Old law vs. the new economy

How New Deal-era regulations stifle flexible work arrangements

James V. DeLong from the August/September 2001 issue

(Page 3 of 5)

Much of the structure of labor law reflects the zanier thinking of the New Deal. One was the idea that the U.S. was a mature economy in the 1930s, and that available work must be rationed. Another was that the road to recovery lay through the creation of scarcity by reducing supply while raising prices. (John Maynard Keynes tried to talk Roosevelt out of this one; he failed.)

The structure remains as built, as if Rube Goldberg had designed it, however inconsistent with subsequent experience or modern life. One of its most important premises is that flexibility is bad. Labor policy assumes that employers have power and workers do not. Thus, workers should not be permitted to bargain over conditions of employment, except through unions, because the imbalance of power means that anything that might lead to abuse will lead to abuse.

Thus, if hourly workers are allowed to work 10 hours a day for four days instead of eight hours for five days, then employers will impose this schedule on some unwilling workers. This cannot be allowed. Thus, if employers and employees are allowed to agree that a worker will get comp time instead of overtime pay, then employers will force this on workers. This too must be forbidden.

The idea that labor markets might work like other markets, that workers might sort themselves out according to their own preferences among packages offered by different employers, is antithetical to the still-prevailing New Deal belief system.

Although unions have often been criticized for crafting unyielding work rules, legal standards actually impose greater rigidity on the workplace. Unions can be bought off, persuaded to relax a rule in a trade for money. Legal standards, on the other hand, are set in stone. If the Fair Labor Standards Act forbids a four-day, 10-hour-a-day week, then that’s that. The employer can’t offer more money for the flexibility, nor can an employee who desperately wants the new schedule offer to take less.

Even anti-discrimination and anti-harassment laws, which have goals with which all would concur, have become forces for rigidity. They are shot through with vagueness and uncertainty, and the multimillion-dollar damages that juries have awarded under these laws have put employers into a defensive posture. This means inflexibility. Because supervisor discretion is too easily painted as discrimination, everyone must be treated alike and everything must be documented. Flexible arrangements cannot be offered to some employees and not others, which makes employers reluctant to offer them at all.

The potential implosion of Social Security is reinforcing government’s propensity to enforce rigidity. Any sensible current entrant into the work force would opt out. He would declare himself a free agent, ask that his employer’s share of Social Security be paid to him in cash, and sock both it and his own share into an index fund. A $50,000 per year worker would save $7,650 in a year, which at 6 percent would be worth $61,200 in 36 years. Few expect the rate of return from Social Security to be as high.

The Internal Revenue Service seems, sensibly, to fear massive defections from the system, and is growing more imperious in its decisions restricting employers’ use of free agents. Any effort toward flexibility is assumed to be motivated by a desire to evade Social Security tax obligations, and can be countenanced only if the deal passes an elaborate 20-point test. An employer who guesses wrong on the result will pay heavily.

The IRS’ assault on flexibility is always justified by stern lectures on the need to protect the workers against exploitive employers, never in terms of protecting Social Security revenues against the rationality of the work force. In fact, the IRS policy injures workers both directly and indirectly. Not only is the worker’s rate of return on his savings reduced, but employers have responded by imposing strict time limits on the tenure of independent contractors, decreeing that after a set period -- usually three months -- they must be cast adrift, regardless of their own desire or the state of the project on which they are working. Companies have also stopped hiring temps directly, forcing them to come in through temp agencies, which take a big chunk out of their pay. Both courses leave the workers worse off.

Employers who adopt flexible arrangements are also getting nicked by employees who repent of their bargain and want labor law to rewrite it. Last year, Microsoft agreed to pay almost $100 million to workers who had signed very clear contracts affirming their independent status. The IRS forced their reclassification as employees, and they then sued Microsoft on the theory that as employees they should have received stock purchase privileges in the 1980s.

AOL is being sued by volunteers who manned its chat rooms and performed other community services. Their original arrangement was very communitarian, and much like a gift economy; their recompense was in the accolades of the online community and in free connection time, which was valuable when AOL charged $6 an hour, but worth zilch when it instituted flat pricing of $19.95 per month.

These volunteers noticed that many company employees earned not just community approval but cash and stock options, which then became worth a fortune. They also noticed that the Fair Labor Standards Act does not allow volunteers in profit-making organizations. Like the Microsoft contractors, they want to be employees, retroactively.

Customer representatives at Amazon’s Seattle facility are also reconsidering the glories of the new economy. They launched a unionization drive, an effort brought to a halt when the company cut the size of the facility and fired most of them.

Racial-bias litigation is increasing, with some minorities alleging that their underrepresentation in high-tech industries must be due to discrimination. They, too, want retroactive relief, particularly stock options, calculated at the peak values of the Nasdaq.

New economy vs. old law