you against claims stemming from items in clients' homes that are damaged during the course of cleaning. Obviously, if your people break an ash tray, which is not something worth filing an insurance claim over - you simply pay it out of your own pocket. But if you drop cleaning chemicals on an expensive carpet, knock a Picasso off the wall while dusting it or break a Ming vase - you want your insurance company to pay those kind of claims (unless you have an escape plan to Mexico all figured out!!!!).

If you provide company vehicles, you will obviously have them adequately insured. However, if you compensate people for using their own transportation, you (1) need to make sure they have the appropriate comprehensive liability insurance and (2) its imperative that you purchase "non-owned vehicle insurance" to protect you in the event of an accident.

As for employee dishonesty insurance (bonding), you want to have what is called "third party fidelity bonding". Many companies claim to have their employees bonded. However, what many of them have only protects the employer. A third party fidelity bond is designed to protect your client. Contrary to common belief, we are aware of many instances where the insurance company paid for items reported stolen by cleaning employees. What is important is that you have your client file a police report after reporting the theft to you.

"All My Clients Care About is Price"
If that is a generally true statement about consumers, then nobody told Mercedes, BMW, Cadillac, Porsche, Westin Hotels, Marriott, Nieman-Marcus, Macy's, the makers of Rolex or the tens of thousands of four and five star restaurants around the country.

There is no question that "price" is one of the 4-Ps of Marketing. However, if that's all you're talking to prospective clients about, it will be THE major factor in the decision of whether to do business with you or not. If you're operating a "real" and legitimate business, price is only ONE of the factors people will use to make their decision as to whether or not to hire you.

When you run your business as a business, there is so much more to talk about and sell than just how much you charge to do the cleaning. When you incorporate the kind of legitimacy into your business such as what we discussed in this article, you're also selling peace of mind and professionalism.

You can't be all things to all people and you must decide what type of clientele you're willing to service. You don't need a roster of millionaires as clients to build a successful and profitable business. But you should be targeting households with an annual income in the $100,000/year range. To these clients, doing business with a legitimate business that conducts itself prudently and professionally is as important to them as the level of good service you provide.

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