May 18, 2011
In Defense of Loyalty
Posted by Gordon Smith

The American Law Institute is creating a Restatement Third, Employment Law. Chapter 8 of Tentative Draft No. 4, which was discussed today at the Annual Meeting, is entitled "Employee Obligations and Restrictive Covenants." Within that chapter is a section entitled "Employee Duty of Loyalty." This is the core obligation:

Employees owe a duty of loyalty to their employer in matters related to the employment relationship.

This is an uncontroversial (re)statement of the black-letter law, but some members of the ALI challenged the use of the word "loyalty." As noted by several of the ALI bloggers, some members want the ALI to omit references to "loyalty" because it implies that the relationship between employers and employers is reciprocal. These members prefer the term "mandatory obligation," which (to them) connotes that employment is a one-way street.

Although Reporter Samuel Estreicher did not grant the point, he repeatedly invoked the need to "delimit" the concept of loyalty and suggested that the "duty of loyalty" in the ALI's Restatement of the Law Third, Agency was ill-defined. These comments suggest the possibility of some future work to be done rationalizing the duty of loyalty in the two Restatements.

Count me as a fan of the duty of loyalty and as an opponent of attempts to delimit that duty. Such attempts, which surface regularly in the law of business associations, run at cross purposes with the value of the duty as a standard of last resort. Self-interested behavior may be constrained by statute or by contract, but the issue in cases involving the duty of loyalty is whether self-interest was checked in the absence of a specific rule. If courts (or Restatement drafters) are too precise with the boundaries of the duty, they provide bad men with a roadmap for opportunistic behavior. As I have written many times on this blog, ambiguity is our friend in this area.

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August 10, 2010
How to Quit a Job
Posted by Gordon Smith

Option A: Unleash expletives over an intercom at your company's customers, then make a dramatic exit.

Option B: Expose your boss as a letch and Farmville addict using a series of photos with messages on a dry erase board.

It turns out the first fellow didn't actually quit -- he has been suspended -- so the winner is Option B by default. If the woman in Option B had asked my advice, I would have told her not to do it that way, but I have to admit, she made the event memorable.

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July 11, 2009
Henry Ford's "Good Idea"
Posted by Gordon Smith

Kevin Leicht:

Henry Ford had a good idea.

In January, 1914 he announced to the world that his workers would be paid five dollars a day. The five-dollar day doubled the average wage for auto workers, produced long lines outside of the factory gates, and helped to create a mass market for the Model T and other consumer durables.

For the next 60 years, this basic formula spread. An entire consumer economy was built on steady middle class jobs that paid slowly rising wages from productivity gains.

When Henry Ford announced the $5 workday, the W$J suspected a motivation other than creating customers for the Model T or improving the quality of workers' lives: Ford was attempting to reduce the company's profits, thus depriving the Dodge brothers, who owned shares of Ford Motor, of the capital they needed to start their own company. As it turned out, Ford couldn't spend the money fast enough, so he simply stopped paying dividends, a move that lead to the famous case of Dodge v. Ford Motor. You can read more about the dispute here.

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November 20, 2008
GM Prepack?
Posted by Fred Tung

As the Big Three automakers' pleas for emergency bailout money appear to have fallen on deaf ears on Capitol Hill, the blogosphere is awash with discussion of bankruptcy scenarios (see, e.g., here, here, and here).  "Prepackaged" bankruptcy in particular seems to be a popular solution (see here and here).  But I find it hard to see how a prepack would work here.  Unlike a standard Chapter 11 filing, a prepack is a bankruptcy filing where the debtor and its major constituents--in this case, bondholders, banks, employees, unions, management, dealers (have I left anyone out?)--already have a deal worked out before they file.  Instead of negotiating in Chapter 11 (i.e., after the Chapter 11 filing), management and the major constituents work out the company's financial restructuring, new finaCar9ncing, and anticipated operational changes beforehand, and when they file for bankruptcy, they include not just the bankruptcy petition, but also the plan of reorganization and all the creditor consents required to confirm the plan.

Just judging from what I read in the paper, it is not apparent that the Big Three have had any discussions with their banks or bondholders or dealers about how to share the pain of a restructuring, or who would provide financing in bankruptcy.  Now, this may be just posturing on the part of companies.  They seem to be playing chicken with Congress, on the "too-big-to-fail" theory.  Needless to say, that's a dangerous game.  Especially during the interregnum, the specter of political gridlock looms large.

There may just be some usage issues here:  when commentators say "prepackaged," they might instead mean some kind of bankruptcy filing with strong government involvement.  For example, the government could offer bankruptcy financing conditioned on specific operational and managerial changes.  Not a bad idea.  But that's not a prepack.

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March 30, 2008
Brackets and the Workplace
Posted by Lisa Fairfax

Since I traveled to Pittsburgh this week, I had the chance to read a story in the Pittsburgh Post-Gazette on the pros and cons of allowing employees to participate in office bracket pools.  Indeed, some offices have sought to ban such pools.  Apparently not because they may be illegal.  But rather because they may have a negative impact on employees and the workplace.  To be sure, one research firm estimates that the distraction created by basketball office pools will cost employers some $1.7 billion in wasted work time.  This estimate is based on wasted time spent on bracket-related activities from "trash talking at the water cooler" to "watching live videos of the games during business hours."  In addition, to the wasted time, one employment lawyer notes that bracket pools in the office invite trouble because things may go awry.  Such as when someone believes they should have taken first prize and instead gets third place, or worse, when the CEO wins first prize, after having pooled money with "the people in the mailroom and the messenger."  If this happens, the advice is that the CEO should buy everyone lunch instead of pocketing the money.  To be sure, despite the potential loss in productivity, most companies either encourage or do not discourage bracket pools in the office.   Such companies find that allowing employees to participate in brackets is good for employee morale, fostering a sense of community and healthy competition.  So for now, most employees are free to fill out and agonize over their brackets, even on company time.  Given the many students that participate in bracket pools, it is probably a pastime that would be very difficult for companies to disrupt.

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March 17, 2008
Bear Stearns' Employees
Posted by Lisa Fairfax

I know we are trying to move on, but I have heard several news sources and commentators point out that Bear Stearns employees own some 1/3 of the company's stock.  That number seems striking and a bit surprising, particularly given all of the hoopla surrounding Enron and the fact that its employees held so much of the company's stock when it collapsed.  Indeed, I thought one important lesson from Enron, at least for employees, was to diversify.  Apparently not.  To be sure, there are many good reasons to invest in your company's stock.  Then too, a short while ago Bear Stearns did not appear like it was heading for disaster (but then again neither did Enron).  Moreover, it is not clear that Bear Stearns employees have not diversified and hence perhaps there are employees who did not have their entire nest egg in the Bear Stearns basket.   Unfortunately, it seems more likely that employees have once again found themselves in a situation in which they not only face potential job loss, but also the loss of their retirement.   

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February 16, 2008
Jerome Kerviel's Employment
Posted by Gordon Smith

Over the past few weeks, I have heard several condemnations of French employment law prompted by the well-publicized inability of Société Générale to terminate Jerome Kerviel for his trading activities. The suggested lesson for Americans: we are lucky to have employment at will as the default rule because it encourages employment (and, thus, economic development).

Certainly, one of the oft-cited impediments to entrepreneurship in Europe is employment law, but it turns out that the facts underlying Kerviel's activities are messier than first presented. We have emails showing that Kerviel had an accomplice, right? Not so fast ... the purported accomplice now says that the emails were altered to make him look more involved with Kerviel than he actually was. And Kerviel's lawyer says that the accomplice is a fabrication designed to keep Kerviel locked up.

Of course, Kerviel's position remains that SocGen was complicit in the fraud. Or, in the words of Kerviel's lawyer, "everyone knew what Jérôme was doing." Which means, interestingly, that one of the live questions in the case is whether Kerviel is entitled to his year-end bonus! (French version. HT Alan Hyde)

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October 22, 2007
The Radical Vogue in VEBAs
Posted by Lawrence Cunningham

Wouldn’t it be wonderful if you could discharge your debts by paying 50 cents on the dollar? You’d have something in common with General Motors in its bargain with the United Auto Workers union.

The GM-UAW deal adapts an old vehicle, the VEBA (voluntary employee benefit association), in a radically voguish way. Traditional VEBAs, dating to 1928 and used by tens of thousands of US companies, are tax-advantaged vehicles that companies use to manage and fund employee benefits. The new twist, in the GM-UAW deal and others, makes the VEBA a vehicle that unions use to manage and fund those benefits.

GM will transfer to the VEBA $29.9 billion of assets (including a $4.37 billion note convertible into GM stock whose exercise would make the VEBA a 16% shareholder of GM); extinguish from its balance sheet $46.7 billion in liabilities for post-retirement health benefits; and forego further obligations for such benefits. The union assumes all duties from there, including managing and funding the trust and administering benefits—perhaps with some official GM oversight or input.

This new vogue in VEBAs shows the dire straits of some companies burdened by enormous financial legacy costs, due, in part, to bad old accounting rules and curious health care policies.

Until 1993, US accounting rules (GAAP) did not require companies to book a balance sheet liability for promises to employees to pay post-retirement health benefits. The results were bountiful—but often worthless—corporate promises to provide these benefits, contributing to the bankruptcy of some companies. Under the 1993 rule, huge balance sheet liabilities sprouted. This (along with increased costs and other factors) tended to curtail company promises (and reduced the number of companies with 200+ employees who provide such benefits from 66% before the change to 33% today).

Even so, 14 years later, enormous benefit liabilities appear on balance sheets of dozens of US companies, especially manufacturing companies with unionized work forces. For many, the obligation exceeds $1 billion and 5% of total assets (at GM, the figure is nearly $70 billion). These costs impair US competitiveness with foreign companies where national health services foot the bill.

The new vogue in VEBAs may be appealing, but is not free from risk. Two risks are manifest in the GM-UAW deal. First, GM’s initial funding may be insufficient to satisfy the VEBA’s long-term obligations. Second, GM officials may exercise influence over the VEBA. Either way, the risk is that the obligation will remain with GM and not be transferred to the VEBA, as a matter of law or accounting, whatever balance sheet treatment GM adopts now. If so, investors may regret the deal; workers may get two bites at the apple. But there may be no other solution.

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September 24, 2007
GM Workers Strike
Posted by Lisa Fairfax

Members of the United Automobile Workers Union began striking today at GM plants across the country in what is apparently the first national strike by the union since 1970.  In a statement on Sunday, UAW told its members that if a deal between GM and the union had not been reached by 11 a.m. today (and unless they heard otherwise), they should consider themselves on strike.  And thus, after 11 today many workers walked off the job to begin striking for what could be weeks or even months.  To be sure, as GM noted, the apparent stalemate between GM and the union involves "complex, difficult issues" such as those related to health care coverage and how to secure jobs in a troubled industry.  Yet, similar to many conversations in the corporate governance arena, a large part of the stalemate appears to center not only around issues of compensation, but also around the gap between executive and employee compensation.  Thus, in criticizing GM, vice president and director of the union's GM department stated "in 2007 company executives continued to award themselves bonuses while demanding that our members accept a reduced standard of living."  This apparent difference in behavior captures the broader sentiment of employees and their mounting frustration with increased executive compensation.  The seeming difference in behavior no doubt only adds to the complex and difficult issues being confronted at the bargaining table. 

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August 10, 2007
Study Says Bad Bosses Get Promoted, Not Punished
Posted by Lisa Fairfax

A study to be presented at the Academy of Management's annual meeting indicates that bad bosses get promoted rather than punished.  According to the study, nearly two-thirds or 64.2 percent of the 240 people surveyed said that their bad boss was either never censured or was promoted for domineering ways.  The three study authors from Bond University in Australia suggested that the promotion of such leaders has a negative impact on the corporate environment and the bottom-line.  Indeed, despite their apparent success in office, such leaders not only cause workplace strife, but also cause serious malaise for their subordinates including nightmares, insomnia, depression and exhaustion.  Bad bosses also lead to increased employee turnover, which can impact profit.  This is because not only do many employees eventually walk away from workplaces with spiteful supervisors, but such supervisors often develop a reputation that makes it difficult to recruit and retain employees.  The study's authors faulted senior managers for failing to recognize the signs of bad supervisors as well as the leaders above such managers who fail to intervene or otherwise elect to reward the behavior of spiteful bosses.

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July 17, 2007
Businesses and their Employees
Posted by Lisa Fairfax

I have been traveling a bit lately and, as is apparently inevitable, my most recent flight was delayed.  However, the delay gave me the opportunity to speak with a fellow passenger who happened to own a mid-sized business.  Once he discovered that I was a Corporations professor at a law school, he at first lamented lawyers and the amount of money he had to pay in legal fees each year.  He then said that the fees (and the threat of lawsuits they often represented) were particularly annoying because he was, as he described himself, "one of the most accommodating bosses in the world."  When I guess I appeared skeptical, he explained that he made it a point to have a very flexible work schedule for his employees, and if people needed time off or to come in late to "watch their kids or whatever"--his answer was always that they should take the time, their job would be there when they returned.  He said the answer was the same if the time off was ten minutes or ten months.  When I asked him if he could really run a business with people taking ten months off at a time, he responded that the problem with most people in human resources was that they "forget that resources are things you build up, not something you constantly turn over."  I found the quote so interesting, that I knew I would share it.  The conversation reminded me that while many corporate scholars may debate the wisdom of whether or to what extent corporations should devote time and resources to employees, at least some business owners do not see it as a debate at all.  Thus, while I know that not all employers have the same philosophy as my fellow passenger, I found it refreshing to hear that some not only believe that focusing on employees and their welfare is an integral part of running a business, but also implement that belief through their employment policies.  Alas, I considered my flight delay time well spent.

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Anti-blogging Clauses
Posted by Gordon Smith

Paul Kedrosky raises an interesting possibility about the fallout from John Mackey's excellent internet adventure: "while anti-stock-blogging/posting clauses haven't yet hit CEO/exec contracts, they will. And soon."

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January 22, 2007
Moss on Suing One's Own Law Firm
Posted by Christine Hurt

Scott Moss has a very interesting article on Findlaw about the Sullivan & Cromwell associate who is representing himself in a lawsuit against the firm for discriminating against him on the basis of his sexual orientation.  Scott was a plaintiff's-side employment attorney in New York, so he knows the mountain of which he speaks.

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January 18, 2007
Credit Checks and Civil Rights
Posted by Fred Tung

CSM has an interesting piece on credit checks as a civil rights issue.  Apparently, more and more employers perform credit checks as part of their diligence in hiring.  However, some studies show that average credit scores for blacks and Hispanics are worse than for whites, while there is apparently a lack of data supporting a relation between bad credit and poor employee performance.  The story describes a suit against Harvard University by a job applicant whose bad credit history prevented her hire.

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June 29, 2006
Judge Weighs In on Prosecutorial Tactics in Post-Enron Fraud Cases
Posted by Lisa Fairfax

Tuesday a district judge finally weighed in on prosecutors’ practice of seemingly encouraging corporations and other entities to refuse to pay the legal fees of their employees accused of fraud or wrong-doing.  In a case involving tax fraud allegations against several former KPMG partners, U.S. District Judge Lewis Kaplan ruled that prosecutors unconstitutionally pressured KPMG into cutting off legal fees for its employees, apparently interfering with their right to a fair trial.  In a strongly worded opinion, Kaplan noted that the government had let “its zeal get in the way of its judgment.”

In sharply criticizing the legal fee policy, Judge Kaplan also calls into question the viability of the “Thompson memo.”  The memo sets forth a variety of factors that federal prosecutors must consider when determining whether to indict business entities, including the willingness of such entities to waive attorney-client privileges and whether the entities pay the legal bills of employees who are accused of misdeeds.   Prosecutors evaluate an entity’s cooperation based on its compliance with these factors.  In KPMG’s cases, it was able to avoid criminal prosecution in part because of its continued cooperation with the government.  And hence KPMG’s refusal to pay legal fees.  Prosecutors insisted that they applied no pressure on KPMG, but Judge Kaplan characterized their actions as holding the “proverbial gun” to the head of the company.

The decision may have a significant impact on the criminal prosecutions of corporate officials.   Post-Enron prosecutors apparently have utilized aggressively the tactics outlined in the Thompson memo, and those tactics seemed to have paid off because they essentially allow prosecutors to rely on the corporation to help build cases against various officers and directors within a corporation.  This appears to have resulted not only in the high profile guilty verdicts we have seen, but also in a host of guilty pleas from corporate actors.  Certainly cutting off legal fees to employees is just one of the techniques available to prosecutors outlined in the Thompson memo, but the tone of Judge Kaplan’s decision appears to raise concerns about government overreaching more generally—thereby casting a disapproving net over the entire Thompson memo.

It is not clear what kind of impact the decision will have on businesses and their employees embroiled in these suits.  Indeed, Judge Kaplan did not dismiss the suit against the KPMG employees.  Instead, the judge encouraged employees to file a lawsuit against KPMG for their legal fees.  As other commentators have noted, the decision appears to bind entities to pay the legal fees of its employees, even when there is no written agreement to that effect.  (KPMG apparently had an unwritten policy of paying such fees).  But this seems contrary to governing law, which of course does not require that corporations indemnify their employees.  At the very least the decision may encourage corporations and other entities to more affirmatively exclude particular employees from indemnification.  The decision also may make it more difficult for businesses to appear cooperative, forcing prosecutors to make good on their threat that such entities will be criminally indicted and suffer the fate of Arthur Andersen.  Given the Supreme Court’s ultimate resolution of the Arthur Andersen case, the realistic impact of that threat is not entirely clear.

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