How Democrats Stifle Labor Markets

Richard Epstein*

Richard Epstein

Richard Epstein

The National Labor Relations Act of 1935 (NLRA) introduced a major revolution in labor law in the United States. Its reverberations are still acutely felt today, especially after the recent, ill-thought-out decision in the matter of Browning Ferris. There, the three Democratic members of the National Labor Relations Board overturned well-established law over the fierce dissent of its two Republican members. If allowed to stand, this decision could reshape the face of American labor law for the worse by the simple expedient of giving a broad definition to the statutory term “employer.”

Right now, that term covers firms that hire their own workers, and the NLRB subjects those firms to the collective bargaining obligations under the NLRA. Under its new definition of employer, the NLRB majority expands that term to cover any firm that outsources the hiring and management of employees to a second firm, over which it retains some oversight function. In its decision, the NLRB refers to such firms and those to whom they outsource the hiring as “joint employers.”

Just that happened when a Browning Ferris subsidiary contracted out some of its recycling work to an independent business, Leadpoint. Under traditional labor law, Browning Ferris would not be considered the “employer” of Leadpoint’s employees—but the Board’s decision overturns that traditional definition. No longer, its majority says, must the employer’s control be exercised “directly and immediately.” Now “control exercised indirectly—such as through an intermediary—may establish joint-employer status.”

By this one move, the Board ensures that unions will now have multiple targets for their organizing efforts. A union can sue the usual employer who hires and fires, and it may well be able to sue one or more independent firms who have outsourced some of their work to that firm. The exact standards by which this is done are not easy to determine in the abstract. Instead, the new rules depend on some case-by-base assessment of the role that the second firm has in setting the parameters for hiring workers, determining their compensation, and supervising their work.

There is a quiet irony in this ill-considered transformation. The Democratic majority protests that it is only applying “common law,” i.e. judge made definitions of employers and employees to shape out the structure of the NLRA, which explicitly repudiates every key move in the common law of labor relations.

The analysis of the term “joint employer” starts with the NLRA’s definition of an employer, which reads: “The term ‘employer’ includes any person acting as an agent of an employer, directly or indirectly,” and then tacks on a list of exclusions including the United States and various state governments. The complementary definition of an “employee” under NLRA section 2(3), which, with largely irrelevant qualifications, states none too helpfully: “The term ‘employee’ shall include any employee. . . .”

The NLRA makes no effort to define joint employers of a single employee. Nor does it contain any indication that this category should occupy a large space in the overall analysis, even though Browning Ferris opens up the possibility that a very large fraction of the labor force has multiple employers.

To reach this conclusion the Democratic majority notes that the common law definition of an employee is the benchmark for its statutory choice. Yet the common law approach to labor relations was historically the antithesis of the creaky administrative machinery mandated by the NLRA. Under the common law rules, there were no limitations as to the bargain that could be struck between the employer and the worker. All contractual provisions relating to wages and the conditions of work were left for the parties to decide, as was the case with respect to the duration of the arrangement. In general, most employment contracts wereat will, which meant that the employer could fire the employee for a good reason, a bad reason, or no reason at all, just as all employees could quit for a good reason, a bad reason, or no reason at all.

To the naïve, this system of contractual freedom often looks as though it is an open invitation for labor market instability, but in fact it has proved exactly the opposite. The flexibility over contractual duration and terms keeps both sides in line, and thus adds immeasurably to the overall productivity of human capital.

The NLRA, passed 80 years ago, has posed a serious threat to the productivity of labor markets from day one. Its basic structure imposes a duty on each employer to bargain collectively with a union that has been selected by a majority of workers within a statutorily defined bargaining unit. That bargaining system blocks the constant short-term adjustments always needed in response to changing conditions in either labor or product markets by imposing a rigid set of restrictions on any unilateral contract changes offered to workers on a take-it-or-leave-it basis. These proposed contract changes are deemed unfair labor practices and prohibited.

The NLRA’s top-heavy labor agreements impose onerous work rules on once free businesses that hurt workers as well as employers in an actively moving marketplace, and these agreements leave unionized firms at a serious competitive disadvantage with their more nimble competitors. Over the last 60 years, even with little or no change in the substantive law, thelevel of unionization in the private sector has declined rapidly, from a peak of about 35 percent in 1954, to under 7 percent today. Time has only exposed the defects of a statute flawed from its creation at the height of the New Deal.

The efforts of the NLRB majority to cover “joint employers” is clearly an effort to breathe life into a moribund labor movement, by making hash out of the common law rules on which it purports to rely. From the beginning, the labor law had to ask which individual workers were employees of the firm, subject to unionization, and which were independent contractors who were not.

In the 1944 case of NLRB v. Hearst, the Supreme Court held that individual “newsboys” who sold Hearst papers were to be treated as employees for the purposes of the labor statute, even though their contracts with Hearst had designated them as independent contractors. The majority of the current Board relies on Hearst for its willingness to apply the statutory definitions “broadly . . . by underlying economic facts.” But that majority conspicuously neglects to mention that Hearst was in fact repudiated in the Taft-Hartley Act of 1947, which excluded (most imperfectly) “any individual having the status of an independent contractor,” without giving a workable definition of who those individuals are.

Nonetheless, the Hearst case did have one critical feature that the NLRB’s majority ignored. In Hearst, the only question was whether ordinary workers should be treated as an employee or an independent contractor. There was, however, no third party involved, and hence no issue of whether two or more firms should be treated as joint employers of any individual worker. Exactly the same point holds in the 1968 decision in NLRB v. United Insurance Co. of America, relied on by the majority, where the Supreme Court held that individual “debit agents” of the defendant insurance company were in fact its employees.

It should be evident why United Insurance Co. of America might well be correct. The whole point of the NLRA is to protect the right of employees to unionize. If an employer could redescribe individual employees as independent contractors, the basic protections of the NLRA (however ill-advised in principle) could be circumvented by a simple labeling exercise, without making a difference in the day-to-day operation of the overall business.

The Democratic majority also relied heavily on Section 220 of the Restatement of Agency that deals with the classification of certain independent workers as independent contractors or employees. In dealing with this issue, the NLRB majority discusses the ten factors that the Restatement invokes to answer this question, without noting two gaps in its argument. The first is that each factor is directed toward individual workers and a single employer, without reference to any joint employee situation. How else to explain the one factor that observes “(e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work; . . .?” The Restatement also asks about the distinct nature of the worker’s occupation, the duration of the relationship, and the kind of day to day supervision, none of which are relevant to the joint employer question.

Second, this lengthy inquiry arose when the at-will rule at common law let the parties cut whatever deal they saw fit. What the NLRB majority forgot to do was to look at the material that immediately preceded section 220 in Chapter 7 that begins: LIABILITY OF PRINCIPAL TO THIRD PERSONS TORTS. Section 219 is then headed; When Master Is Liable for Torts of His Servants.” At this point, the punch line should be clear. The independent contractor question did not govern their relationship, but arose to make sure that the common law employer did not escape liability for the torts committed by his servants against strangers by labeling them as independent contractors. But as between the parties, the question of categories doesn’t matter—at least in the absence of regulation.

Today of course, the argument is that the law has to look over this arrangement to see that other statutory obligations imposed on employers are not breached. It was for that reason that the California Commission in Berwick v. Uber Technologies reverted to the common law definition of an independent contractor to tackle the question in the most inappropriate way possible while determining case-by-case which Uber drivers were employees and which were independent contractors. The same issue arises when employers try to classify part-time individual workers as independent contractors to avoid various statutory obligations on family leave, sick pay, overtime, and the like.

None of those issues is relevant here, where the correct inquiry asks whether the joint employer rules will disrupt the settled historical pattern of collective bargaining. The NLRB majority made a passing effort to justify its decision by quoting some government statistic that indicated an increase in the number of “contingent” and “temporary” employees as of 2005 to about 4.1 percent of employment, or 5 million workers. But that factoid reveals nothing about the efficiency of the proposed modifications to the collective bargaining system.

On that question, the new joint employer rules will likely batter today’s already grim labor market, as they will not only disrupt the traditional workplace but will completely wreck the well established franchise model for restaurants and hotels. As the majority conceded, the so-called joint employer does not even know so much as the social security number of its ostensible employees. It has no direct control over the way in which the current employer treats its workers, and yet could be hauled into court for its alleged unfair labor practices. That second firm knows little or nothing about the conditions on the ground in the many businesses with which it has forged these alliances, which eases the operations for both. Those advantages will be lost if the joint employer rule holds up in court. At the very least, the majority’s decision would require each and every one of these contracts and business relationships to be reworked to handle the huge new burden that will come as a matter of course, leaving everyone but the union worse off than before.

It would be one thing, perhaps, if the majority saw the light at the end of the tunnel. But over and over again it disclaims any grand pronouncements, making the legal question of who counts as an employer a work in progress that will be finished no time soon. Against this background it is irresponsible to undo the current relationships by a party-line vote. That point should also be clear to the courts and to Congress. The quicker this unfortunate decision is scrubbed from the law books, the better.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

The Political Economy of Nail Salons

Richard Epstein*

Richard Epstein

Richard Epstein

The New York Times recently published two wildly celebrated articles by journalist Sarah Maslin Nir. The first article, “The Price of Nice Nails,” describes in painful and accurate detail the trials and tribulations in the manicurist trade in New York City and elsewhere. The second article, “Perfect Nails, Poisoned Workers,” documents the health risks to which manicurists in the trade are exposed.

In this age of strong populist discontent with the state of American labor markets, Nir does not pull any punches in condemning the abusive practices in this rapidly growing industry, which is largely serviced by Korean, Chinese, Nepalese, and Hispanic women: “Manicurists are routinely underpaid and exploited, and endure ethnic bias and other abuse.” Her investigation documents the tyrannical practices of the small business owners who employ the manicurists. Whatever the benefits of cheap manicures may be for the people of New York City and nearby communities, Nir argues that they exact a human toll, moral and physical, on the young immigrant women of Asia and Latin America.

The two articles have provoked a huge public reaction. New York Governor Andrew Cuomo hasannounced “Emergency Measures” and immediate “salon by salon” enforcement to make sure that health abuses and “wage theft” will be blocked. The salons that do not comply will be shut down.

Nir’s articles have been met with widespread approval. It is for precisely this reason that it is necessary to slow down and ask whether Nir’s revelations, even if true, justify Governor Cuomo’s actions. My fear, quite simply, is that his vigorous enforcement efforts will leave matters worse off than before.

The key point here is that Nir’s story does not fully hold together when tested against the standard lessons of economic theory and history. My critique of Nir’s narrative rests on a key assumption about human behavior. In economic matters, people generally try to maximize their own self-interest even when faced with few options and severe constraints.

Today, the manicure trade is booming. The number of shops in Manhattan continues to grow rapidly, notwithstanding the awful conditions and low wages that the workers endure. The unpleasant and dangerous nature of the working conditions is no secret to the women who work daily in the trade. Nir opens her piece by describing the large numbers of Asian and Hispanic women who regularly line up early in the morning on the streets of Queens waiting for “cavalcades of battered Ford Econoline vans” to pick them up and whisk them away to their work sites. The simple question is this: Why do these women come back day after day to the same location for rides to the same jobs if the situation is as toxic as Nir paints it?

Nir does not identify what brings them back. If they were worse off taking these jobs, at least some of them would move into other lines of work with higher pay and better working conditions. But these women are repeat players, and at least some of them slowly get improved wages and better work conditions from their hard-boiled employers. On this score, the standard economic test is whether these women are worse in their current jobs than with their next best alternative—an alternative universe that is left unidentified and unexplored by Nir. Some obvious possibilities for the women who quit is to not work at all, or to work in dangerous trades like drugs or prostitution where the results for these displaced women could be worse. Jobs in legal markets may well be foreclosed by a high minimum wage law, which further reduces their set of choices, as does their weak or nonexistent command of English.

In the long-term, these women may live to regret their choices, especially in light of the poor health outcomes they may suffer. But there is no long-run unless the women can survive in the short-run. It is for that reason that health issues may prove the most knotty. To some extent, the long-term dangers are latent. Nir’s articles thus perform a genuine public service by highlighting to all concerned the dangers of working in this environment.

But even here it is difficult to attribute the poor outcomes to employer exploitation. The most poignant example of health risks that Nir offers is of Eugenia Colon who was the owner of the nail salon in which she contracted her lung damage, working side-by-side with her employees. Clearly, simple precautions like wearing masks may well make sense in that environment. It may also be possible to eliminate the use of various nail polishes and other preparations that carry with them the worst possible risks.

The best remedy here may not be Governor Cuomo’s edict to shut down noncompliant salons. Once the information from Nir’s article gets out, both workers and customers will, however imperfectly, start to take the health risks into account. The volume of business at risky salons should go down, and the prices should go up—a wholly appropriate response now that the health risks have become more salient.

The underlying economic issues must be addressed as well. The intense demand for jobs pushes the supply curve outward, which means that more workers will be employed at lower wages, everything else being equal. No one knows for sure exactly what alternatives these women might have or how well they might pay. But we do know this: It is highly unlikely that the women in question lack key information about their current conditions. Yet they choose to return again and again.

One reason they return is, as Nir notes, that the demand for new workers seems practically insatiable. That extra demand should offset in part the downward pressure on wages from the high supply. But nothing says that the two forces are of equal magnitude. And the market evidence suggests that, on net, the higher supply drives wages lower. The low wages are no secret insofar as local Asian newspapers are “rife” with advertisements offering as little as $10 per day for the work in question, and requiring new recruits to pay $100 in cash to learn the trade. It is not, therefore, as though potential employers commit fraud to tap new supplies of naïve employees. Nor do they exercise coercion by, for example, stripping guileless applicants of their passports to prevent them from returning home. The economic theory of revealed preferences suggests that the opportunities offered by these shops are as good as these women can find anywhere else.

In dealing with the governor’s options, it is important to realize how little room he has to maneuver. Thus, looking at the employer side of the industry, it is hard to see how small firms can collude to keep wages low. Entry and exit into this industry is relatively easy, for literally hundreds of small shops offer manicures at cheap prices in New York City alone, charging an average of under $11.00 per session, or roughly half the national rate. These firms could not collude on wages even if they wanted to, for rampant cheating for the best workers would break up their joint efforts.

In this highly competitive industry, low prices bring and retain customers, rich and poor. Those low prices translate into low profit margins for most employers and low wages for their employees. Even the most successful employers know that they sit on the knife’s edge: if they raise their prices, they will lose their customers to a nearby shop. If they lower their prices, they will not be able to cover their costs. The vice-like equilibrium of competitive markets comports with the facts on the ground.

Last, what about the discrimination that goes on at these salons, with Korean manicurists being at the top of the pecking order, making the most money and earning the most privileges, and Hispanics being at the bottom, as Nir describes? That too, for better or worse, persists in at least some competitive markets. Employers lose big if they make mistakes in estimating the abilities of their workers. If they pay higher wages to less productive workers, their competitors who don’t make that mistake will drive them out of business. Perhaps the Korean proprietors have nasty stereotypes about their Hispanic employees. But the harder question is whether these nasty stereotypes are true generalizations about the relative average productivity of different work classes.

If the Korean shop owners are wrong, other firms can enter the business and scoop up underpaid Chinese, Nepalese, and Hispanic workers—at least if entry is free. Right now, about a quarter of the shops are owned by members of other ethnic groups. It would be instructive to know their pay scales as well. To be sure, if the dominant Korean group could use force to block new entry, that behavior should be punished. But Nir’s account offers no evidence of intimidation against new entrants.

Once there are no illicit barriers to entry, the analysis flips over. Gary Becker’s path-breaking hypothesis—that invidious discrimination cannot survive in competitive markets—rings true nearly sixty years after it was published. Labor markets are too complicated to be captured in any stick-pin economic model, for workers are human beings not standardized commodities. Yet, as I argued a long time ago in Forbidden Grounds, these complexities argue against, not for, government regulation of labor markets.

Take the question of firm composition. One good guess is that small firms offer opportunities for substantial gains from racial separation. Common tastes, customs, and language within ethnic groups make it easier to provide standardized background conditions for all workers, which could matter on such mundane matters as to what music is piped into common areas. What goes on in the workplace can be bolstered by cooperative relationships outside the job.

Yet that form of racial and ethnic separation is likely to prove fatal in larger firms trying to reach a broad portion of the market. These firms typically find it indispensable to draw their work force from all racial and ethnic groups in order to service their diverse customer base. So long as the insiders know more than the outsiders, including outside regulators, invoking the antidiscrimination or minimum wage laws is generally a mistake.

Here is why: However unattractive the current market equilibrium may be, if the government intervenes to try to make the situation for employees better, it could easily, even on wage and health regulation, actually make things worse. Before Governor Cuomo leaped into the fray, Nir’s article observed that federal and state labor laws are not being enforced in the industry on such key topics as discrimination and the minimum wage. Many employees are reluctant to cooperate with public authorities because they sense that the enforcement of these protective laws will cost them their jobs. At this point, the antidiscrimination laws and the maximum hours and minimum wage laws operate as a huge tax on fragile employment decisions.

The health laws too can have this effect if they go so far as to shut down the businesses, leaving the workers, owners, and customers to fend for themselves, sometimes in underground establishments that are riskier than the above-board shops they displace.

In effect, each round of regulation, regardless of its particular design, will create a wedge between what the employer pays and what the employee gets. We know that minimum wage laws have especially hard effects on young minority teenagers who are priced out of the market. Regulating nail salons will have a similar effect. Some of the regulated firms will go out of business; some of the firms will contract services, raise prices, and survive. But many workers will lose their jobs, only to find their reentry into the labor market blocked by high minimum wages and strong antidiscrimination laws.

These cautious observations are not just idle speculation. Over a century ago, the target of much well-intentioned indignation was the child labor laws, which sought to keep young children out of the marketplace until they reached, say, the ages of 14 or 16. The evidence, assiduously gathered by economist Benjamin Powell in his work on sweatshops and child labor, shows that these laws hurt the very children they were intended to help by driving them into begging, prostitution, or crime. Deprived of their best option, their families had only inferior options, and the results were not pretty.

So what then should be done? It is clear that there is no political will to provide these workers with public subsidies tied to their low income. Any intervention will therefore take place on the regulatory side. As should be evident, the best way to help these manicurists is by giving them more options. Make sure that new firms are free to enter the business, and make sure that workers in the industry who want to leave are not blocked from getting other jobs by minimum wage laws and antidiscrimination laws. Governor Cuomo, acting out of righteous indignation, may be moving too far in the wrong direction by stepping up enforcement of the current laws when the right result may be to tack in the opposite direction, and making a strong priority of system-wide deregulation. 

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.