How will private equity firm Blackstone manage headline risk at SERVPRO?
October 18, 2022
In March 2019, the private equity firm Blackstone Group’s Core Equity Partners Fund acquired SERVPRO, a disaster restoration company with headquarters in Tennessee, for $1 billion.[i] “We look forward to working with SERVPRO and its franchisees to help fuel the business’ next phase of growth,” Blackstone Managing Director David Kestnbaum said at the time.[ii] Blackstone’s Core Equity Partners fund is designed for longer-term investments of up to 15 years.[iii]
SERVPRO is involved in the difficult work of rebuilding communities after disasters, which is largely done by immigrants, and US-born people of color, groups that have a long, documented history of employer abuses such as wage theft, discrimination and sub-standard workplace standards.[iv] Indeed, workers at SERVPRO and its franchisees have reported issues of wage theft[v], resulting in franchisees paying back wages[vi]; workers have also alleged race discrimination[vii] and sexual harassment[viii], reaching settlements with their employers. These and other examples detailed below demonstrate potential headline and regulatory risks for Blackstone and its investors.
A diverse group of Blackstone investors, frontline workers and other Blackstone stakeholders have been assessing SERVPRO’s record and have requested that Blackstone respond.[ix] With potentially more than a decade left owning SERVPRO, Blackstone investors must exercise their duties to their beneficiaries to be fully aware of the facts and conduct due diligence with Blackstone regarding how they are managing this investment.
The Facts About Blackstone’s SERVPRO
With locations across the United States and Canada, SERVPRO celebrated the opening of its 2,000th franchise in June 2022.[x] While SERVPRO does not publish an employee count, the company ultimately profits from the labor of workers connected to SERVPRO through franchisees, which may use subcontractors[xi] to hire additional workers or services. This franchising and subcontracting method can implicate SERVPRO if its franchisees engage in wage theft and other unlawful actions with subcontracted workers.. The following are examples of practices by SERVPRO franchisees or their contractors:
SERVPRO Franchise Forced to Pay for Wage Theft
In November 2019, a SERVPRO franchisee in Boynton Beach, Florida paid more than $200,000 in back wages to employees following an investigation by the US Department of Labor into charges the company failed to pay federally mandated overtime pay.[xii]
The employer paid “straight-time” rates, in cash, for all of the hours worked to employees who worked more than 40 hours in their work weeks.
“Additional violations occurred when the employer automatically deducted time from some employees’ timecards for meal breaks, even when they worked through their breaks,” said a news release from the Department of Labor.[xiii]
SERVPRO Franchise’s Lack of Asbestos Precautions Leads to School Closure
In Massachusetts, a SERVPRO franchise earlier this year settled claims by the Massachusetts Attorney General that its restoration work at an elementary school led to asbestos contamination, forcing the school to close for the remainder of the year and forcing the relocation of all students.[xiv] From the Massachusetts AG:
“The AG’s complaint alleges that SERVPRO failed to recognize that the ceiling tiles contained asbestos, even though school documentation, which is required by federal law and was available to SERVPRO for review, stated that the tiles contained asbestos and required special handling. Instead, during a winter school vacation, the company allegedly broke the tiles into pieces and removed them from several classrooms, hallways, and stairwells without using legally-required safety measures. The company also allegedly dropped some of the tiles out of a second-floor classroom into a dumpster, which contaminated both floors of the school with asbestos fibers.”
The SERVPRO franchise working at the school was not certified to remove asbestos. In the settlement, the SERVPRO franchise, which was not certified to remove asbestos, agreed to pay $67,400 in civil penalties for violating the Massachusetts Clean Air Act and committed to having at least one employee on each of its worksites to have completed training to improve awareness of asbestos risks.[xv]
SERVPRO Franchise Settlement with NC AG After Accusations of Violating Laws
The North Carolina Attorney General alleged that an Idaho-based SERVPRO franchise operating in North Carolina after Hurricane Florence was overcharging residents for restoration work, violating the state’s Unfair and Deceptive Trade Practices Act. In August 2020, the franchise settled the price gouging claims for $100,000.[xvi]
“I’m pleased that my office was able to reach a settlement that prevents this company from imposing any further financial harm to hardworking North Carolinians who were trying to repair their homes after Hurricane Florence,” said North Carolina Attorney General Stein in August 2020.[xvii]
SERVPRO Franchise Operating High-Risk Youth Immigrant Detention Center
One of the primary examples of poorly managed franchisee oversight occurred when an Oregon-based SERVPRO franchise took over a government contract to manage youth care in an immigrant detention center in Fort Bliss, Texas in May 2021.[xviii]
Kim Brooks, a spokeswoman from parent company SERVPRO Industries, claimed that the corporate office was unaware that the franchise took on this contract, saying that the work “was entered into without our knowledge… these are not approved SERVPRO service offerings. We have been informed by the franchise operator that it will no longer be providing these services through the SERVPRO franchise.” This suggests that the parent company has some level of control over how its franchisees operate. Though this example shows that SERVPRO does not follow franchisee activity as closely as it perhaps should, it is able to hold the franchises to certain company-wide standards.
(Screen shots from SERVPRO franchisee Clark Contracting LLC website, Clark Contracting LLC job site, and WY National Logistics website as of August 25, 2022)
SERVPRO maintained its relationship with the franchise owners, who simply shifted the business to another company they control named WY National Logistics to house the detention center services.[xix] As of October 2022, Nicole Clark was the registered agent for WY National Logistics, with an address in Sutherlin, Oregon. This was the same address used by Clark Contracting LLC, which was listed as the owner of SERVPRO of North Eugene/West Lane County as of October 2022.[xx]
On its website, SERVPRO franchisee Clark Contracting LLC still lists “Shelter Management: Site Management and Supervision of Youth Care Workers and Minors” as one of the services it provides.[xxi]
In many of these examples, the SERVPRO Industries has attempted to avoid any accountability for the actions of its franchises, claiming that the company “maintains a high-level, arms-length contractual relationship with its franchises.” Similarly, Blackstone has yet to accept responsibility for any issues at SERVPRO.
The Private Equity Stakeholder Project and Resilience Force, an organization dedicated to advocating for workers in the disaster restoration sector, first reached out to Blackstone about this issue back in March. Blackstone has not responded.
The Blackstone Group should respond to concerns about SERVPRO by ensuring that workers have safe and healthy conditions on the job and that communities are rebuilt with the highest levels of care and dignity.
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[i] “SERVPRO, leading franchisor of residential and commercial property damage restoration services, announces recapitalization and long-term partnership with Blackstone,” Media release, Mar 26, 2019. https://www.blackstone.com/news/press/servpro-leading-franchisor-of-residential-and-commercial-property-damage-restoration-services-announces-recapitalization-and-long-term-partnership-with-blackstone/
“Blackstone Nears Deal to Acquire Servpro Industries,” Wall Street Journal, Mar 18, 2019. https://www.wsj.com/articles/blackstone-nears-deal-to-acquire-servpro-industries-11552936361
[ii] “SERVPRO, leading franchisor of residential and commercial property damage restoration services, announces recapitalization and long-term partnership with Blackstone,” Media release, Mar 26, 2019. https://www.blackstone.com/news/press/servpro-leading-franchisor-of-residential-and-commercial-property-damage-restoration-services-announces-recapitalization-and-long-term-partnership-with-blackstone/
[iii] “Longer-term investment vehicles can outperform—but
only for the right types of assets.” Bain & Co, Mar 13, 2018. https://www.bain.com/contentassets/9f88dfb08f024461b99987698c44d843/bain_brief_spotlight_on_long-hold_funds.pdf
[iv] “The Migrant Workers Who Follow Climate Disasters,” The New Yorker, Nov 1, 2021. https://www.newyorker.com/magazine/2021/11/08/the-migrant-workers-who-follow-climate-disasters
[v] “ServPro franchisee to pay more than $200,000 in back wages,” South Florida Sun Sentinel, Nov 25, 2019. https://www.sun-sentinel.com/business/fl-bz-servpro-pays-200k-for-overtime-after-dept-of-labor-probe-20191125-e2gvf6gvnjayfgmdfojgezg22u-story.html
[vi]U.S. Department of Labor Data Enforcement Database. The Wage and Hour division investigated at least nine cases against Servpro franchises between 2003 and 2021 and found 76 violations for about $74,000 in back wages to 72 employees. One case called for the franchise to pay $56,000 for underpayment of 35 employees in Long Island City, New York in 2006. Two franchises had more than one investigation and in one instance, the Wage and Hour division imposed a civil monetary penalty.
[vii] Middleton-Thomas v. Piat, Inc., f/k/a ServPro of Olathe/Lenexa, Inc, Case No. 17–2023–JWL. https://casetext.com/case/middleton-thomas-v-piat-inc-1
[viii] Michalak v. Servpro Indus., Inc., Civil Action No. 18-01727 (RBK-KMW) https://casetext.com/case/michalak-v-servpro-indus-inc-1
[ix] “Private Equity Stakeholder Project Joins with Resilience Force, State Treasurers and Others at an Investor Briefing on Climate Resilience and Risk,” PEstakeholder.org, May 13, 2022. https://pestakeholder.org/news/private-equity-stakeholder-project-joins-with-resilience-force-comptrollers-and-others-at-an-investor-briefing-on-climate-resilience-and-risk/
[x] “SERVPRO Toasts Its 2,000th Franchise,” Media release, Jun 28, 2022. https://www.globenewswire.com/en/news-release/2022/06/28/2470364/0/en/SERVPRO-Toasts-Its-2-000th-Franchise.html
[xi] Construction Technician job announcement, SERVPRO of Coeur d’Alene, https://www.workstream.us/j/bb20826c/servpro-of-coeur-d-alene/hayden-36998/construction-technician-822d3f41?referer_source=https%3A%2F%2Fwww.google.com%2F. Construction – Superintendent job announcement, SERVPRO of Madison County, https://www.theladders.com/job-listing/construction-superintendent-servpro-of-madison-county-huntsville-al-3-a23ad54b.html.
[xii] “ServPro franchisee to pay more than $200,000 in back wages,” South Florida Sun Sentinel, Nov 25, 2019. https://www.sun-sentinel.com/business/fl-bz-servpro-pays-200k-for-overtime-after-dept-of-labor-probe-20191125-e2gvf6gvnjayfgmdfojgezg22u-story.html
[xiii] “ServPro franchisee to pay more than $200,000 in back wages,” South Florida Sun Sentinel, Nov 25, 2019. https://www.sun-sentinel.com/business/fl-bz-servpro-pays-200k-for-overtime-after-dept-of-labor-probe-20191125-e2gvf6gvnjayfgmdfojgezg22u-story.html
[xiv] “Leominster Damage Restoration Company Settles Claims of Illegal Asbestos Work at Fitchburg School,” Massachusetts Attorney General, Feb 7, 2022. https://www.mass.gov/news/leominster-damage-restoration-company-settles-claims-of-illegal-asbestos-work-at-fitchburg-school
[xv] “Leominster Damage Restoration Company Settles Claims of Illegal Asbestos Work at Fitchburg School,” Massachusetts Attorney General, Feb 7, 2022. https://www.mass.gov/news/leominster-damage-restoration-company-settles-claims-of-illegal-asbestos-work-at-fitchburg-school
[xvi] “$100,000 settlement reached in Pender County Florence-related price-gouging investigation,” WECT News 6, Aug 13, 2020. https://www.wect.com/2020/08/13/settlement-reached-pender-county-florence-related-price-gouging-investigation/
[xvii] “$100,000 settlement reached in Pender County Florence-related price-gouging investigation,” WECT News 6, Aug 13, 2020. https://www.wect.com/2020/08/13/settlement-reached-pender-county-florence-related-price-gouging-investigation/
[xviii] “’A horrible mess’: Contractor issues add to turmoil at Fort Bliss migrant children shelter,” El Paso Times, Jun 25, 2021. https://www.elpasotimes.com/story/news/2021/06/25/fort-bliss-migrant-children-intake-shelter-deplorable-conditions-sources-allege/5324736001/
[xix] WY National Logistics corporate registration, accessed Oct 5, 2022. https://egov.sos.state.or.us/br/pkg_web_name_srch_inq.show_detl?p_be_rsn=2151046&p_srce=BR_INQ&p_print=FALSE
[xx] SERVPRO of North Eugene/ West Lane County corporate registration, accessed Oct 5, 2022. https://egov.sos.state.or.us/br/pkg_web_name_srch_inq.show_detl?p_be_rsn=2064823&p_srce=BR_INQ&p_print=FALSE
[xxi]www.clarkcontractingllc.com, accessed Oct 5, 2022.
