The Hidden Costs Of Conventional Employment Relations:
New Practices To Serve Your Company's Bottom Line
by Stuart H. Brody, Esq.
The Hidden Costs Of Conventional Employment Relations:
New Practices To Serve Your Company's Bottom Line
by Stuart H. Brody, Esq.
This is an article on employment relations by a lawyer. But let me assure you,
you're not going to read the usual legal advice. You will not be told how the latest cases
require you to tighten your handbook disclaimers (to protect your power to revise
practices and terminate employees at will), beef up your job descriptions with exhaustive
lists of "essential functions" (for protection against ADA claims), complete performance
appraisals (to justify discipline), give "name, rank and serial number" references (to
protect against defamation claims) or to conduct sexual harassment investigations (in the
hope of avoiding liability). Why? Because you're probably up to your ears with
"the latest" on legal compliance. Legal compliance has become an obsession. And, to be
candid, most of the techniques fail to work.
LITTLE VALUE OF STANDARD HR PRACTICES
I believe that these and other employment practices have little value in
minimizing liability or enhancing employee productivity. Some quick examples why.
Handbooks are rarely read, and typically offer information of little significance.
The disclaimer is nothing more than a threat.
Job descriptions that are vague or general offer no real guidance to employees;
those that are cluttered with detail obscure the essential nature of the job.
Neither offers a credible indication of "essential functions" for legal purposes.
Performance appraisals allow limited input by employees, and contain
judgments that are abstract and value-loaded (such as "capable" or "communicates well")
or overly complex with innumerable and meaningless shades and gradations. Few
supervisors are willing or able to synthesize the meaning of an entire year's work, and
virtually any criticism will be seized upon by the disappointed worker as unfair,
discriminatory or inconsistent with other signals.
With regard to refusing to provide meaningful references, I think lawyers
just made up this fear. In most cases, there is insubstantial reason to refrain from
giving a truthful negative reference. And, by not telling the truth we perpetuate
employment of the incompetent, even dangerous worker.
ADA requirements have forced interviewers to wallow in technicalities
rather than get to the bottom of things.
Sexual harassment investigations can foul a work environment worse than the
alleged harassment itself.
When it comes time to fire the problem employee, we cower before the
daunting array of federal and state protections: the Americans with Disabilities
Act, the Family and Medical Leave Act, the Workers Compensation Acts, Title
VII and so forth, rather than chose the obviously productive choice and
terminate the employee.
The list goes on and on. Law has ceased to be a creative means for achieving
Human Resources goals and has become instead a collection of sterile defensive
techniques that drain business productivity and rarely minimize liability. Lawyers and
HR practitioners are too-often technical, obsessively defensive, overly-cautious and
divorced from the business imperatives of contributing to the bottom line.
ACHIEVING VALUE THROUGH HUMAN RESOURCES PRACTICES
So let's focus our attention on the central question: Can Human Resources
contribute to the profitability of the company through the design of employee practices
that add value to the company and save money. To answer this question, we will (1) look
at three common employment issues: the problem employee, the performance appraisals,
and the sexual harassment investigation, (2) determine what those conventional HR
techniques are costing us, in dollars and cents, and (3) propose creative alternatives that
increase profitability and reduce liability.
THE PROBLEM EMPLOYEE
We're going to first look at the problem employee, the one everyone
would love to get rid of, but is afraid to. You know who I mean. The one who always seems
sick or on leave. For example, out for eight weeks on Workers Compensation for an alleged back injury, then dozens of single-day absences to take a relative for treatment
of an unspecified illness. Next, claiming clinical depression, the employee leaves for four
weeks on disability, then seeks an ongoing accommodation under the ADA and, two months
later, leave under FMLA to tend to a different sick relative. You get the picture.
Typically this employee was never a great performer, but often this has not been
adequately documented.
If the problem employee has not been replaced, other employees must fill in.
Employees can pull together to support a co-worker, and this spirit can enhance
productivity, but asking co-workers to support someone they regard as a shirker has the
opposite effect on productivity.
If you've replaced the person during leave, FMLA or otherwise, you must provide
an equivalent position when he or she returns, even if there is no real need for them.
Often after return from leave, they continue to be absent, in effect creating their own on-
going, open-ended policy.
So why not fire the poor performer or the one who abuses leave? The answer
boils down to fear of being sued. The typical lawyer's advice is: "don't terminate without
grounds. The risks of suit are too great. Wait until you have something concrete. Use
your performance appraisal to set things up." And, in the meantime, endure the
productivity loss.
What are the assumptions underlying the fear of being sued? That everyone will
sue? That all cases will result in a settlement, or a gargantuan award? That even the most
frivolous case will incur high fees?
Let's take a look at these assumptions and put a cost value on them. We may just
be able to design better HR responses if we do. The starting point is available statistics on
what happens to the typical discrimination lawsuit. For instance, let's consider the Equal
Employment Opportunity Commission's statistics for case disposition in 1993 (the last
year measured).
53,078 charges with the EEOC
33,709 ( 73%) Dismissed or finding of no cause
6,900 ( 13%) Backlogged. Not resolved.
5,541 ( 12%) Settled before disposition
923 ( 2%) Finding of reasonable cause to sue
398(.086%) Cases the EEOC directly brings on behalf of the
complaining party
Note that the EEOC found merit in only 2% of cases filed, and in less than
1% did it actually bring the case to court on behalf of the employee. The EEOC loses 2
out of 5 cases it brings to trial. Of the cases it wins, the average award is relatively low:
$40,000.
Of course this is not the end of the story. Employees whose cases are dismissed
by the EEOC may still hire attorneys and sue on their own. However, prominent plaintiff
attorneys will tell you that their own self-selection process excludes nine out of 10 cases.
Most cases brought to court lose. Of those plaintiffs that win, no one can say exactly how much is generally obtained. Remarkably, no comprehensive study of awards in discrimination cases has been done. Even the insurance companies that offer employment liability insurance have no real idea of the frequency and size of plaintiffs' victory. Very, very, few cases wind up with large awards. Yet the large awards get the publicity and drive our fears.
Now it is certainly true that even a frivolous case must be defended and legal defense costs money, but often not nearly as much as tolerating the problem employee. Let's examine what our restraint in terminating such an employee costs, in dollars and cents, by measuring the impact of the unproductive employee on the company.
Let's assume that the average salary of an employee is $30,000, or $40,000 including
benefits. Because of absence or poor performance, I would conservatively suggest that half this salary
is wasted. You're losing $20,000 each year for such an employee.
What about the impact of the problem employee on co-workers? If the problem
employee is not replaced, employees who must cover for him or her may become resentful and less productive. Can we measure this? Consider this productivity suggestion:
Productivity Suggestion:
Requiring employees to do the work of co-workers they view as incompetent
or irresponsible, without compensating them, will cost you as much as if you did compensate them. Judged by this measure, the dissatisfaction could cost you another $20,000 in lost productivity. So far, we have $20,000 wasted on the problem employee, and another $20,000 in lost
productivity on those who must cover for him or her.
What about the HR official's time managing the problem employee? HR managers will
concede that as much as 50% of their time is spent on problem employees. This additional cost could
amount to thousands of dollars per problem employee.
The exact numbers don't really matter, and every HR official can measure their loss in
terms specific to their business. The point is that this method of analysis allows a manager to measure
the cost, in dollars and cents, of the decision to retain a problem employee. And such measurement also
provides you with a vocabulary to relate to the CEO and CFO-those folks who keep calling Human
Resources a cost center and a drain on profitability. And once in a dialogue over profitability, you have
an opportunity to offer an alternative approach. What approach? Offering the employee a settlement to
leave (and not sue). To put it bluntly, "pay them off." Our analysis reveals how much it is worth-at
least $20,000 per year, and possibly $20,000 more on lost productivity of the co-workers.
Imagine, paying $20,000 or less, to get rid of an employee costing you more, and
avoiding the time, expense and uncertainty of "setting up" their eventual termination via the
performance appraisal. And by obtaining a release, you can lay to rest your fears of litigation. If the
employee refuses, in most cases you should go ahead and terminate them. Your productivity savings
should be more than enough to handle attorneys fees if it comes to that.
Is this notion so novel? Perhaps not. We pay agencies to recruit employees, why not
pay to get rid of them? Eliminating the problem employee is an investment in other employees and in
business Why aren't more companies seeing it this way? Because we're used to being reactive. But how
many companies do you know make money reacting, rather than leading and innovating?
PERFORMANCE APPRAISALS: THE PREMIER DE-MOTIVATOR
Let's shift to another area that incurs tremendous wasted costs: the performance
appraisal. I am not a fan of performance appraisals. Here are some reasons. Performance appraisals are:
typically one-sided, allowing no meaningful employee input;
highly judgmental and intimidating, rather than evaluative and guiding;
based on general and vague criteria or overly specific and meaningless
gradations of judgment;
rarely effective in describing the employees' faults (assuming they are bold
enough to address them at all);
ineffective in supporting termination, because other grounds for termination
often supersede the basis for the negative appraisal;
often inconsistent with past appraisals by the same or other supervisors;
of limited use in litigation, because the employee's lawyer can show that
similarly negative appraisals of other employees resulted in less severe treatment;
Even when they refer to the fault for which the employee is subsequently terminated, the
tone is often inconsistent with the seriousness of discharge, suggesting pretext; and often transparently used simply to justify other employment action on compensation or discipline, fueling further employee cynicism, and proof of pretext.
What are the real costs involved in the handling of performance appraisals? Are there
creative alternatives? Let's look at a company of 800 employees.
PART I
Cost of time in preparation of 800 appraisals $34,022
( Based on two hours of manager's time per appraisal x average salary
of $28.60 per hour or $52,000 per year)
Manager's time meeting with employee
One hour per manager per employee 23,040
(at $28.50 per hour or $52,000 per year)
One hour per employee 10,992
(average employee's salary of $13.74
per hour or $25,000 per year)
Total 34,022
PART II
HR officials, review per employee 5,720
(1/4 hour per employee at $28.60
per hour)
Discussion with upper management re 5,720
implications and other administrative tasks
(1/4 hour per employee at $28.60 per hour)
Total costs per year $90,994
These are the hard costs involved in the administration of the process. But aren't the
costs really greater than $90,994? The answer is yes. To understand why, consider the impact of the performance appraisal on the employee.
Can employees engage in activity they perceive as useless, unfair, judgmental and
intimidating, without a negative impact on productivity? Of course not. The people who seem to forget
this are the lawyers who keep urging their clients to do appraisals to "minimize liability" without
recognizing the horrendous impact on productivity.
Is it possible to measure this impact? No. Not without extensive empirical tests that
have not yet been done, in part because few HR professionals and scholars recognize the importance of
such measurements. But we all know that the negative impact on productivity exists. In the absence of
precise measurements, let's develop a working hypothesis.
Productivity Suggestion:
When an employee is engaged in an activity he or she perceives
as useless, the initial dollar cost of lost productivity is double the salary paid to the employee during that activity, and increases over time.
Suppose that an employee spends an hour with a supervisor, at an average of $13.74
per hour/per employee. Now double that, according to the productivity suggestion. That's $27.48.
Multiply by 800 employees for a total of $21,984 in additional productivity loss. That's in one year. But
as the hypothesis suggests, if the environment continues to make employees feel unfairly measured and
judged, productivity will continue to decline. The dollar value of the productivity loss will rise
accordingly.
Is this analysis speculative? To a degree it is, but no less so then other conceptual
models of management consultants. Models upon which millions of dollars are showered and great
shifts of business directions are based. Can anybody deny that commitment and motivation are built
over time in the workplace? Or that once commitment and motivation decline, they tend to keep
declining. Isn't the whole concept of progressive discipline based on that expectation? Is the
relationship between management and labor any different than that between participants in any other
relationship? If the relationship is not maintained and fails to grow, it atrophies and dies.
Once again, as with the problem employee, by measuring what we lose in dollars and
cents, we have a basis to enter the dialogue of change and lobby for more cost-effective methods. This
means greater profitability and an enhanced value of HR.
Is there a better way to do performance appraisals? I envision a new document
generated at the time of hire, that sets out not just the "essential functions" of the job but the goals of
each side.
Even employees at the lowest level can be guided to articulate some sense of their
goals: skills they would like to learn, strengths they expect to bring, weaknesses to address. Do they
expect to be promoted? On what basis? To what job? How long do they expect to stay with the
company? How can the company help them achieve these goals?
If employees can't come up with a sense of what they're attempting to accomplish or
can contribute, you may wonder how productive they are capable of being. If supervisors can't
articulate how they wish an employee to develop, can they can effectively supervise?
The plan would be revised periodically, not just once a year, as the strengths or
weaknesses of the employee become apparent and as the employee and supervisor begin to define their
goals.
This approach avoids the losses that result from the passivity bred into the traditional
appraisal process. The shift we seek is to the employee taking responsibility for his or her own
objectives, and the supervisor being accountable for developing these objectives. An evolving
understanding of responsibilities on both sides is forged. If the employee takes no responsibility, that
ay be the best basis you'll ever have for termination, far better than the artificial, hurried end-of-the-
year summary we now foist on them. And if the employee fails to meet goals he or she has outlined,
you surely have a defense stronger than the customary unilateral disciplinary approach: a consensual
understanding of the standards an employee acknowledged he or she would meet yet didn't.
This may seem radical, yet it's a simple shift from judgment and fault-finding to periodic
guidance and evaluation. You may just find that your job descriptions become irrelevant in this process.
Another savings. But most important, we have the potential here to reverse the erosion of productivity.
The key point is that by measuring what we lose-in dollars and cents-we have a basis to enter the
dialogue and lobby for more cost effective methods leading to greater profitability.
THE SEXUAL HARASSMENT INVESTIGATION:
COMPOUNDING THE PROBLEM
Let's look at another common area where traditional practices yield disappointing
results. This area is sexual harassment.
Basically, three practices have evolved to address the explosion of litigation in the area
of sexual harassment: policy, training and investigation. A sexual harassment policy is probably the
single most cost-effective HR convention: it costs nothing and goes far in establishing good faith.
Every employer should have one. Training is a more complicated question. It can be expensive and
ineffective if not delivered with sufficient management conviction.
The most problematic of the three practices is the sexual harassment investigation. It is
routinely regarded by employers as an indispensable element in limiting liability. Typically, the
investigator is assigned to assess culpability and recommend appropriate disciplinary and corrective
action. Corporate investigators, or their lawyers, take evidence from "victim" and perpetrator," often in
closed sessions cloaked in unnecessary formality, one side at a time (often second guessed by lawyers
representing each side ), then enmesh co-workers as witnesses while the rumor mill churns. The
debilitating effect on the work environment is widespread and powerful.
Finally, a decision is rendered. If the investigator has assigned guilt, one side is left
embittered and the other, at best, with a vengeful vindication. If the investigation is inconclusive (the
usual result so that the employer may avoid damaging admissions), charges of white-wash are leveled
by both sides. Some employers even feel compelled to disseminate the result to all involved, including
co-workers, further polarizing the workforce.
What are the costs of an investigation? They vary widely. Let's see if measuring cost is useful. Work time of employee witnesses participating in the investigation
Two hours per employee at $13.74 per
hour x five employees = $ 137.40
Lawyer engaged to conduct investigation
$175 per hour x 15 hours = 2,625.00
Time of HR official supervising investigation 129.00
$28.60 per hour x 15 hours
What does this amount to? A little over $3,000.
It can be readily seen that these costs barely scratch the surface in measuring real costs.
Why? Because the impact of anger, resentment, gossip and workforce polarization on productivity is
far more substantial. Can we measure this? Consider our third productivity suggestion.
Productivity Suggestion:
When an employee is engaged in an activity he or she perceives as unfair, as
well as useless, the initial dollar cost of lost productivity is four times the
salary paid the employee during that activity, and increases over time.
Now, let's put a value on that. Take the lost employee time ($137.40) and multiply
it by four. That's $549. Not a lot, right? Anyone who has gone though a sexual harassment
investigation knows it is much more.
What of the impact on an employee found to have committed sexual harassment?
Won't there be a drop in productivity that may or may not be reversed over time? That's if they remain
employed. Or you could lose a star performer, costing far more.
An employee found to have been the victim of sexual harassment, even where some visible
action has been taken against the so-called perpetrator will exhibit a drop in productivity that may or
may not be reversed over time. They, too, may leave, incurring additional costs of recruitment, hiring
and training.
Let's say the two employees, "perpetrator" and "victim," are earning a total of $100,000,
and lose 1/4 of their productivity each in the course of a year. That triggers an additional $25,000 in
costs.
We don't need precise measures to know that more creative options could reduce this drain
on productivity. We believe sexual harassment mediation is a cost effective substitute for investigation
in a wide range of cases.
The focus of mediation is not on assigning blame, but on restoring a work atmosphere
fouled by the harassment, or the charge of harassment. Affected employees, "perpetrator" and "victim"
alike, would be obliged to participate.
Ideally, employees would be notified when taking the job, that they have a commitment to
contribute to the company's ongoing success, and this means helping to solve problems when they
arise. If a sexual harassment problem arises, whether the employee is an alleged perpetrator or a target,
the employee may be required to help solve the problem by going to mediation. The theory underlying
this approach is that the company has no obligation to make it easy for its employees to sue. If the
employee wants to sue, he or she can quit and do so. If they want to continue working, they are
required to stay and work it out even if a suit is filed. It's that simple.
Does this approach protect you legally, as strongly as an investigation? I believe so. In a
case handled by our firm-the first ever in New York under the auspices of the American Arbitration
Association-the target refused to mediate. We asked his attorney (the target was a man) the following
question: "How receptive do you think the judge will be to your case when he learns that your client's
sole concern is in scrambling for dollars rather than engaging in a dialogue of conciliation?" The
answer, of course, is not very sympathetic. A judge will be much more receptive to an employer who
requires the perpetrator to reform his ways, rather than simply writing him up, suspending or discharging him.
The cost of the mediation may be equal to or greater than the cost of an investigation, but
should reap greater productivity benefits. And you know, when people get into a room and start
talking, especially with a skilled mediator, a funny thing happens: a process of understanding and
reconciliation. Our workplace is almost hostile to such thoughts. And when consultants talk in these
terms, CEOs and CFOs turn a deaf ear.
But they do understand terms like "investment", "pay off" and "cost-effective". The
language of dollars and cents. That is why I've tried to present to you alternatives whose soundness lies
in a measurable increase in productivity.
CONCLUSION
When a problem comes up, ask yourself, "why not step aside of the conventional approach
and try something different? Then measure it. The way may seem unclear at first. But, there are always
costs to be saved or profits to be enhanced. Create your own productivity suggestions. You may just
find you're on the road away from rigid conventionality toward new possibility.
Stuart H. Brody is Senior Counsel to the Labor and Employment Group of Gibney, Anthony
& Flaherty, LLP, based in New York City. The following article is adapted from a speech before the American Management Association's 1995 convention in Chicago. The author acknowledges with deep gratitude, Stephen F. Ruffino, Esq., head of Gibney, Anthony & Flaherty, LLP's Labor and Employment Group, for promoting ongoing exploration of innovative HR practices, Mr. Bjorn Modee, President of Business Training Systems, Inc., for his vast expertise on profitability measurement, Deborah Virella, the Human Resources Director at Robert Fleming, Inc., for lending her 20 years of creative HR leadership, and Peter Cousins, Esq., Partner at Gibney, Anthony & Flaherty, LLP, for his keen editorial eye.
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