Budgeting: Labor

How do you budget for labor when the future of labor is so uncertain? More than just forecasting the moves made around immigration issues, planning for labor costs is about understanding how changes to healthcare, employment law, minimum wage and more will play into annual price tags.

But first, let’s address the elephant in the room. How will immigration policy affect labor availability?

“The grape supply is going up, and demand [for said grapes] is going up, but who is going to pick those grapes and who is going to make the wine? Most importantly, how much are you going to have to pay them to do that?” asked Greg Walsh, co-managing director and an employment lawyer with Dickenson, Peatman & Fogarty, at the 2017 Vineyard Economics Symposium in Napa Valley. “When we try to predict what the current administration or current Congress are going to do, I’m unable to do that. It is total chaos.”

Immigration

Since 1940, the number of Mexican immigrants into the United States per year has steadily increased, reaching a peak of 11,711,000 in 2010, according to the Migration Policy Institute. Five years later, the number has dropped to 11,643,000—in itself not a significant decrease, but one that signals a shift that is likely to continue based on the attitude and perceptions of the current administration. Mexico’s National Survey of Occupations and Employment reports the emigration rate from Mexico (which does not refer to the final destination) dropped following the Great Recession in the United States and stayed low, from 6.4 migrants per 1,000 residents in 2008 to 3.3 migrants in 2012, though there was a slight uptick in 2015 to 3.6 migrants per 1,000 residents.

“This was a workforce that was pretty freaked out after the election,” said Walsh. “They were constantly being targeted in the news and didn’t know what was going to happen in their communities. They’re also dealing with the competing concern that they are absolutely in demand. Their services are absolutely needed.”

So what does this mean for vineyard managers looking for help in the vineyard? With a shallower pool, there will be fiercer competition with other crops, particularly strawberries and, yes, cannabis, that have year-round, constant work.

“Sure, there’s been less immigration, illegal or otherwise, from Mexico, from Central America, to the United States. You see the numbers are going down. The border crossings are getting fewer but what has really impacted us is the change in cropping,” said Steve McIntyre, a prominent grower on the Central Coast, where the diversity in crops is much greater than on the North Coast.

“Strawberry is the number one crop in Monterey County, and it’s just 5,000 acres. You ask your average produce guy, who’s growing both strawberries and leafy greens, what the net return is on those two different crops, and he’ll say, ‘oh my god the strawberries kills it.’ I’ll say, ‘Why aren’t you all strawberries?’ He says, ‘I can’t get enough labor.’”

The Strawberry Commission estimates $40 million worth of fruit goes to rot each year because it isn’t harvested fast enough, and growers are paying $15 to $20 per hour, according to McIntyre. He says winegrowers are just trying to make do with the general $11 to $12 per hour. Between a shrinking pool and higher rates, finding labor is becoming increasingly difficult.

The H-2A visa program, which had a perception of being an expensive and flawed fix in the state of California, has gained a more positive reputation as of late; however, there are some lingering concerns about the housing and pay rate aspects of it. [Editor’s note: For a complete look at the H-2A visa program, see “Growers Showing Interest in H-2A Visa Program” in the December 2016 issue of Wine Business Monthly.] McIntyre was quick to point out that the increased up-front costs might pay off in the long run. The federal minimum H-2A hourly pay is $12.57 per hour, and housing costs are taken care of by the employer—an intriguing offer for potential workers. “The major take-home here, if there are some, is that the H-2A workers are more productive. They come here to work, and they’re really motivated. They are at least, by our experience, 50 percent more productive than our domestic workforce.”

So, you’ll have a more productive workforce, but what would it cost to provide housing, food and all the other requirements stipulated through the program? McIntyre reports that growers are buying up or leasing every hotel and apartment complex in the Salinas Valley. He does, however, have a different, less expensive and more permanent solution: Tiny Homes or mobile modular solutions. “These are great. . .They are made in Ohio; they can be set up in a matter of hours. They don’t require a foundation. It’s a really great concept, and they’re fairly inexpensive at about $25,000 apiece.”

He reports that total costs per H-2A worker are running at about a $2 premium over a domestic worker.

For those vineyards with no interest or unable to participate in the H-2A program there are two options: mechanize (a costly endeavor in itself) or pay more for domestic labor.

Pay Rates

Traditionally seen as the “leader” in employee-friendly law, the California legislature proposed 2,000 bills in 2016, 1,000 of which made it to the Governor’s desk and 860 were signed into law. While a good number of them related to employment law, there were three that really matter to employers: Minimum wage, the end of the agricultural exemption and piece rate.

It would be fair to say that winery and vineyard employers in California are well aware of these changes and how they will affect bottom lines. The 2017 minimum wage rates for California sit at $10 per hour for employers with 25 employees or less and $10.50 per hour for those employers with more. The minimum wage will increase $0.50 for each category on January 1, 2018 and increase again every year until the state minimum wage reaches $15 in 2022 and 2023. The federal minimum wage will remain at $7.25 per hour. A good number of states have plans to increase their lowest pay levels as well (see Tables).

“You say, ‘Well, this doesn’t apply to me. We don’t pay minimum wage.’ That’s right. Probably very few of you have any of your employees making minimum wage,” said Walsh. “You have employees that are making $3 more than minimum wage or $5 more, or $8 or $11 more than minimum wage—because that’s where market forces drive this thing.” His point: the increase in the minimum wage will drive all wages higher as companies will be forced to raise salaries to remain competitive.

He’s quick to point out that even though companies with fewer than 25 employees will have another year to push the final $15 minimum wage through, the extra time does not matter as market forces, like inflation and competition from cannabis, hospitality and other industries for labor, will, again, push all salaries higher in the end.

Base Salaries Continue to Rise

In 2016, base salaries in the wine industry showed a slight increase, and that trend is likely to continue into 2018. If you’re looking to hire in the next year or provide raises to employees, benchmarking those salaries could be helpful in determining the most effective and useful allocations. All positions tracked in Wine Business Monthly’s annual Salary Survey showed moderate increases, though high-level sales positions were awarded an average of 12.7 percent more in base salary, the highest surge in all positions tracked.

Salaries for Winemaker 1 positions (those more tactical in nature and requiring less experience) increased 5.5 percent, Winemaker 2 (the more senior, strategic and higher-paid positions) salaries increased 3.2 percent, tasting room manager salaries increased 5.9 percent, and vineyard manager salaries increased 1.2 percent. Of course, these are just the averages. Salary changes were heavily based on region and winery case production, with those in California and working at large wineries receiving higher annual salaries. Full results of the survey, conducted in partnership with Western Management Group, an independent consulting firm that specializes in compensation and salary surveys, will be revealed in the October 2017 issue of Wine Business Monthly.

Benefits

Once again, healthcare costs for employers are set to rise next year. According to Chris Reiter, senior vice president, employee benefits for Woodruff-Sawyer & Co., a leading wine industry insurance brokerage and consulting firm, the majority of small group North Coast wine businesses will see their rates increase anywhere from 5 to 17 percent when they renew on December 1, 2017. Large employers can expect increases between 5 and 15 percent.

“Woodruff-Sawyer’s Wine Trust should beat the overall market, and we expect modest, if any, increases on January 1, 2018,” said Reiter. (Editor’s note: The company’s benchmarking results will be available in late June with plenty of lead time for 2018 planning and will be published in the October 2018 issue of Wine Business Monthly.)

What else can we expect in the next year? According to Reiter, higher year-over-year deductibles and out-of-pocket maximums—both the result of the Affordable Care Act. The United States Senate is currently working on some reforms to the ACA, though the House of Representatives will likely make “material differences” to anything passed through the Senate. Reiter expects a vote by the end of the year. “Any changes would most likely not be effective until 2018 and would benefit wine industry employers. Many of the burdens placed on businesses to offer coverage and comply with onerous reporting obligations would be eliminated,” he said.

His best advice for wineries is to look into alternative and innovative solutions to healthcare options, including non-market solutions, like the WS Wine Trust and other agricultural trusts; high-deductible health plans with tax-advantaged accounts (HRA/HSA) and/or supplemental health plans (Accident/Hospital/Critical Illness); alternative funding arrangements (partially self-funded/MEC plans) and incentivizing employees/dependents to make healthy choices.

“The writing is on the wall. HSAs are going to be the big push. If you’re an employer with employees resisting this type of coverage, start them on it,” said Jennifer Chung, Woodruff-Sawyer’s vice president, senior compliance officer, in a webinar.

Be Prepared to Spend More

Whether through an H-2A program, finding new domestic labor, paying more per hour or even mechanizing a vineyard, expect to spend more money during the growing season. And budget for higher salaries and increased benefits costs for all employees. 

This article originally ran in the August 2017 issue of Wine Business Monthly.
Photo by Scott Summers, and ran with the original article.