DEBORAH GROBAN OLSON
ATTORNEY AT LAW
1021 Nottingham Road
Grosse Pointe Park, Michigan 48230
Phone (313) 331 7821
Fax (313) 331 2567
Email dgo@esoplaw.com
Employee participation programs may make companies more competitive in the world market; however, if employees do not own their companies, they are not guaranteed that their employers' increased competitiveness will secure their jobs. The author supports the NLRB's interpretation of the NRLA that makes it more difficult to create an employee participation program in a non-union company than in a unionized company. To do otherwise, she argues, would further weaken unions, whose ability to protect the security of U.S. jobs has diminished over the past two decades. Rather than change the NLRA, she proposes to change corporate, tax, and ERISA laws to give employee owners more rights as shareholders to control their companies, to vote their stock, and to have board representation that fully empowers them to negotiate their interests.
Corporate shareholders benefit from increased world competitiveness and from increased market share, which is ultimately reflected in the stock price. Such benefits are often obtained by outsourcing work to labor markets cheaper than the U.S. If the shareholders are employee owners who work in the U.S., they may not benefit from such increases in competitiveness. If employee owners are laid off before becoming vested in their ESOP stock accounts, they will receive no benefit from the company's increased competitiveness. If they are vested, and lose their jobs but receive the cash value of their stock interest, they are still unemployed and likely to generate less economic activity in the U.S. than they did when they were employed.
However, suppose that the employee owners' corporate board, and the boards of all the other companies with employee-owner representatives, had to balance the employee owners' interests in keeping a job with other concerns about competitive pricing, technological competition, executive compensation, and relationships with customers and suppliers. In that case, would the board, the management, the union, and the employees all be more apt to hold full-interest negotiations and find participative solutions to their problems that would better serve the national interest of full employment?
This article explores methods of empowering such employees to fully express their interests as employee owners in negotiation with other interests represented on the corporate board to create a system of interest negotiation between the parties that will serve our national interests in the twenty-first century. The first part of the article presents an overview of the labor movement as it relates to employee ownership and participation. The second part of the article presents legislative proposals aimed at finding common ground between the trade union movement and employee ownership. These proposals are being made to the Commission on the Future of Worker-Management Relations, also known as the Dunlop Commission.1
How can the American workplace enhance job security for Americans while improving the competitive position of American companies in the world marketplace? We must begin by exploring whether our current national interests are served by existing labor and corporate laws. These laws arose in the nineteenth and early twentieth centuries to enable the creation of public equity markets and to balance the rights of property owners in their dealings with one another and their employees. These laws were conceived in the context of a primarily national, not a global, marketplace.
Over the course of the twentieth century, we have enacted numerous laws to improve the standard of living and quality of life of Americans, including labor, child labor, wage and hour, civil rights, occupational safety and health, and environmental protection laws, as well as building and zoning codes. Many, if not all, of these laws increase the price of doing business in the U.S. Most developing countries have not enacted as many laws protecting individuals and the environment. However, we have deemed it in our national interest to do so.
With the advent of a global marketplace, it has become possible for corporations in the U.S. to produce overseas, avoiding the social costs of much of our protective legislation and decreasing employment in the U.S. The decrease of U.S. employment has led to significant social problems and their attendant costs here including crime, substance abuse, hopelessness, family violence, and so forth.
Although corporations now exist in a global market, people still live in cities and states within national boundaries. The purpose of the nation-state is to protect its inhabitants. Laws that were created to enable economic growth within the nation-state, such as corporate and labor laws, now have an impact on world competitiveness that they did not when most trade was within the nation-state.
Our economy is essentially based on free trade. Congress, with the passage of legislation such as the North American Free Trade Agreement (NAFTA), has taken a clear position that it will not strive to protect the interests of U.S. citizens by restricting trade to protect jobs. Therefore, we must look to the relationship between the parties to production for solutions to keep American industry producing wealth for Americans.
The rules of collective bargaining embodied in the National Labor Relations Act (NLRA) were adopted to quell industrial strife in the 1930s. At that time, Congress determined that the interests of the country were best served by allowing employees to organize into unions to negotiate wages, hours, and terms and conditions of employment with corporations because individual workers no longer had the bargaining power necessary to negotiate fair wages and conditions for themselves. During that era of industrialization, companies needed large numbers of unskilled workers, unions were organizing them, and without legal protection the clashes between unions and companies were frequently violent, interfering with interstate commerce.2
The framers of the NLRA found that company unions were a major evil, which Congress chose to eradicate using NLRA section 8(a)(2), 29 U.S.C. § 158(a)(2), which provides that an employer shall not
dominate or interfere with the formation or administration of any labor organization or contribute financial or other support to it: Provided, That subject to rules and regulations made and published by the [National Labor Relations] Board pursuant to section 156 of this title, an employer shall not be prohibited from permitting employees to confer with him during working hours without loss of time or pay.
Section 2(5) of the NRLA, 29 U.S.C. § 152(5), defines "labor organization" as follows:
The term "labor organization" means any organization of any kind, or any agency or employee representation committee or plan, in which employees participate and which exists for the purpose, in whole or in part, of dealing with employers concerning grievances, labor disputes, wages, rates of pay, hours of employment, or conditions of work.
The National Labor Relations Board (NLRB; Board) decided two cases in 1992 and 1993 that show how the Board weighs the rights of employees to choose or forego union representation while protecting collective bargaining rights, by requiring that if a company engages in collective bargaining it must do so with a bona fide union that is not controlled by the company. These cases are Electromation, Inc.3 and DuPont.4
Electromation dealt with participation committees that were challenged by a union as "labor organizations" illegally dominated by management and "dealing with" employees "concerning grievances, wages, hours, terms or conditions of work." The challenging union had attempted to organize the company in question and management withdrew from active participation in the committees during the course of the union campaign. The Board found that these committees (which involved labor and management in discussing working conditions, but left final decisions about implementing committee proposals to management) were dominated by management and dealt with work conditions. The Board further found that anti-union animus was not required to find a section 8(a)(2) violation.
The Electromation decision included a substantial discussion of the legislative history of the Wagner Act (the original version of the NRLA enacted in 1935 before its amendments in 1947 by the Taft-Hartley Act and in 1959 by the Landrum-Griffin Act), including the following:
The legislative history reveals that the provisions outlawing company dominated labor organizations were a critical part of the Wagner Act's purpose of eliminating industrial strife through the encouragement of collective bargaining. Early in his opening remarks Senator Wagner stated: "Genuine collective bargaining is the only way to attain equality of bargaining power....The greatest obstacles to collective bargaining are employer-dominated unions, which have multiplied with amazing rapidity since the enactment of (the National Recovery Act). Such a union makes a sham of equal bargaining power....(O)nly representatives who are not subservient to the employer with whom they deal can act freely in the interest of employees. For these reasons the very first step toward genuine collective bargaining is the abolition of the employer dominated union as an agency for dealing with grievances, labor disputes, wages, rates or hours of employment."5
The Board went on to note that the original NLRB took as its first order of business to weed out company-dominated unions, 6 and that indeed its first case, Pennsylvania Greyhound Lines, 1 NLRB 1 (1935) was an employer domination case.
Although we may feel that our world is quite different than that of 1935, in this area it is probably not so different. Since the 1970s, labor unions have been losing elections, largely due to the increased intensity of management campaigns and the conservative decisions of the NLRB allowing many of these anti-union tactics to prevail, coupled with world competition which has severely weakened the bargaining position of national unions.
In DuPont, the Board attempted to distinguish between "pure communication" programs between employers and employees, and programs designed to deal with making decisions or bilaterally resolving disagreements. In DuPont, the company had a collective bargaining agreement with a union, but attempted to discuss some issues directly with employees outside of the union structure. The Board found that "brainstorming" and "suggestion boxes" did not constitute illegal "dealing with" employees because proposals are not made and thus decisions are not rendered on employee proposals. Alternatively, if hourly employees were given total authority to make decisions for the company, that too would not constitute illegal "dealing with" as there would be no negotiations between labor and management. However, wherever managers are dealing with groups of employees about ideas and management ultimately has veto power, management is illegally "dealing with" employees under section 8(a)(2).7
These seem to be reasonable boundaries to protect the rights of employees to organize when they have issues they may wish to negotiate with employers. To decide otherwise, in the name of promoting employee participation, would simply provide a mechanism with which companies might diminish the ability of employees to protect themselves when they are dealing with the company on matters of concern to themselves over which the company has veto power.
Employee participation has been adopted by many employers as a replacement for "Taylorism" or "scientific management"8 to meet the more sophisticated needs and methods of modern production. As production of large quantities for mass markets gives way to more specialized production for niche markets, employers need better trained and more flexible and multi-skilled employees to run ever more sophisticated equipment to meet their customers' needs on a just-in-time basis. Employee participation means different things in different places, but it essentially means that production employees have a greater voice in determining the methods and organization of production. This usually involves teamwork and regular meetings between production employees and some level of management.
Protecting collective bargaining does not require diminishing participation. In many instances, particularly in the auto and steel industry, significant employee participation has been negotiated within the context of collective bargaining agreements with little problems. For example Ford, General Motors, Saturn, and Chrysler, which negotiate with the UAW,9 and many of the companies that negotiate with the USWA,10 have extensive participation programs that have not been challenged under the NLRA.
The situations where employers claim that NLRA section 8(a)(2) impedes their ability to engage in employee participation are generally those in which there has been some attempt at union organization that was thwarted or replaced by an employer-created employee participation program.
The NLRB has made a reasonable effort to allow workplace participation without undermining the ability of employees to unionize unhindered by interference from employer domination of the union. Since 1979, the portion of the U.S. employees represented by unions has steadily decreased. There is no reason to further weaken the ability of unions to organize.
Labor unions are the primary institutions in the U.S. designed to protect the interests of working Americans. Mechanisms that aim to aid the competitiveness of U.S. firms in the world market can do so in several ways. Some of those methods, such as decreasing wages or outsourcing work abroad, may decrease the employment and financial security of working people in the U.S.
Organized labor's chief political role has been to protect the economic and job security of employees. As a country, we need trade, economic, and industrial policies that enhance the competitiveness of U.S. firms in ways that provide jobs and income, and increase the stake, skill development, and domestic consumption of U.S. citizens and residents.
Organized labor constantly strives to protect those interests. Therefore, its ability to organize should not be diminished by allowing more employer domination of labor organizations in the guise of labor-management participation. Presently, some of the most sophisticated labor-management participation programs exist at highly unionized major auto and steel makers where participation is properly negotiated under the existing law.
Labor unions are not a natural obstacle to participation because they generally seek to increase the influence of workers in the workplace. There is thus no real reason to further weaken labor law to achieve more participation. Rather, employee participation should be encouraged as a policy in ways that both increase international competitiveness and protect domestic incomes. Participation programs instituted in an effort to avoid unions, however, smack of company unionism.
As capital has become increasingly mobile during the past decade, organized labor has become aware of global competition for jobs. It has become increasingly difficult to maintain and increase fixed compensation. Labor often must accept variable compensation based on productivity, market share, or profitability variations for its companies or products. Good employee participation programs have helped employees understand how these external market factors affect the company and how their participation can affect those market factors. Employee ownership is a mechanism of variable compensation, which often includes some increased job security, enabling employees and their unions to accept the vagaries of variable compensation.
In the near future there will be as many employee owners in the U.S. as there are unionized workers. "Sometime between 1991 and 1995, the percentage of workers in companies that have more than 10% employee ownership will exceed the membership of the entire trade union movement."12
Employee owners could provide a base, and their ownership interests a basis, to protect national interests in corporations if, as proposed below, they were given sufficient rights, information, and resources to act knowledgeably upon their interests, particularly if certain legal obstacles were removed.
There are provisions of corporate, pension, and tax law that hinder employee owners from directly expressing their unique interests as employee owners. Enabling them to express those interests in the boardroom would create a counterweight to outsourcing, which could force corporations to seek solutions to competitive pressures by means other than decreasing domestic employment. The ESOP laws also could be changed to provide greater tax incentives for companies that provide employees with a greater percentage of employee ownership and with greater voice and participation rights.
Under corporate law, every director owes a fiduciary duty to every shareholder to protect the interests of that shareholder. Board members are not permitted to protect the interests of one set of shareholders to the detriment of another group. Minority shareholders can and do successfully sue board members who oppress them for the benefit of the majority shareholder(s). This is an important principle, enabling public and private equity markets to exist. However, this principle, which arose in a time when most equity markets operated nationally, not internationally, should be altered to accommodate the protection of domestic employment and income concerns. Employee owners and unions should be given special exceptions to these rules in order to protect domestic employment.
Specifically, employee owners should be allowed to elect board of director representatives who are entitled to represent their special interests as employee owners and are not held liable as fiduciaries to non-employee shareholders. This would help balance some of the inequality that non-management employee owners generally have in relation to other shareholders, an inequality that arises both from the employee owners' lack of experience in corporate management and from the systemic orientation of the equity markets to measure all decisions based on return on financial investment. Employee owners often make a financial sacrifice to invest in their companies primarily out of a concern for job security. To maximize the return on their investment, they should evaluate corporate decisions in light of their primary concerns of job security and income, and not just for the ultimate value of the stock in their accounts upon their retirement or termination of employment.
These board representatives would then have a greater obligation than other directors to protect domestic employment. They could not hold rigidly to a "no layoffs or outsourcing" policy to the extent that it would kill the company. But they could cause the company to exert itself to its fullest extent to cut costs in other areas before taking away the sustenance of employee owners.
Some state laws now permit or require board of director members to consider the impact of their actions on communities.13 This proposal endorses those laws but intends to expand upon them by recognizing that employee owners have a very specific interest in job security that is crucial to protecting local communities, and should be given a larger voice.
This is presently an area of state law and differs from state to state. Nonetheless, the effect of this issue is national. Perhaps this concept could be accommodated by one of the numerous mechanisms under federal tax law that cause corporations to organize themselves as needed to obtain various federal tax benefits.
Some arguments against making such changes in corporate law are that if this proposal were enacted it would have dire consequences, (1) opening the door for majority interests on boards to oppress minority interests, (2) possibly chasing away investors, or (3) making companies too short-term oriented based on employees' short-term interests.
The concerns of other investors can be solved by fine-tuning the legislation enabling employee owner board members. To ensure the protection of property rights of equity owners, employee owner board members could be limited to comprise not more than one-third of the board of directors to counterbalance their effect on the rights of non-employee shareholders. It might be necessary to offer equity investors a greater return for their money in exchange for an agreement to have specific employee owner-oriented board seats. Sensitivity to the needs of equity markets would be required to properly draft such legislation. However, we should not be so overly sensitive to these concerns that we forget that equity markets are international and that national interests rest with employees who live in the U.S.
Regarding opening the door to provide similar rights for other interests, one must examine the value of those interests to the nation-state. Other interests should not be entitled to such representation because no other interest is as meaningful to protecting employment and incomes in the U.S. Investors usually vote their own pocketbook interests regardless of their overall fiduciary responsibility. However, less experienced, less sophisticated, and less wealthy employee owner representatives are much more likely to be restrained by the existing letter of the fiduciary rules than are sophisticated investors.
The claim that employee owners have a short-term view of their investment is not borne out by the history of employee-owned companies. In fact, it appears that ESOP companies have done well by comparison to their competitors, and that those with the greatest employee participation have done the best.14
ERISA's fiduciary standards should be changed in majority employee-owned companies to permit fiduciaries to give participants' interests in job security equal or greater weight than their interests in retirement security when determining the "best interest of the participants."
In recent years, the U.S. Department of Labor (DOL) has intensified its efforts to protect the interests of ESOP participants by increasing its litigation of ESOP fiduciary cases. However, some of the principles it promotes have made ESOP financing increasingly difficult. Perhaps a change in emphasis, from paternalism to empowerment of employees to protect their own interests, would have the desired effect of preventing abuse of the pension system while permitting workers, unions, and equity investors to make rational deals with each other based on their mutual self-interests.
Many outside investors have been discouraged from entering into a joint venture with an ESOP because of the DOL's continuing interest in promoting a dollar-for-dollar rule insisting that equity be distributed based on equating hard cash dollars invested up front by outsiders as equivalent to company contributions to the ESOP for repayment of debt over time. 15
The DOL has well-founded concerns that ESOPs may be used to benefit the seller rather than the participants. However, if the participants have the ability to direct the company after its purchase for their own benefit, and if there are fewer barriers to union representation on corporate boards, then employees and unions will be far more likely to succeed in buying companies. Thereafter, employees and unions will be in a far better position to make an employee-owned company serve the needs of protecting employment and income security in more companies.
Furthermore, if the tradeoff for allowing the interests of employee owners as employees to be recognized as proper fiduciary concerns is to concede the dollar-for-dollar position of the DOL on ESOPs, the net effect may be to increase the number of ESOP deals for which equity investors can be found, without sacrificing the protection of employee-participant interests.
At present many company founders get away with selling their stock to ESOPs at inflated prices. The DOL does not have enough staff to police its valuation policy. Labor unions, with the changes proposed herein, could negotiate sufficient control over the matters of greatest concern to their members and could attract more investors into employee-owned deals. That, in turn, would produce a greater portion of the economy subject to domestic control over employment and income policy in corporations.
The ESOP lender requirements in Internal Revenue Code (IRC) section 133 should be made contingent on the following requirements giving employees increased voting, information, and participant rights, any or all of which may be waived if the ESOP is created through collective bargaining. These changes presume that a corresponding exception would be made in ERISA allowing employee owners to direct trustees how to vote allocated and unallocated shares without putting the trustees in the fiduciary bind created by current law of having to override the participants' directions if they do not believe them to be in the participants' best interests.16
State and/or federal tax credits should be created to encourage individual investment of IRA or 401(k) funds in state- and labor-sponsored venture capital funds that focus on employee ownership.18
Majority ESOP companies that would otherwise lose net operating loss tax credits (NOLs) due to change of control provisions under IRC section 382 should be allowed to keep the NOL credit provided the company changes to a majority employee-owned and controlled company.
Congress should consider loosening the IRC section 415 limits in companies where the employees take significant pay concessions in order to buy a controlling share of the company.
There is no way to know whether increased participation will improve the competitive position of U.S. companies on the world market. Statistics from the Ohio study on employee ownership and participation show that participative companies have higher productivity than their non-participative counterparts.19
However, if employees in U.S. companies have a voice that must be reckoned with in corporate decision making, their interests will be addressed. The interests of U.S. employees are more clearly aligned with the national interests of the U.S. population than are the interests of multinational corporations that, although headquartered in the U.S., may be owned substantially by foreigners. Therefore, it is clearly in the long-term national interest of the U.S. to increase the voice of U.S. employees in corporate decision making.
1. The Dunlop Commission is a ten-member panel, headed by John T. Dunlop, Lamont University Professor Emeritus at Harvard University, that was established in May 1993 when President Clinton asked Secretary of Labor Robert B. Reich and Secretary of Commerce Ronald H. Brown to appoint a commission to investigate the state of worker-management relations. The Dunlop Commission was asked to recommend (1) new ways to enhance productivity through labor-management cooperation and employee cooperation; (2) changes in collective bargaining to enhance cooperative behavior, improve productivity, and reduce conflict and delay; and (3) ways to increase the extent to which workplace problems are directly resolved by the parties themselves rather than through regulatory bodies and the courts.
3. Electromation Inc. and International Brotherhood of Teamsters, Local Union No. 1049, AFL-CIO, and Action Committees, 309 NLRB 990, 309 NLRB No. 163, 142 LRRM 1001, 1992 NLRB LEXIS 1417 (1992).
4. E.I. du Pont de Nemours & Co. and Chemical Workers Association Inc., International Brotherhood of Dupont Workers and Chambers Works Central Safety and Occupational Health Committee, Antiknocks Area Safety Committee; Jackson Lab Programs and Publicity Committee, Freon Central Safety Committee, Chambers Works Fitness Committee; et al., 311 NLRB No. 88, 311 NLRB 893 (1993).
5. Electromation, 309 NLRB No. 163 at 7.
7. Dupont, 311 NLRB No. 88 at 2-3.
8. "Scientific management" was the prevalent theory of industrial organization in the US in the 1930s through 1950s, whereby production jobs were broken down into small repetitive jobs so each worker needed little training and operated at maximum efficiency, like a glorified machine.
9. International Union, United Automobile, Aerospace and Agricultural Implement Workers of America.
10. United Steel Workers of America, AFL-CIO, CLC.
11. Telephone interviews on August 30, 1994, with Jalmer Johnson, Economic Analyst for the Airline Pilots Association, and with Michael Glanzer of Keilin and Bloom provided background information for the author's opinions expressed here. Such opinions are those of the author and are not attributed to these sources.
12. Joseph Blasi, "Employee Ownership: Opportunities for Unions," Workplace Topics vol 2, no. 1 (July 1991), 17.
13. Ohio Revised Code section 1701.59(E) permits, but does not require, the directors to consider the interests of the corporation's employees, customers, suppliers, creditors, the economy of the state and nation, community and societal considerations, and so forth
14. In its 1987 report on ESOPs, the U.S. General Accounting Office (GAO) found that employee-owned companies surpass their traditional competitors in productivity only when they include significant employee participation programs. Those conclusions are confirmed and extended by several recent studies, including a 1993 study by the Northeast Ohio Employee Ownership Center (NEOEOC). The NEOEOC study found that employee ownership is closely associated with improved productivity and quality, decreased employee turnover, and improved worker motivation and job satisfaction. Minority ESOPs with less than 10% holdings seem to have a less pronounced impact on firms than more significant levels of employee ownership. Majority ESOPs are more likely to involve non-managerial employees in decision making than minority ESOP companies. All ESOP firms, however, invest more in training non-managerial employees after their ESOPs are in place than they did before. 80% of the managers surveyed said the ESOP had a positive effect on employee attitudes. 69% said that the ESOP had a positive effect on employees' on-the-job performance. 54% said customer service improved and that employee participation increased in 78% of the surveyed firms.
According to the 1990 GAO study, stock accounts in ESOPs on average were somewhat lower than those in other types of defined contribution plans, but were growing at a faster rate. The average vested account balance was higher, $22,756 and the values of individual accounts ranged from $0 to $387,472.
15. DOL v. Farnum, 17 BNA Pension Reporter 1494 (D.R.I. 1990).
16. This list of suggested changes is taken from the author's article, "ESOPs for People, Not for Wall Street," this Journal vol. 5, no. 2 (Spring 1993), 8-9.
17. For more detail, see id. at 9.