The intereview ranged from some pretty serious & intense issues to me singing Chicago’s “If You Leave Me Now” with the Recruiting Animal. Here’s some comments about the interview:

Also, on April 13th, my article and editorial Thoughts on Private and Public Sector Union Relations was published on Slate.com’s BizBox, a small business blog.  Thanks to Steve Viuker who manages the blog.  The full text is below.

In the Private Sector

I recently completed my third union negotiation and dispute resolution of the past six months. One case involved a successful union decertification, and the other two involved settlements before the National Labor Relations Board (NLRB). Due to confidentiality clauses in settlements and not wanting to upset people and disturb my clients’ business operations, I won’t get too specific about my clients or these unions.

What I’ve learned from these negotiations and dispute resolution processes, and the current labor struggles, is that in most private sector industries unions aren’t needed. Sure, in any vocation involving mining, long distance transportation or any other heavy industrial or physically and mentally dangerous activities, unions sometimes serve a valuable safety purpose (i.e., monitoring, inspection and enforcement), but short of safety, unions don’t do much for private sector businesses and employees.

With one client, which is a small business that had a handful of union employees, we were forced to layoff most of the union employees in order to prevent bankruptcy. We did this knowing that these layoffs would be litigated. It took almost a year to get this case to trial before the NLRB. Finally, on the day that trial was supposed to start, and all of the threats and innuendo had been set aside to discuss reality, we settled the case. My client won very, and I emphasize the word very, favorable terms. Thus, this decades old business will remain open and bankruptcy is no longer being discussed.

Many of the businesses I deal with, including the above-mentioned client, have no history of union grievances or unfair labor practice charges, and some rarely communicate with their union at all. Furthermore, due to continuing influences of racism, sexism and religious bias, unions these days still serve as a barrier for minority and female hiring. Although, out of desperation and reality unions have improved in their egalitarianism, many of the reasons for which they were founded (e.g., wage inequality, hours and conditions of employment) no longer exist to the extent that unions can remedy or assist with these concerns. For example, unions have been largely silent when it comes to the “glass ceiling” that still confronts many women, immigration issues, and they’re too slow reacting to job classification changes and changes in the economy.

Essentially, both private and public sector unions today are largely pension fund managers. They exist to fulfill their pension obligations. They need new and existing members in order to keep their pensions funded so they can stay current on payouts. Most of the unions that I’ve dealt with have pensions which are significantly declining in value since economic shakeup 2008. One particular fund that I examined lost billions in less than a year. A few are doing well considering the circumstances. Nevertheless, like Social Security and Medicare, most union pensions have dismal long-term prospects.

Moreover, many of these funds are plagued by corruption regarding fund management choices. These funds invested in risky securities (and in my opinion, did this with the hope of a kickback or insider information like free investment advice). Some funds have a lack of oversight to the extent that their officers and directors often take expensive trips to resorts and similar destinations for meetings amongst themselves, investment advisors and potential investors (part of the kickback they receive). Some of this information is obtainable through these funds’ federal filings (not the insider information/kickbacks of course; for that you need access to personal financial records).

Unfortunately, many private and public sector employees will only get pennies on the dollar due to government pension takeovers (i.e., the PBGC-Pension Benefit Guranty Corporation), bankruptcy and other refinancing schemes. And, many pensioners will probably never receive their pensions if they don’t plan on staying in America because they’ll have to arrange to receive their pensions in other countries, and they won’t know how to retrieve it. Some will get worn down by the retrieval process or will even forget that they’re owed a pension, or realizing that the pension is a ripoff, they’ll take an early withdrawal for a fraction of what they’ll be owed if they waited until they’re fully vested.

In short, many of today’s private and public sector workers who are covered by these pensions don’t understand their rights and obligations. Some employees I speak with even believe that somewhere out there is a retirement account with their name on it. With pensions, that’s not true. It’s a fund that has tens to thousands of enrollees, and all that money is commingled.

When you add all of this to the multi-employer pension withdrawal liability that’s mandated by ERISA–Employee Retirement Income Security Act, any reasonable person should see that these many of these funds don’t have the wherewithal to survive.

In the Public Sector

Many of these same issues are now affecting the public sector. If you examine some of the reporting and editorializing going on, there’s much discussion about public sector unionized employees (and public sector employees in general) earning more than their private sector counterparts. This compensation variance isn’t always reflected in salaries but may be more apparent when factoring the overall costs of benefits (insurance, retirement funds, etc.). Generally this leads to a larger government, and a larger government historically leads to economic stagnation, inflation, corruption and lack of innovation.

For an interesting analysis of this dynamic see www.npr.org/2011/02/25/134065799/Truth-Squading-Public-Private-Pay-And-Benefits.

Furthermore, when government employees (elected and non-elected) start to earn more than their private sector counterparts, a greater and sustained sense of entitlement to higher compensation becomes ingrained (how common are tax rollbacks and cuts?). Once we start paying government employees more, and the size of government increases, it’s very difficult to revert to a smaller, cheaper and more efficient form of government.

What may be even more troublesome, if you believe in the free market, the private sector and entrepreneurialism, is that for the first time in U.S. history, the number of unionized employees in the public sector, 7.6 million, exceeds the number in the private sector, 7.1 million (see http://stats.bls.gov/news.release/pdf/union2.pdf and http://stats.bls.gov/news.release/union2.nr0.htm). It appears that we’re becoming less of a producing economy and more of a civil service and regulatory oriented economy.

What’s happening now in government and in states like Illinois, Indiana, California and Wisconsin is a reflection of the frustration and fear that the economic collapse of 2008 brought on. There’s a growing divide among many sectors of our society as to how to alleviate this frustration and fear.

For example, it’s not just citizens vs. government and Republicans vs. Democrats, but big business vs. small business (some big businesses seemingly faired well during the downturn due to government/taxpayer aid and little of this aid has “trickled down” to smaller and medium-sized businesses). In short, people are angry that highly paid public sector employees are the people who made the decisions to help big business weather the storm, whereas many smaller businesses had to rely purely on market forces for survival.

What all this means for private sector labor unions is that as smaller businesses cut back operations, change locations or close because there’s not enough profit (as my clients are contemplating and doing), and their percentage of profit lost compared to taxes paid increases, there will be decreased private sector unionizing, less compensation for union employees, and much greater frustration and discomfort over what their public sector union “brothers” are earning compared to their “brothers” in the private sector. Less “brotherhood” will result too.

Meanwhile, all unions lobby for increased union rights, salaries and benefits, but where will the money to fund this come from? Who funds a bigger government and weaker dollar?

First, I think that it’s a novel concept to equate employees as being the same as “property,” especially in the context of criminally convicting someone for “wire fraud.”   However, in the criminal law context, I don’t think that rusing is the same as wire fraud, unless a company can make a really strong case that an employee is company property and can be barred from going from one employer to another because a recruiter tricked them into leaving, and that the criminal justice system needs to imprison the recruiters perpetrating that fraud in order to prevent them or others from doing the same thing.

Let’s get real about this.  A recruiter who ruses to get past a gatekeeper in order to reach a real decision maker or information holder isn’t committing a federal crime.

But, in answer to the writer who asked if there’s a point where rusing could become illegal the answer is yes.  This will occur when rusing has been clearly indicated as being either criminally or civilly liable conduct.  This can occur via legislation or court decision.  But it hasn’t happened yet.  In the civil law context, liability (money damages or equitable relief) may occur if an enforceable contract or agreement has been violated.

The fact is no one is really sure how, when or if this new Act will be enforced. And, there aren’t any interpretive regulations yet (there are proposed rules available in PDF format at this link; if the link is expired, then search Google). The law basically provides more narrow but explicit definitions of what an independent contractor is, and it only applies to the construction, trucking, landscaping and related trades.

For my client, a trucking company, it’s not a big deal because the independent contractor agreement that I drafted for them months ago is already compliant with the new law. In fact, as long as a business’ independent contractor agreement strictly complies with federal and most states’ laws regarding independent contractors, that business will probably already be compliant. It’s a good idea for any affected business to audit their independent contractor agreements for compliance with this law–better safe than sorry (it’s also cheaper!).

The Act is enforced by the Illinois Department of Labor, one of our state’s more bureaucratic organizations (or as a colleague once said: “They screw everybody equally.”). The basic intent of the law is to prevent construction, landscaping, trucking and similar businesses from “misclassifying employees” as “independent contractors” in order to avoid paying payroll taxes, overtime, workers comp, insurance, etc.

So long as a business maintains strict adherence to the usual independent contractor rules of lack of control over the contractor, which includes hours, equipment, methods of work, etc., that business will probably be in compliance. Also, keep in mind that because the law is new and hasn’t been tested, the Illinois Department of Labor might go easy on businesses that, even though they may have violated the law, are acting in good faith. However, be mindful that the Internal Revenue Service, the Illinois Department of Employment Security, the Illinois Department of Revenue, and other business taxing agencies, might not take a lenient approach.

In short, don’t mess around with employee misclassification in any industry. Generally, the costs to clean up mistakes always exceed the costs to avoid them in the first place.

Hi Charles ,

Thanks for throwing light on this subject ! However, I have a few doubts and would appreciate if You could help resolve them:

1. What is the guarantee that the exiting employee would not reveal the secrets / sue the firm even after signing the severance agreement / taking the money ?

2. is this a common practice in US / other parts of the world?

3. If this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees and all working population must be aware of this .. your views ..

Regards

Ritu Anand

HR

GE – India

My response to Ritu follows:

Hi Ritu,

Thanks for your questions. They’re excellent and thoughtful. I’m going to post them and my responses to the HR Community’s list serve and on my website.

I’m answering your questions in the same order and number you asked them.

1. What is the guarantee that the exiting employee would not reveal the secrets/sue the firm even after signing the severance agreement/taking the money?

Answer: As a means to discouraging the employee conduct you refer to, all severance and separation agreements should permit the employer to recover damages, costs and expenses from the employee (assuming the legal system permits such recovery). This won’t absolutely prevent an exiting employee from talking, but it increases the likelihood that they won’t breach the agreement.

Even if a severance or separation agreement prohibits disclosure, if the ex-employee breaches, the employer still needs to take enforcement action. This does not necessarily mean that the employer has to sue the ex-employee. The employer can issue some type of warning (letter, phone call, etc.), or the employer can contact competitors and warn them about using such secrets. The latter action poses its own risks due to ethical concerns, antitrust, defamation, libel and slander concerns. Obviously, the most extreme action an employer can legally take is to actually sue the ex-employee for breaching the agreement. A lawsuit will cost the business time and money, even if they can recover damages, costs and expenses from the employee.

With respect to a lawsuit or some other sort of complaint by the ex-employee, this is easier to deal with. As long as the terms of the agreement’s confidentiality, nondisclosure and other prohibitions are legally compliant, no court or other sort of tribunal should adjudicate a lawsuit or complaint, and all costs, expenses and damages should be awarded to the employer.

2. Is this a common practice in US/other parts of the world?

Answer: Yes, this is a common practice in the U.S., and it has been increasing in popularity. These agreements used to be reserved for top executives and are now being used for employees at all levels. The confidentiality and noncompete aspects of these agreements are also commonly used for pre-employment agreements between employers and employees.

With respect to its popularity in other parts of the world, it depends on the nation’s, province’s or region’s legal system. Common law and “Westernized” legal systems are likely to uphold severance and separation agreements as they’re mutually agreed to contracts with valuable consideration exchanged between the parties. Additionally, more capitalistic economies ( e.g., former Soviet-bloc nations) might be more prone to honor such agreements as the protection of the employer’s property (capital) is paramount to innovation and profitability. However, these same legal systems will take measures to protect and ensure an individual’s ability to apply their skills, trade, knowledge and abilities in an unrestricted manner. After all, if individuals cannot freely earn a living, then they cannot consume the goods and services employers produce, and businesses will lose money.

3. If this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees and all working population must be aware of this .. your views ..

Answer: I briefly discussed your concern in my article. Excerpted below:

“Clients typically ask whether by offering an employee a severance, separation, or some hybrid agreement, they’re setting a legal precedent within their company or creating a feeling or belief of entitlement to such a benefit among employees. In short it’s not likely that the company will be legally obligated to offer the same to other employees. However, if other employees learn about such agreements, there’s a greater degree of possibility that a sense of entitlement will result. So, when deciding whether to use a separation or severance agreement, a business should consider the impact on employee morale, and to at least some extent consider the legal ramifications of using such an agreement.”

To expand further upon this, you might be right to say that “[i]f this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees.”

There are U.S. companies which have a reputation for caving in to exiting employee demands for large severances because they’re afraid of the public relations ramifications of lawsuits, complaints, ill-will, etc. Some companies just think it’s cheaper to offer money than to defend their record. But, as I indicated above, the likelihood of a legal precedent being set is minimal.

The concerns regarding employee morale and feelings of entitlement can be combated by offering severance and separation agreements infrequently or in extreme circumstances (e.g., in order to protect company confidentiality, capital, etc.), and making it clear to employees that they are at-will employees (if applicable). In other words, it’s relatively easy in an article like this to state in a generic and sterile manner what should or shouldn’t be done. It’s a completely different matter to actually draft and execute an agreement in a way that sufficiently communicates to a particular employee and the entire workforce that this is an isolated and unique circumstance, and a serious and binding agreement with provisions that must be honored. In short, how individual businesses and practitioners implement severance and separation agreements is crucial. Issues with execution are what leads to misunderstandings, disputes and your questions. I personally believe that many of the issues you allude to are avoidable and resolvable via a professionally drafted and executed severance or separation agreement and the advise of competent legal counsel.

Now, a few caveats. My original statement, as well as my response to your questions, are general statements and not intended as legal advice nor do my statements create any sort of attorney-client relationship. Moreover, as stated above, every circumstance is unique and might require its own unique agreement, contract and mode of execution. Again, consult competent legal counsel before taking any action.

I hope that this answers your questions. Feel free to ask for additional information or opinions. Moreover, thanks for taking the time to read the article.