The employment at-will rule is what has led to the ease with which US employers have laid off, without pay, more than 22 million employees according to today's updated figures (April 16), including a record breaking 5 million+ in each of the last three weeks alone since the beginning of the shutdown caused by the pandemic.
It means employees can be dismissed for any reason and without warning, as long as the reason is not illegal (e.g. firing because of an employee's race or religion).
Executives, on the other hand, who are employed under ‘termination for cause’ employment contracts, have seen some of their cash compensation reduced.
Two regulatory filings from Macy’s, the department store, illustrate the inequities in the employment relationship between management and workers. The first states that Macy’s has closed all its stores and, on 30 March, “communicated to its employees that, beginning April 1, 2020, it will be putting the majority of its workforce on furlough. While on furlough, employees will not receive salary or hourly wages…all employees at the director-level and above who are not furloughed will have a pay reduction and Macy’s Chief Executive Officer and the Board of Directors will receive no cash compensation.”
As if that latter announcement was not enough, a few days later, another Macy’s filing described a very different kind of ‘furlough’. Paula Price, the company’s CFO announced her voluntary departure on 31 May, leading to Macy’s announcing a six-month advisory agreement with her under which she “will receive $510,000 in advisory fees broken into six monthly payments…. Ms. Price will also not repay to the Company any portion of any relocation payments or benefits that the Company has provided to her”. Those last benefits comprised half a million dollars in relocation plus associated tax gross-ups in 2019. Presumably she will not be required to repay the $300,000 golden hello bonus she received in 2018 either.
It’s the kind of story that you would think would make any self-respecting socially responsible investor’s blood boil.
But the damage is not, of course, limited to Macy’s. The unprecedented numbers of unemployment filings in the US as a result of employment at-will practices clearly show that the so-called balance of power in this employer/employee relationship is not a balance at all, since all the power lies with the employer. What worker would complain if they were prevented from leaving without reason for a 30-day notice period if they also received a full month’s salary when their employment was terminated without cause?
As I stated earlier, CEOs and other senior executives are rarely employed at-will. They are typically employed using contracts that require good reason for termination on both sides. If such good reason is not provided, the results are multi-million dollar cash severance payments and accelerated vesting of all equity awards. These inequitable executive contracts have been the target of shareholder resolutions.
The question here is, if they’ve filed resolutions criticising overgenerous employment contracts for CEOs, why haven’t SRI investors addressed the enormous injustice of at-will employment? Other resolutions address the gender and race pay gap, LGBTQ employment discrimination, mandatory arbitration, employee directors. The list of employee rights shareholder resolutions is not that long, but never has this fundamental injustice in the US employment situation been addressed.
Why is that? It cannot surely be because most SRI investors employ their employees at-will?
Nor can it be because not being able to fire people at will, when economic circumstances require it, might actually impact the bottom line. Nevertheless, not even the labour union funds, surely the most qualified, have addressed this issue.
Some resolutions have approached the problem without naming it. A proposal at this year’s conglomerate United Technologies annual meeting requested a report “regarding the impact on communities from the closure of Company manufacturing facilities and alternatives that can be developed to help mitigate the impact of such closures in the future”. But none have addressed the issue head on.
Lawyer, Mark Carey of Carey & Associates, traces the origin of the at-will rule in a blog, saying it “can be credited to an Albany, New York lawyer named Horace Wood in 1877”. According to Carey, Wood conjured the rule out of nothing as there was no legal authority for it. It is still current, he writes, because: “it was adopted by the Courts and must be resolved by the Courts, not the legislatures [the state lawmakers]”. Carey alleges that “courts knew and currently know that employer-side interest groups will lobby to kill every piece of legislation designed to eliminate or modify the employment at-will rule”. Carey urges employees to demand a “for cause termination” employment agreement when they return to work, but the employment situation will be even more unbalanced when that happens.
I asked a selection of activist investors and experts on shareholder resolutions what might be the cause of no one taking up this challenge to make companies reconsider their employment practices. Richard Clayton, research director at CtW Investment Group, which represents a number of labour funds, said: “I could certainly imagine a proposal that would call for a company to employ people subject to a ‘just cause’ standard, and/or call for some minimum severance pay (2 weeks) for employees. As to why this hasn’t been the subject of any shareholder resolutions or other investor activity, I suspect that this would be pretty tough to get through the no action process, given the SEC’s seemingly inviolable conviction that how a company treats its employees just can’t be a matter that has material effects on investment returns, the evidence be damned.”
Rosanna Landis Weaver, programme manager at SRI non-profit, As You Sow, agreed, saying “my impression is that any shareholder resolutions on the topic would have been quickly excluded under an ordinary business challenge”, where a company would ask the SEC to take no action if it excluded the shareholder resolution on the grounds that it dealt with a company’s ordinary business. Heidi Welsh of E&S non-profit researcher, Si2, said there had been many “decent work” resolutions but that most of these focused on gender pay discrepancies: “To my knowledge,” she wrote in an email, “there haven’t been any resolutions citing this problem of employment at-will.”
Perhaps it’s time for someone to try.
Or, at the very least, here’s another option. Since Say-on-Severance regulations were introduced in parallel to Say-on-Pay, severance payments must now receive shareholder approval before they pay out. So far, even though such approval is non-binding, few, if any, have been blocked. Perhaps shareholders should block every executive severance package until companies agree to employ all their workers on the same kinds of contracts their executives enjoy.