| |
 |
 |
|
Len Watkins
Joshua Genser
|
 |
| |
|
 |
Offices
in Point Richmond and Emeryville
125 Park Place, Suite 210
Point Richmond, CA 94801
Phone: 510-237-6916
Fax: 510-236-9851
2200 Powell Street, Suite 890
The Watergate Office Towers
Emeryville, CA 94608
Phone: 510-237-6916
Fax: 510-236-9851
|
|
|
 |
| |
Employment
Litigation and Job Loss
|
|
Governor
Wilson, in his State of the State address, called for
measures to reduce employer exposure to liability for
wrongful termination. The Governor cited a study by
Rand Corporation economists which, according to the
Governor, concluded that out-of-control claims by plaintiffs'
lawyers have cost California 650,000 jobs. The Rand
study, however, does not support the Governor's conclusions.
It could be that alarmists, like the Governor, are
causing more job losses than is any amount of litigation.
Rand economists James Dertouzos, Elaine Holland, Patricia Ebener
and Lynn Karoly published a series of papers in the late 1980's and
early 1990's analyzing information about wrongful termination litigation
gathered from 1980 through 1986. Those studies never concluded that
wrongful termination litigation has cost California 650,000 jobs.
That number was derived from an extrapolation of the Rand studies'
comparisons of different states. The 1992 Rand paper, Labor-Market
Responses to Employer Liability, which is specifically the one to
which the Governor alluded, stated that: "We
also find evidence of an employment effect when states are differentiated
on the basis of whether tort and/or contract remedies are available.
For instance, the adoption of a tort cause of action (i.e. public-policy
tort or good-faith tort) results in about a 3-percent reduction in
employment." The 650,000 job figure, then, is 3 percent of California's workforce.
However, the data studied by Rand are quite old. Among other significant
changes since 1986 are California Supreme Court cases substantially
limiting the tort remedies available to plaintiffs in wrongful termination
cases. (e.g. Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654,
254 Cal.Rptr. 211, 765 P.2d 373, and Hunter v. Up-Right, Inc. (1995)
6 Cal.4th 1174, 864 P.2d 88, 26 Cal.Rptr.2d 8.)
The Rand studies did conclude that the costs of wrongful termination
litigation and liability were very small. The 1992 Rand paper concluded
that: "Despite
the existence of large jury awards, our first investigation of the
economic effects of wrongful termination demonstrated that the direct
legal costs (measured as legal fees, settlement payments and jury
awards) appear to be quite small. A sample of cases filed in California
indicates that the typical plaintiff can expect to receive a final
payment that, in present value terms, amounts to half a year's salary.
Even accounting for the 95 percent of cases that settle prior to
trial, the aggregate direct legal costs of wrongful termination litigation
amount to less than $10 per employee, or $100 on a per-termination
basis. ...the aggregate legal costs are only about 0.1 percent of
the total wage bill."
One tenth of one percent of total wages paid to California workers
is a huge amount of money. To put it in perspective, however, what
employee would not be willing to pay $10 to $12 to support an infrastructure
designed to protect him or her against terminations in breach of
contract, violation of public policy, or even in bad faith? Thus,
if the specter of legal costs is not so menacing, what is the source
of concern? The Rand studies conclude that the true costs of wrongful
termination litigation come from employers' fear of such litigation.
The 1992 Rand paper explained: "However,
either because firms are extremely risk averse or because decisionmakers
are avoiding what could be larger liabilities, the indirect economic
effects of wrongful termination are significant. [W]e estimate that
the employment response to increased wrongful-termination liability
is consistent with about a ten percent increase in wages. This implies
that the indirect effects of wrongful-termination doctrines are 100
times more costly than the direct legal costs of jury awards, settlement
and attorney fees."
Those indirect costs are described in more detail: "In
attempting to avoid the liability, firms may adopt preventive measures
that themselves represent hidden or indirect costs of the new legal
environment. For example, firms may avoid the liability by not terminating
employees who are poor performers. When workers are fired, severance
payments may be used to prevent the threat of a wrongful termination
suit. In periods of expansion, firms may be less willing to add to
their work force, preferring instead to expand overtime hours or
use temporary workers for whom the liability costs are lower. In
addition to altering their utilization of labor, firms may adjust
their internal decisionmaking processes, requiring more screening
when workers are hired, more formalized review and evaluation procedures,
and less autonomy regarding termination decisions. These types of
indirect costs may overwhelm the smaller direct legal costs of wrongful
termination."
As much as these dire consequences appear to justify the Governor's
call for reform, the problem is that employers' worries may not be
rational. That is, as real as these results might be, they may be
only symptoms of a sort of legal hypochondria, where the fear of
liability causes more damage than could any real exposure. As the
1992 Rand paper states: "[B]ecause
of misperceptions or a lack of accurate information, businesses and
managers may simply not have accurate information about the true
costs of the liability associated with the new legal doctrines. Even
with accurate information...firms and managers may be extremely risk
averse, so that they attempt to avoid even the small probability
of a very large wrongful-termination award."
Moreover, there are benefits to greater protections for employees
that must be taken into account and weighed against the costs. According
to the 1992 Rand paper: "Whether
or not these changes are desirable depends upon whether or not there
are compensating benefits to employees, firms, or society at large.
Surely, some workers benefit from the enhanced job security, and
others receive compensation in isolated cases of egregious employer
behavior. The limitations on manager discretion in firing employees
could also be more generally efficient, with benefits accruing to
firms as well. If so, firms may already have incentives to adopt
job security provisions and mechanisms to protect employees against
mistreatment. However, the legal system reduces uncertainty about
the enforceability of the implicit agreement and provides an external
guarantee, thus enabling management and labor to reap the mutual
benefits of a long-run employment relationship. Workers are willing
to invest in firm-specific human capital, are willing to work to
enhance long-term firm profitability, and may be willing to accept
a lower wage rate in return for job security."
By contributing to the misinformation and hysteria that surrounds
the debate over tort reform, those proposing such reforms may be
actually causing the problem. |
| |
| |
|
|
|
|
