III. Epstein and the Contract At Will
A) Private and Public Spheres. Epstein begins by noting the distinct tension between the sphere of the public and the sphere of the private. Barring some strong argument to the contrary, private relationships should not be regulated as though they were part of the public sphere. In other words, you are and ought to be free to associate with whomever you choose and to dispose of your property as you see fit. You ought also to be free to exclude others from associating with you or your things. There are, however, limits upon the practice of freedoms, even on those within the sphere of the private. Epstein notes that there have been at least two such limits – The National Labor Relations Act of 1935 which, among other things, established the rights of unions to engage in collective bargaining, and the Civil Rights Act of 1964 which established the concept of protective groups. Note well that these positive acts by legislation only draw limits to the practice of freedom within the private sphere, all of the rest of the practice of employment is, in a sense, up for grabs by way of the common law as demonstrated by the passage the Payne v. Western Atlantic Railroad:
[People] must be left, without interference to buy and sell where they please, and to discharge or retain employees at will for good cause or for no cause, or even for bad cause without thereby being guilty of an unlawful act per se. It is a right which an employee may exercise in the same way, to the same extent, for the same cause or want of cause as the employer.
The above quote is one of the better statements in American Common Law of a doctrine transferred from British Common Law, the doctrine of Employment At Will (EAW). EAW states that in the absence of law or contractual consideration, employers have the right to hire, promote, demote, and fire as they please. That means that unless there is a contractual obligation to the contrary or unless the job is covered under some legislative statute, an employer can terminate or fire an employee AT WILL, so long as the employee is paid for her time worked. If the employment relationship is covered 1) by a contract that considers term or duration, 2) a statute like those that protect state or federal workers, or 3)Title VII (Equal Employment Opportunity) of the Civil Rights Act of 1964 or Title IX of the Education Act of 1972 which established coverage of protected groups, then it’s a whole different ball game.
The phrase “against the public interest” is often employed by the courts and in statutes contra EAW as a black box or ad hoc justification for continued rights to employment or to compensation for wrongful termination. Sometimes we recognize that state has an interest in protecting your job against termination, such as an accountant who alleges she was fired for reporting auditing inaccuracies to the legal authorities. Also, the public has an interest in protecting the jobs of citizens called to jury duty or to National Guard service. But ordinarily, no reason even needs to be given to justify a termination. A company may legally terminate for good cause, for no cause, or even for causes morally wrong, without being thereby guilty of legal wrong. Might make one a little nervous, eh?
Employees can also terminate employment relationships at will. Barring contract or statute, there is no legal requirement for anything like the often practiced “two weeks notice.” Most workers, even salaried employees, are employed under EAW. There is usually a contract for workers; it just does not usually stipulate a term or duration of employment. W&R say that at least 60% of private sector employees are employed at will.
Finally, it is worth noting that one could easily be guilty of some moral wrong without breaking the law. It might be wrong to fire somebody because you don’t like his choice in professional football teams, but perhaps it would be unjust from some other argument to allow the law, or the public sphere, to interfere in this private choice. In that sense, the employer would be morally, but not legally wrong, to fire this employee.
Now that we understand what EAW says, an important question remains: “Is EAW, as a legal doctrine, morally justified and by what argument?” Epstein thinks, as many Law and Economics types often do, that the doctrine is justified because it works to the mutual benefit of both parties to the contract at the time the contract is formed. The purpose and justification of the doctrine is to ensure this mutual benefit, not to simply allow the employer to take unfair or unjust advantage of the employee. The test for such a mutually beneficial relationship moves his analysis out of the realm of pure Law and Economics into some bits of Analytic Jurisprudence. Epstein thinks EAW is mutually beneficial and thus justified because it passes the following tests: 1) Intrinsic fairness, 2) Positive effect on utility and wealth, and 3) Positive distributional consequences.
B) Intrinsic Fairness – One important aspect of a respect for personal or private freedoms is respect for the right to contract. Being free to contract as you see fit is a right and an end in itself. Most would argue that the right to contract extends to making contracts that are even not in your interests, as long as said contract is not coerced. In other words, it might be bad for you to make this contract, but that is a cost of the practice of the freedom to contract – you’re free to make all sorts of mistakes from the prudential point of view. In any event, Epstein argues that the freedom to contract is as essential as any other basic freedom. Epstein compares the employment relation to other paradigm private relations such as marriage, religion, and freedom of political association. Since government interference is presumptively wrongful with regard to the practice of marriage, speech, etc., so to should it be presumptively wrongful to interfere with the right to contract, including the right to make employment contracts as you see fit, be you employer or employee. In other words, the right to contract is fair since both sides have a right to practice the same freedom as they see fit. Put differently, it would be unfair to require one side of a contract to always bear some burden never born by the other side. It would be unfair to require employers to retain employees while allowing employees to leave at will. The reverse would be equally unfair. Thus EAW respects equal bilateral rights to the freedom of contract and such equal respect for either side is intrinsically fair.
C) Utility and Wealth – Does EAW promote utility or wealth? Well, it certainly seems to license or allow either side to leave the other side in the lurch, by quitting or by firing. So perhaps this is one way in which it would not serve utility to allow employment contracts to be written under at will conditions. Epstein makes an interesting point regarding fairness as a sufficient condition for justifying EAW. The law is silent with regard to initial starting points regarding duration and disposition for employment contracts, but it could be just as fair, in one sense, to require both sides to meet some other conditions. In other words, if the law said something regarding starting points in employment relations and required both sides to start at the same point, that would be fair, but perhaps not just. A broader notion of justice and fairness, say critics, is not addressed by the simple idea of fairness recognized above since it does not recognize, among other things, that the two sides are not on equal footing with regard to bargaining power and ability to withstand negative effects. Opponents to the contract at will might reason that no rational bargaining parties would ever subject themselves to such an unfair contract that allowed them to be left out to dry when fired, or when an employee quits, any more than a rational bargaining party would subject themselves to a contract of abject and total slavery. Epstein says that critics of EAW argue that moderate government interference would be justified since it would redress this grievance AND assist marked forces in forming only those contracts which are fair and serve utility.
Against this claim, Epstein concedes that some contracts will not serve the interests of both parties, for reasons of idiosyncrasies, naiveté, or whatever. People are not always good at forming contracts which serve their interests, but on the whole and in the main, people are good at choosing what contracts it would be good or best for them to form. Contracts are typically in the interests of both parties. It would be unreasonable to assume that employees and employers would routinely enter arrangements which left them worse off than they were before. Why then should we think contracts under EAW typically work to the advantage of both parties? Epstein says we must take a full range view of the costs and benefits that arise from collaborative ventures. The old way of thinking of this problem of the disparity of power in the relationship is to think about ways of minimizing abuse by the employer, but the new way is to think about how to maximize utility and wealth from the relationship, which means minimizing both employer and employee abuse. Why would rational actors choose EAW as opposed to some limiting conditions? In order to answer this question, Epstein thinks EAW maximizes utility from four points of view or with regard to the following concerns:
1) Monitoring Behavior – EAW allows for flexibility in response to evidence from monitoring behavior of both parties. An employer is at the mercy of the employee in many ways. There is outright theft that is probably covered under criminal law, as is fraud and embezzlement. Prosecution of said cases would be slowed down by cost and are difficult to prove. The non-maximal producing employee is another drag on the company. Allowing employers to fire at will maximizes utility when such evidence from monitoring becomes plain. The low cost of hiring and firing under EAW helps to both explain the persistence of EAW and justify it for Epstein.
An employee is in a similar position with regard to the abuse of power by the employer. If the employer were to pay the employee a sum and require obedience and unlimited service for some period of time, without a possible avenue of exit for the employee, then the employee would be required to bear all marginal costs of continuing the relationship. If the costs of continued adherence to the contract exceed the remuneration, then the employee is free to leave at will under the EAW system. So if the boss starts asking you to do things you feel are no longer worth the pay, you can leave under EAW.
Both parties know that the other party can sever the relationship whenever the relationship no longer serves their maximal interests, and that is one reason why rational actors would choose EAW ex ante or from the beginning.
2) Reputational Losses – Capricious Actors suffer a loss in reputation, one that will bring the most swift retribution when the other contractors are allowed to leave at will. Epstein argues that against the common perception, the flexibility of EAW can be seen to serve the interests of employees as well as employers when either party develops a bad reputation. If Bob is fired for no good reasons, then Alice, Ted, and Mary see this as capricious behavior by the company and can make their own moves as they see fit. Rational actors and contractors would want this flexibility to react and thus utility is again served. Good reputational effects are also maximized. The larger the employer, the more difficult it is to conceal capricious firing to the larger number of employees.
3) Risk Diversification and Imperfect Information – EAW allows contractors, most specifically employees, to offset the risks of usually having only one job. If that job starts to go south, the employee is free to go back to the market to get another job. While the employee usually only holds one job at a time, the risk of loosing the job is diversified over multiple employers over time. The argument can be made of sole proprietors, though need not be made with regard to larger firms.
EAW allows contractors maximal flexibility to respond to the imperfect information in the employment market. Contractors do not have perfect information on this prospective employer or this prospective employee, thus a rational actor would want to reserve the right to sever the relationship at will.
4) Administrative Costs – The imposition of any for-cause condition will require administrative costs. At the very least, it would require that both sides present evidence and engage in some costly legal wrangling. The at will doctrine enjoys the cost-free position. Epstein thinks imposing for-cause conditions will result in large numbers of dismissals generating suits and litigation. A rational actor would not risk imposing the costs of these legal moves on both sides, since now even an employee’s performance, and perhaps personal life, will be subject to legal investigation.
D) Distributional Concerns – Epstein argues that no deserving group will be unambiguously benefited by a change in the at will conditions. No systematic transfer is likely to occur from a change in the rule. The employment rules would and do cover all levels of employment. Epstein argues that it is difficult to establish any deserving group who would benefit in a change to a for-cause rule. The non-performing employees are the ones most at risk under EAW, but why should we attempt to transfer wealth to them? Further, how would a change in rules transfer any wealth since the change would be unilateral and applied to all? He also notes that performing employees will have a stake in both sides of the equation since those employees will tend to have pensions and other investments managed by their employers. Performing employees have a stake in the continued efficiency of their employers. No gains to the least well off are to be made by changing EAW.
In his conclusion, Epstein notes that no system of regulation of employment conditions can hope to match the benefits and utility afforded by EAW. At will conditions promote maximal utility and are not restrained by justified notions of fairness or distributional concerns.
Questions to Answer
1. What is the difference between the public sphere and the private sphere?
2. What is Employment at Will (EAW)? Are there capricious, crazy reasons to fire an employee that are also morally acceptable?
3. Is EAW fair? Is Epstein using a good conception of fairness?
4. What does Epstein mean by “utility” and is this different from classical Utilitarianism? Is he correct about how his conception of Utility advocates EAW?
5. What is Epstein talking about when he talks about distributional concerns?
PAGE 5