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How Employer Fears of Wrongful-Firing Cases Eliminate Jobs

Once upon a time, you could be fired to make room for the boss’s son-in-law or because the owner just didn’t like your face. Employment was at somebody else’s pleasure. Termination was at will.

In most states, those days are over. Bad things still happen to employees, but California has led the way in expanding worker protections against so-called wrongful termination, in the process increasing job security and helping safeguard women and minorities in the workplace.

But at what cost? Apparently, plenty. California’s climate of employer liability for wrongful termination has probably reduced employment in the state by 2% to 3% compared to what it might have been if the protections didn’t exist, according to James N. Dertouzos, a RAND Corp. economist

In California, with more than 13 million workers, Dertouzos’ estimate means that as many as 390,000 jobs have been foregone, a gigantic number considering that fewer than 100,000 jobs have been lost in the state’s reeling aerospace industry since 1987.

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“In a nutshell, the efforts of the state judiciaries to protect workers’ job security are altering employers’ hiring and firing practices,” Dertouzos says. “And one of the results is less hiring.”

Dertouzos, who confesses to a “pro-labor streak,” is no wild-eyed reactionary advocating a return to serfdom. He and fellow RAND economist Lynn A. Karoly are the authors of a new study, “Labor-Market Responses to Employer Liability,” published by RAND’s Institute for Civil Justice. It tries to assess the economic repercussions of the expanded worker protections that sprang up in state courts nationwide during the 1980s.

These protections came into being at a time of growing emphasis on individual rights, and partly fill the vacuum left by declining union power. They probably have broad support among the general public too.

“The right not to be discharged arbitrarily from one’s job is fundamental to our culture and ought to remain so,” says John True, a senior attorney at the San Francisco-based Employment Law Center, a nonprofit organization that sues employers.

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The new RAND study is important not because it suggests that we should abolish worker protections, but because it might help us make an informed choice about how much society is willing to pay for legal protections against wrongful discharge.

Without question, employer liability for wrongful termination has raised labor costs. Companies have created big human-resources bureaucracies and established elaborate termination procedures. They probably keep around more incompetents too.

Employers also hire less, an effect that Dertouzos says seems most pronounced in large non-manufacturing companies. And they may be more prone to use temporary or part-time help.

The RAND study is nothing if not timely. California remains stuck in a nasty recession--unemployment in June was 9.5% statewide--and business is thumping for improvements in the state’s business climate.

Paul Grossman, general counsel of the California Employment Law Council, which includes 70 of the state’s biggest employers, says California law relating to firings may be America’s worst for business.

Next week, moreover, the Americans With Disabilities Act of 1990 takes effect. This sweeping federal legislation will bar discrimination against the handicapped, requiring employers to provide “reasonable accommodation” to help handicapped workers cope, except in cases where an employer would incur “undue hardship.”

Most workers already have substantial protections. You can’t fire someone in California for refusing to do something illegal, or in violation of what many courts construe as an implied contract promising fairness. And you can’t fire because of race, gender or other discriminatory factors (although white men under 40 have few rights in this area).

If you do, your former employee might have grounds for a tort action, which means the possibility of unlimited damages. Angel Gomez III, a Los Angeles attorney who defends management in such cases, says that during the past three years the average California verdict has approached $1.5 million, with a median of $500,000. Verdicts exceeding $1 million are running at the rate of one per month.

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That may sound like a lot, but in the scope of things this sort of litigation isn’t as expensive at it seems. Dertouzos himself, in a 1988 study at RAND, pegged the direct legal costs of wrongful-termination litigation at only one-tenth of 1% of the total wage bill. (For the record, most of the money that changes hands goes to lawyers.)

So the reaction of employers at first seems out of all proportion to the threat. But Dertouzos says we probably have this backward. Litigation costs and damages are relatively small precisely because employers have so drastically--and expensively--changed their behavior in response to this perceived threat.

But wasn’t that the whole point? Workers today doubtless have a greater degree of job security; less anxious about arbitrary dismissal, they might even be more productive. And society at least seems more just.

Not all the changes need be so costly. At Paul, Hastings, Janofsky & Walker, where Grossman is in charge of employment law, he urges clients to make new hires agree in advance to arbitration. Employers can also require an “at-will” agreement, in which employees acknowledge that they can be fired without cause, but such pacts do not always stand up in court.

On the other hand, nothing is free, even in California. Implied contracts, tort liability and other such anti-firing constructs come at a price. The question is whether the benefit is worth the gain. Says Dertouzos: “It makes all employees a little more costly, but some people don’t get to work.”


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