Employment at Will
One of the things that everyone wants from their job is security. But, except for a relative few in the job market, security is something most employees do not have. This is because they are “at-will” employees. This arrangement means that a company has the right to terminate your employment at any time for any reason with or without cause. You may find this arrangement startling, more so when you discover that employees actively choose this arrangement because it is the best of all possible employment arrangements. Today we’ll consider two articles one of which argues against this “at-will” arrangement and the other which offers a defense.
The article by Radin and Werhane outlines several objections, in principle and practice, against at-will employment. Among these are the claims that it violates certain rights that employees have, it violates the principle of fairness, and there are certain legal objections. Finally, they argue that successful employers operate according to practices that violate the concept of at-will employment thus indicating that it should be changed in significant ways if not eliminated.
The first argument against at-will employment is that it violates certain basic rights that we all have and these rights are not forfeited when you are hired. For example, the right to free speech, privacy, due process, and certain property rights. The reason they claim at-will employment violates these rights is that in such arrangements employers can fire you for no cause. So, you might say something that your boss finds objectionable and because of this, you could be fired. But this seems to directly violate your right to free speech. Another example is that you could be fired for not submitting to a random drug test or search of your desk. But these seem to violate your right to privacy. Do you forfeit these rights when you become an employee?
In addition to these violations of will, employment seems to go against the basic right to fairness that we have. In doing so, at-will employment tends to support arbitrary treatment of employees. If I am an employer and I don’t like how you dress I can fire you. Or if I don’t like the sound of your voice (never mind what you might be saying) I can fire you.
At this point, you might be thinking that there are certain legal restrictions put on employers to guard against such treatment. To a certain extent, you are correct which brings up Radin and Werhane’s next objection. There are certain legal restrictions on at-will employment which does tend to reduce the number of arbitrary treatment employees can be subjected to. However, before enumerating these I should probably state what might already be obvious. If an employer is determined to terminate an employee there are ways around many of these legal restrictions and since at-will employees have no right to due process or appeal the true cause of their termination may never be known.
In any case, there are laws against discrimination that restrict the causes for termination (or hiring) of an employee. Anytime you fill out an application you will notice a statement to the effect that in hiring the employer does not discriminate based on race, color, national origin, age, religion, marital status, sex, and so on. Hiring or firing for any of these reasons is illegal.
In addition, many states are now passing “just cause” laws that demand that employers who wish to terminate an employee do so for a just cause and that the cause be known to the employee. In essence, these laws are codifying your right to know why you are being terminated and your right to appeal this decision. These laws severely restrict the at-will arrangement.
In some states, courts have ruled that employers and employees are bound by “implied in fact” contracts. What this means is that the act of hiring an employee implies a certain good faith arrangement that the employee will not be treated arbitrarily. One of the things this implies is that they will not be fired for no reason or without cause.
Finally, there are other legal restrictions in place against arbitrary hiring and firing procedures. These include jury duty for example. You cannot be fired simply for being called to jury duty. You also cannot be fired for exercising your right to vote. And, since we’ve already discussed whistleblowing you might find it comforting to know that you cannot be fired for blowing the whistle.
Finally, Radin and Werhane point out that many successful companies engage in practices that go against the spirit of at-will employment. Many companies engage in such practices, such as training and retraining, not because of any legal requirement but because this is the best way to get and keep highly qualified employees. Not surprisingly, a company that gains a reputation for fair treatment of its employees, as well as just compensation, will tend to attract more highly skilled employees. This represents an implicit argument against the at-will arrangement.
On the other side, Richard Epstein wishes to argue in favor of at-will contracts and offers several points in their defense. His main arguments in favor of will contracts are that they encourage the right to freedom of association, they lower the cost of hiring and firing, they increase the flexibility employees have, and finally, they are the result of a rational bargaining process between employers and employees. That is to say, that the at-will arrangement has not been imposed on unwilling employees but rather chosen by them as the best arrangement.
Some of these advantages may be obvious. In an at-will arrangement, an employee has greater flexibility simply because they can quit any time they wish. This matches the employer’s right to fire at any time so the argument goes that there is parity here. This upholds the freedom of association. I can work for whom I choose and I can change jobs when I choose.
To see some of the other benefits which might be less obvious Epstein encourages us to see the at-will arrangement as the best answer to some basic questions regarding employment. It is important to remember that at the beginning of the employment arrangement each party has to deal with certain unknown variables concerning the other party. In other words, there are things the employee doesn’t know about the employer and there are things the employer doesn’t know about the employee. These things are difficult to get by simply asking for disclosure. So, with that in mind we need to answer three questions:
How does each party create incentives for the proper behavior of the other?
How does each side insure against certain risks?
How do both sides minimize the administrative costs of their contracting practices?
According to Epstein, the answer to each of these questions is the at-will contract. He outlines the answers in five areas:
1. Monitoring behavior: Here abuse can be minimized since the right to fire that the employer has is matched by the right to quit that the employee has. While employees under contract do have certain advantages there are also risks of abuse. Employers can be prevented from abusing these contracts if they know the employee can and will quit under such circumstances. But aren’t there still incentives for arbitrary treatment? This brings us to…
2. Reputational losses: Epstein argues that there are reputational costs that employers suffer for arbitrary treatment of employees and employers bear the burden of these much more than employees. There are also reputational benefits to good treatment and once again the employer realizes more of these. So, in both cases, there is a strong incentive for employers to protect their reputation under at-will arrangements by treating employees fairly and not arbitrarily firing them for no reason or without cause.
3. Risk diversification and imperfect information: One of the best ways to minimize risk in investing is to diversify your investments. In other words, as your mother always told you, don’t put all your eggs in one basket. In terms of employment, the at-will arrangement allows for this kind of diversification in employment by allowing an employee to diversify employers over time. A corollary to this is the idea that the best form of job security is multiple sources of income. As Epstein points out one of the benefits of at-will contracts is that they see employees as independent contractors. Employers knowing this recognize that if they do not justly compensate an employee, the employee can simply contract their services to someone else. They are like free agents.
Closely connected to this is the fact that the at-will arrangement protects against imperfect information. An employee knows little about the true conditions and requirements of a job until they are hired. But, if they are under contract it may be difficult to get out of this if the conditions are not to their liking. At will, contracts can be broken much easier.
4. Administrative costs: One of the obvious benefits to employers of at-will employees is that it lowers their costs both in terms of hiring and firing. At first, this may seem to be only a benefit to the employer. However, it is important to remember that anytime you raise the cost of something you get less of it. So, if you raise the cost of employment you get less employment. In other words, you get more unemployment. This is a huge disadvantage to the prospective employee so lowering costs is a benefit to both employers and employees.
5. Distributional concerns: Here Epstein is arguing that there is no good reason to think that eliminating or modifying the at-will arrangement will produce any benefit in the distribution of wealth in society as a whole or even to individual employees. If such modifications would produce such benefits employees would have voluntarily sought these changes long ago. This again ties into his claim that the at-will arrangement exists because it has been chosen as the best arrangement among all other competing ones. While this may seem counterintuitive to those looking in from the outside, it is not so for the employees participating in the at-will contracts.
Finally, it is important to remember that employees have just as much of a stake in the success of a company as employers. Remember when we discussed stakeholder theory? Many employees are also shareholders in their company because of the investment plans that employers offer. So, the success of the company is an important interest not only from the standpoint of someone’s employment but also for other stakeholder roles that the same person plays. To see this one must look at the entire context of the employment arrangement and the environment in which this takes place. Speaking of which, our next lecture addresses the concerns raised by the environment and the effect employers and employees have on it.
The article by Radin and Werhane outlines several objections, in principle and practice, against at-will employment. Among these are the claims that it violates certain rights that employees have, it violates the principle of fairness, and there are certain legal objections. Finally, they argue that successful employers operate according to practices that violate the concept of at-will employment thus indicating that it should be changed in significant ways if not eliminated.
The first argument against at-will employment is that it violates certain basic rights that we all have and these rights are not forfeited when you are hired. For example, the right to free speech, privacy, due process, and certain property rights. The reason they claim at-will employment violates these rights is that in such arrangements employers can fire you for no cause. So, you might say something that your boss finds objectionable and because of this, you could be fired. But this seems to directly violate your right to free speech. Another example is that you could be fired for not submitting to a random drug test or search of your desk. But these seem to violate your right to privacy. Do you forfeit these rights when you become an employee?
In addition to these violations of will, employment seems to go against the basic right to fairness that we have. In doing so, at-will employment tends to support arbitrary treatment of employees. If I am an employer and I don’t like how you dress I can fire you. Or if I don’t like the sound of your voice (never mind what you might be saying) I can fire you.
At this point, you might be thinking that there are certain legal restrictions put on employers to guard against such treatment. To a certain extent, you are correct which brings up Radin and Werhane’s next objection. There are certain legal restrictions on at-will employment which does tend to reduce the number of arbitrary treatment employees can be subjected to. However, before enumerating these I should probably state what might already be obvious. If an employer is determined to terminate an employee there are ways around many of these legal restrictions and since at-will employees have no right to due process or appeal the true cause of their termination may never be known.
In any case, there are laws against discrimination that restrict the causes for termination (or hiring) of an employee. Anytime you fill out an application you will notice a statement to the effect that in hiring the employer does not discriminate based on race, color, national origin, age, religion, marital status, sex, and so on. Hiring or firing for any of these reasons is illegal.
In addition, many states are now passing “just cause” laws that demand that employers who wish to terminate an employee do so for a just cause and that the cause be known to the employee. In essence, these laws are codifying your right to know why you are being terminated and your right to appeal this decision. These laws severely restrict the at-will arrangement.
In some states, courts have ruled that employers and employees are bound by “implied in fact” contracts. What this means is that the act of hiring an employee implies a certain good faith arrangement that the employee will not be treated arbitrarily. One of the things this implies is that they will not be fired for no reason or without cause.
Finally, there are other legal restrictions in place against arbitrary hiring and firing procedures. These include jury duty for example. You cannot be fired simply for being called to jury duty. You also cannot be fired for exercising your right to vote. And, since we’ve already discussed whistleblowing you might find it comforting to know that you cannot be fired for blowing the whistle.
Finally, Radin and Werhane point out that many successful companies engage in practices that go against the spirit of at-will employment. Many companies engage in such practices, such as training and retraining, not because of any legal requirement but because this is the best way to get and keep highly qualified employees. Not surprisingly, a company that gains a reputation for fair treatment of its employees, as well as just compensation, will tend to attract more highly skilled employees. This represents an implicit argument against the at-will arrangement.
On the other side, Richard Epstein wishes to argue in favor of at-will contracts and offers several points in their defense. His main arguments in favor of will contracts are that they encourage the right to freedom of association, they lower the cost of hiring and firing, they increase the flexibility employees have, and finally, they are the result of a rational bargaining process between employers and employees. That is to say, that the at-will arrangement has not been imposed on unwilling employees but rather chosen by them as the best arrangement.
Some of these advantages may be obvious. In an at-will arrangement, an employee has greater flexibility simply because they can quit any time they wish. This matches the employer’s right to fire at any time so the argument goes that there is parity here. This upholds the freedom of association. I can work for whom I choose and I can change jobs when I choose.
To see some of the other benefits which might be less obvious Epstein encourages us to see the at-will arrangement as the best answer to some basic questions regarding employment. It is important to remember that at the beginning of the employment arrangement each party has to deal with certain unknown variables concerning the other party. In other words, there are things the employee doesn’t know about the employer and there are things the employer doesn’t know about the employee. These things are difficult to get by simply asking for disclosure. So, with that in mind we need to answer three questions:
How does each party create incentives for the proper behavior of the other?
How does each side insure against certain risks?
How do both sides minimize the administrative costs of their contracting practices?
According to Epstein, the answer to each of these questions is the at-will contract. He outlines the answers in five areas:
1. Monitoring behavior: Here abuse can be minimized since the right to fire that the employer has is matched by the right to quit that the employee has. While employees under contract do have certain advantages there are also risks of abuse. Employers can be prevented from abusing these contracts if they know the employee can and will quit under such circumstances. But aren’t there still incentives for arbitrary treatment? This brings us to…
2. Reputational losses: Epstein argues that there are reputational costs that employers suffer for arbitrary treatment of employees and employers bear the burden of these much more than employees. There are also reputational benefits to good treatment and once again the employer realizes more of these. So, in both cases, there is a strong incentive for employers to protect their reputation under at-will arrangements by treating employees fairly and not arbitrarily firing them for no reason or without cause.
3. Risk diversification and imperfect information: One of the best ways to minimize risk in investing is to diversify your investments. In other words, as your mother always told you, don’t put all your eggs in one basket. In terms of employment, the at-will arrangement allows for this kind of diversification in employment by allowing an employee to diversify employers over time. A corollary to this is the idea that the best form of job security is multiple sources of income. As Epstein points out one of the benefits of at-will contracts is that they see employees as independent contractors. Employers knowing this recognize that if they do not justly compensate an employee, the employee can simply contract their services to someone else. They are like free agents.
Closely connected to this is the fact that the at-will arrangement protects against imperfect information. An employee knows little about the true conditions and requirements of a job until they are hired. But, if they are under contract it may be difficult to get out of this if the conditions are not to their liking. At will, contracts can be broken much easier.
4. Administrative costs: One of the obvious benefits to employers of at-will employees is that it lowers their costs both in terms of hiring and firing. At first, this may seem to be only a benefit to the employer. However, it is important to remember that anytime you raise the cost of something you get less of it. So, if you raise the cost of employment you get less employment. In other words, you get more unemployment. This is a huge disadvantage to the prospective employee so lowering costs is a benefit to both employers and employees.
5. Distributional concerns: Here Epstein is arguing that there is no good reason to think that eliminating or modifying the at-will arrangement will produce any benefit in the distribution of wealth in society as a whole or even to individual employees. If such modifications would produce such benefits employees would have voluntarily sought these changes long ago. This again ties into his claim that the at-will arrangement exists because it has been chosen as the best arrangement among all other competing ones. While this may seem counterintuitive to those looking in from the outside, it is not so for the employees participating in the at-will contracts.
Finally, it is important to remember that employees have just as much of a stake in the success of a company as employers. Remember when we discussed stakeholder theory? Many employees are also shareholders in their company because of the investment plans that employers offer. So, the success of the company is an important interest not only from the standpoint of someone’s employment but also for other stakeholder roles that the same person plays. To see this one must look at the entire context of the employment arrangement and the environment in which this takes place. Speaking of which, our next lecture addresses the concerns raised by the environment and the effect employers and employees have on it.