Posts Tagged ‘minimum wage’

Paying workers with payroll cards: the $40 billion wage violation you’ve never heard of

July 11, 2013

Imagine that you’ve just gotten your biweekly paycheck. You take it down to the bank and start putting it to work. You haven’t used your bank account for a month or so, so first you check your balance just to make sure everything’s in order. You transfer some money to your savings account or another personal account, then make a cash withdrawal. You get home, and after a brief chat with your spouse, you decide to make your paycheck available to both of you – but, shoot! You left your check stub at the ATM! You need it to be replaced quickly just so you can get on with your bookkeeping, so you put in for an expedited replacement. It arrives, and you turn it into a joint account.

Now imagine that everything that just happened took up 5% of your income.

If you worked a minimum-wage job for Home Depot and got paid with a prepaid payroll card distributed and managed by a third party, then took all of the steps listed above, you spent almost $30 on a $580 biweekly minimum wage paycheck, all because the accessibility of your own paycheck, of the money you worked for, is at the mercy of fees imposed on you by Citibank. That’s almost 5% of an income that is already so low that you can qualify for food stamps even with a full-time job.

Several major media outlets have recently run stories detailing the increasingly widespread practice of paying workers, mostly minimum- or low-wage workers in hourly positions, not with cash, not with direct deposits, but with pre-paid credit cards, and the efforts of workers to fight back against that system. Most of this litigation is in its preliminary stages, is mostly coming from private parties and not the state (the state’s intervention in the wage-card system is so far confined mostly to data-gathering), and is focused not on the wage-card system itself, but on the various fees that come attached to such cards.

Since the cards are supplied by private parties just like any other pre-paid credit card, the profit motive compels the issuer to build in hefty fees for the kind of transactions that many people with ordinary bank accounts would take for granted. A friend of mine who works an hourly job but who is paid with a payroll card permitted me to share the fee structure she has to deal with just to get access to her own money. Click to enlarge:

Typical prepaid payroll card fee structure

Typical prepaid payroll card fee structure

The fees are largely nonsensical – does it really cost the administrator of the card more than three times as much in infrastructure costs if somebody makes a withdrawal from a teller instead of an ATM? Does the card provider really lose money that needs to be recouped if somebody doesn’t use their account for a few months? These questions are not mere rhetorical axe-grinding; there is legal significance to the question of what is being deducted from a paycheck and why (more on that below). And on a minimum wage job, where saving next to impossible anyway, even a few dollars a week off the top can mean the difference between saving for the future and living from paycheck to paycheck. But even one penny to get access to your own paycheck is an intolerable affront to your value as a worker, especially if you’re at the minimum wage level.

Most people are used to seeing such absurd fees in statements for credit cards that they volunteer for, or that they voluntarily reject. But the idea that such a payment scheme can be imposed on a worker from above conjures recollections of the days when employers owned not just the worker’s labor, but the worker’s entire life, when a worker paid in company scrip had nowhere to spend his “wages” at the company store, living in the company dormitories, dying in the company chapel, and being buried in the company funerary lot. The very conditions that gave rise to employment protections in law and the labor movement in general have come back, hidden behind the urbane face of business efficiency.

Clearly, there is something intuitively unpalatable about low-wage workers getting paid with cards that have hefty fees attached to them, even just to access their wages. But is it, strictly speaking, illegal? Millions of Americans are getting paid close to $40 billion a year in wages on these cards by businesses ranging from major retailers to mom-and-pops. Here I’ll give a sketch of why I think that any payments like this constitute wage and hour violations, both in principal and in practice.

I. Requiring workers to accept payment in prepaid credit card format is not paying them “wages” within the meaning of 29 USC § 203(m) and 29 USC § 206(a)

The Fair Labor Standards Act (29 United States Code) is the flagship USC provision on minimum wage, setting the $7.25/hour minimum and defining who’s exempt – tipped workers mainly. To wit, at 29 USC § 206(a):

“Every employer shall pay to each of his employees… wages at… $7.25 an hour.”

Emphasis added. Suppose that, instead of counting off a five, a couple of singles, and a quarter in cash every hour and putting it in your pocket, your employer decided to press a button on a payroll website and change around the numbers on your bank account and hers at the same time – still wages? Uncontroversially yes; electronic wage transfers are easy cases of legal “non-cash” wages. But suppose instead that your employer, instead of giving you either cash or direct deposit, gave you a stack of baseball cards whose net market value averaged out to $7.25, in exchange for an hour of work – still wages? Uncontroversially no; company scrip is dead and employers do not get to unilaterally substitute goods of dubious “real” value for cash. So what about the fuzzy cases in the gray area between the uncontroversial poles – cases like prepaid, fee-laden payroll cards issued in an employee’s name?

For purposes of wage and hour laws, prepaid credit cards are more like a stack of baseball cards than like an electronic direct deposit. Drawing the distinction requires looking at what the relevant distinction is, for wage and hour purposes, between an electronic direct deposit and a stack of baseball cards.

The relevant difference is the cash-like quality of direct deposit versus the non-cash-like quality of a stack of baseball cards, and the wage and hour laws agree. The definition of “wages” in the Fair Labor Standards Act is contained at 203(m), and wages are defined only for the purpose of separating minimum wage-exempt tipped workers from non-exempt non-tipped workers, and in allowing that the Secretary of Labor has the right to determine the value of things like room and board paid in lieu of wages. But the interesting part of the definition of wages here is its emphasis on “cash” for determining how much money a tipped worker should be paid. Tipped workers are allowed to be paid less “wages” than non-tipped workers, where:

“the amount paid such employee by the employee’s employer shall be an amount equal to… the cash wage paid such employee [plus tips]…”

Emphasis added. Now, 29 USC does not define “cash,” but I think that we have a pretty good understanding of why “cash” is the preferred method of compensation. So is a pre-paid credit card cash-like, like a direct deposit, or is it non-cash-like, like baseball cards?

Baseball cards aren’t cash-like because their value is uncertain. There is a specialized market for them that has certain barriers to entry and exit. You can’t trade them into a bank and get a roll of quarters back in value equal to the value of the cards. You have to do something with them before you can buy anything with them, stores and banks are free to decline them as “legal tender” at their leisure. Third-party players control their value, not the state. And a pre-paid credit card is clearly much more like this than it is like cash.

  • The value of a pre-paid credit card is highly uncertain. If you have a prepaid card with $50 on it, you’d think you’d be able to buy $50 worth of groceries with it – unless the store doesn’t accept that brand of card, or doesn’t have a card machine. You might lose value on it just by doing nothing whatsoever with it, with an “inactive account fee.”
  • There is a specialized market for them that has certain barriers to entry and exit. There are fees to open an account or move money from the card to an existing account. As noted in the fee schedule I showed you above, there’s even a fee to close your prepaid card account in some cases, or to cash it out. You have to pay money just to get rid of the damn thing!
  • You can’t trade them and get a roll of quarters back in value equal to the value of the cards because the fees built into the card will give you your roll of quarters minus the costs imposed independently by a third party.
  • You have to use the card somewhere, activate it, call a number, sign a form, etc., before you can buy anything with them, and no store or bank in America ever has to accept them as “legal tender.
  • And most importantly, the value of the card is determined by a third party, not the state, not the Federal Reserve. What if you get a prepaid Citibank payroll card, and Citibank goes out of business tomorrow? What if Citibank spins off its payroll card service and they start changing around the fee structure after you get the card? What if Citibank spins off its payroll card service and the new company decides that its not going to honor any previous cards?

These are all problems that you have with non-cash instruments that you do not have with cash instruments like cash, checks, or direct deposits.

On this analysis, paying a worker with a prepaid credit card is the baseball card/company scrip model – which is to say, not paying them. A prepaid credit card is illiquid. Its value might drop to zero if Citibank or whoever else administrates or issues the cards goes bankrupt or spins off the division under new conditions. The fees might change. The fees exist at all.

There is caselaw supporting the position that the law treats illiquid, non-cash compensation fundamentally differently from liquid cash or cash substitutes. Smith v. Woodward (2003 WL 23537985) is one of a plethora of cases illustrating this crucial point. Smith, a cattle man, agreed to do work for Woodward’s cattle ranch for a “$2,500 per month labor credit for labor provided.” (Emphasis added by the court but present in the decision.) Woodward ended up paying Smith with $1,000 cash and $1,500 worth of “cattle care services,” and ultimately claimed to the Oregon court that Smith had received his full remuneration since he had received $2,500 in “total value,” but the court disagreed, and found a wage and hour violation. “Cattle care services” are highly illiquid. If you contract to pay someone $2,500 a month, you owe them $2,500 a month, not 2500 “somethings” a month.

A case that shows the same issue from the opposite side is American Airlines v. United States, 204 F.3d 1103 (2000). Hailing from the strange land of tax law, this case saw American Airlines losing an IRS audit over American Express cards it had given to its employees as bonuses following a sudden uptick in business. Airline crews were given $50 vouchers but did not back out taxes from them or report them as payroll taxes, so the IRS pounced and won its case. Sounds like a point in favor of payroll cards, right? Wrong – the only thing that won the day for the IRS was the total liquidity of the American Express cards. The vouchers were good anywhere, they did not specifically name their recipients, they had no fees associated with them, and they were freely transferable. In the court’s own words:

We hold that… the vouchers constituted a cash equivalent benefit. The vouchers were blank American Express charge forms, bearing American’s account number, and in an amount “not to exceed $50.” The vouchers did not contain the employee’s name or any transfer restrictions. Further, although the letter accompanying the vouchers stated that they were only good at restaurants, there was some evidence that they could be used at non-restaurant business establishments. Even if the vouchers were only valid at restaurants, however, they would still be cash equivalents given the lack of restrictions on their use and transferability. According to one of American’s witnesses, the vouchers were essentially bearer paper.

Emphasis added, id. at 1112-1113. “Bearer paper” is basically what a physical check becomes when you endorse it – good as cash for whoever physically holds it. These cases drive home the central thrust of the wage and hour laws’ insistence upon “wages” being paid as “cash,” and “cash” meaning liquidity. Prepaid payroll cards are not that. Prepaid payroll cards are fee-laden, non-transferable, tied to a specific person, without fixed value. Worse, they are often imposed on employees from above as the sole means of compensation, and even where they are not strictly required by the employer, the opt-out procedures are often so complicated that you’d need a JD just to get through the cover sheet.

Unlike an agreement with your bank that gives you a penalty for using certain ATMs, an agreement with your employer is restricted by the Fair Labor Standards Act and all other wage & hour laws. You are free to contract for whatever bizarre fees and penalties you want with your bank only within the confines of your imagination, but you are not free to contract as such with your employer. Even if the only alternative is unemployment and utter poverty, you are never free to contract to work for less than minimum wage, or to voluntarily de-exempt yourself from overtime laws.

II. The fees on payroll cards constitute illegal deductions from paychecks within the plain meaning of 29 USC § 206 and they frustrate the purpose of 15 USC § 1671

Except as specifically allowed or required by law or a court order, no deductions are permissible from paychecks. If you agree to work for a certain amount of money, then receiving anything less is wage theft – a breach of contract by your employer, and an act of conversion and theft, unless you’ve been told that you’re getting a pay cut.

There are some kinds of deductions from your paycheck that you should expect, that that your employer is required by law to deduct in most cases. This is your FICA, Medicare, Medicaid, and Social Security. Often this also includes state taxes. Sometimes the deduction is required by a court order – sometimes in bankruptcy, divorce, or child support arrangements, the court will permit an adverse party to take money directly from your paycheck, and these deductions are legal. The Wage and Hour Division of the Department of Labor has provided a helpful fact sheet spelling out an exhaustive list of all other times that an employer may lawfully make deductions from paychecks:

  • when an employee is absent from work for one or more full days for personal reasons,
  • sick days without a sick day policy or with a policy that limits sick days,
  • jury duty, adjusted for certain state-required compensation,
  • fees imposed for violation of a good-faith mjor safety rule with the usual notice requirements,
  • unpaid disciplinary suspensions per an established policy,
  • when you start or end the job partway through a pay period,

and one not on the Wage and Hour Division’s list that is specifically created by the National Labor Relations Act,

  • in accordance with the terms of  a collective bargaining agreement subject to the usual minimum wage and overtime laws.

And that’s the complete list. The Department of Labor has always articulated a ruthlessly exclusionary policy that no deductions are legal unless we specifically say they are; it isn’t a list that says “these are examples of legal deductions and so stuff like these are legal,” it’s “everything but these specific things are illegal.”

Now imagine that one day you get your paycheck and you notice that some amount – a tiny amount, maybe just fifty cents – is backed out of your check for “CWC.” You go and ask Boss about the CWC deduction and the cheerful reply is: “Check-Writing Cost, my dear employee. Every pay period we have to go through a whole book of checks just writing paychecks to you guys, so to cover that cost, we’re going to bill you for the price of a paycheck. I mean, come on, its just fifty cents – even on a minimum wage job, fifty cents is just pennies a day!”

Unambiguously an illegal deduction. Unless you have a collective bargaining agreement or have otherwise specifically contracted to let your employer back out the “CWC” and taking out the CWC doesn’t put you below minimum wage or below any overtime pay you’re guaranteed, your employer does not get to dip into your paycheck and just take that money out to cover the cost of check-writing fees.

So when I read a justification for payroll cards like this:

Companies and card issuers, which include Bank of America, Wells Fargo and Citigroup, say the cards are cheaper and more efficient than checks — a calculator on Visa’s Web site estimates that a company with 500 workers could save $21,000 a year by switching from checks to payroll cards… A Victoria’s Secret employee… said it cost her $1.50 just to transfer money from her Citi payroll card to her checking account…

all I can think is, “CWC!” The Victoria’s Secret employee is directly compensating her employer for the employer’s check-writing cost with money that comes straight from her paycheck; the employer has shifted its own costs into the employee and the employer knows it, even though the cost-shifting would likely turn a minimum wage worker into an employee of a wage-violator.

And make no mistake – a fee imposed on making withdrawals from a prepaid payroll card just for getting access to your earned wages is, as an economic reality, identical to a direct paycheck deduction. The employer has just added a single step on top of writing CWC on the pay stub and unilaterally backing out a small but non-zero sum: they’ve had the card’s administrator or the bank write it for them on a card statement instead of a pay stub – but then, since the card is the payment, is there really a relevant distinction between a card statement and a pay stub for employees who get paid with payroll cards?

If the language of the Wage & Hour Division’s guidelines or the National Labor Relations Act aren’t sufficiently precise, then there remains a clearly-articulated public policy against aggressive or needless damage done to workers’ net take-home pay elsewhere in federal law. Title III of the Consumer Credit Protection Act at 15 USC § 1671 clearly lays out Congress’s desire to protect paychecks from excessive garnishment, whether by the state or by private parties:

The Congress finds:
(1) The unrestricted garnishment of compensation due for personal services encourages the making of predatory extensions of credit. Such extensions of credit divert money into excessive credit payments and thereby hinder the production and flow of goods in interstate commerce.
(2) The application of garnishment as a creditors’ remedy frequently results in loss of employment by the debtor, and the resulting disruption of employment, production, and consumption constitutes a substantial burden on interstate commerce.
(3) The great disparities among the laws of the several States relating to garnishment have, in effect, destroyed the uniformity of the bankruptcy laws and frustrated the purposes thereof in many areas of the country.

Now, in fairness, the Consumer Credit Protection Act had direct paycheck deductions to creditors in bankruptcy as its specific targets in mind, but the policy objective is clear and unmistakable: the power of private parties to predate upon employees in the form of wage attachments has grown far too powerful, and that we have good reasons to want to restrict the power of private parties from taking money, even money owed according to the terms of good-faith contractual obligations, out of workers’ pockets.

An agreement between an employer and an employee to receive compensation through a payroll card is exactly the kind of predatory consumer transaction at the heart of the anti-excessive-garnishment regime imposed by the CCPA. The employer and the employee are both private parties making private arrangements for goods and services that impose a de facto garnishment on a worker’s paycheck. Even where that garnishment comes to just a few dollars per pay period, the brunt of this garnishment is disproportionately born by the class of workers most vulnerable to the lost of even a few dollars here and there: the minimum wage or low-paying hourly worker in overcrowded labor markets like retail or food service.

Neither the CCPA nor Fair Labor Standards Act provides a precise definition of what constitutes a “garnishment” except to say that they usually come from the state or from a law, usually tax law. But the laws are very clear about what constitutes a deduction, on the guidelines provided by the Wage and Hour Division’s circulars cited above, and it cannot be seriously argued that there is a major distinction for purposes of minimum wage violation analysis between a “garnishment” by a private company in the form of punishing employees to the tune of a few dollars a pay period just for using a payroll card and a “deduction” in the form of an employer essentially billing its employees for the cost that the employer would normally bear in writing checks or making direct deposits. It is the evil of cutting costs from the coffers of employers and shifting those costs to an employee’s pockets that lies a the heart of a slew of wage and hour laws, not the list of which are the FLSA and the CCPA.

Similar policy articulations abound throughout wage and hour laws and the caselaw interpreting them. Employers can pay tipped workers a pitiful $2.13 an hour – unless the tips don’t get the employee up to minimum wage, at which point the employer pays the difference. Employers can make you pay for the price of getting your uniform cleaned, or can make a security guard pay for his gun – unless the total expense puts the employee below the minimum wage. Nobody is exempt from overtime pay or from the minimum wage – unless the law specifically says so, at which point, the minimum wage is a non-negotiable duty owed to employees.

The unmistakable footprint of this policy abounds in the wage and hour laws. The entire regime of employment law orbits the proposition that one hour of an American’s time is worth not less than $7.25 an hour to an employer. Under the payroll card system, America’s lowest-paid workers find themselves on the receiving end of “fees” serving an economic function identical to illegal wage deductions to cover the employer’s costs of managing a fair, legal payroll system, in open defiance of a clearly-articulated public policy to the contrary – to the tune of $40 billion a year and rising.

III. And if there isn’t already, there ought to be a law forbidding the practice of paying with fee-laden, highly illiquid payroll cards

It is possible that this analysis is all insufficient to establish the case I want to make, that the only reason we’d ever have to think that Congress intended for the minimum wage to truly be $7.25/hour is if it somehow said so more clearly than in the bevy of statutes cited herein. If such is the case, then at the very least it is an essential and imminent public concern to produce legislation clearly forbidding the practice of “paying” workers with non-cash, highly illiquid, fee-laden, wage-draining privately-issued bank scrip instead of money.

The last several decades have seen a relentless assault on the lowest-paid American workers. The courts have almost completely eliminated the power of workers to join together in class-action suits to levy their grievances en masse, in suits that by themselves are too small in winnings and too big in factual complexity for it to be worth any competent lawyer’s time. Wages are stagnant against skyrocketing employer-side profits, and the minimum wage is now so low in terms of real dollars that the minimum-wage worker typically qualifies for food stamps – Wal-Mart is so embroiled in this reality that it even has programs in place to help its workers get on EBT. Meanwhile, years of carefully-calculated public opinion assaults have driven membership in unions, the only social force that has consistently given workers a prayer of balancing the overwhelming lopsided power employers have over low-wage or unskilled workers, to historic lows, and it has taken a near-total collapse of the American middle class to get union favorability back above water. Workers have been told that discrimination is over, that the gender pay gap is motherhood’s fault, that unions are all mafia fronts, that your employer has a divine right to read your social media posts and monitor your email, that business efficiency is all that matters, that those with the hungriest waistlines must tighten their belts the hardest, for decades, and now we have come full circle to the point where employers are issuing private currency systems, for their own benefit, as “compensation” to the economically-powerless underclass they have tired so hard to create.

There is a law. There are several laws. I have cited a small fraction of them here, a smaller fraction still of the case history, showing unmistakably that the payroll card system is an intolerable affront to everything that American wage and hour law stands for. But if somehow when the dust settles from the increasing public and state attention that payroll cards are receiving and the cards remain intact, then our leaders must be petitioned to look back to the days of company towns sustained by company scrip and say “never again!”

Is your unpaid internship illegal?

June 13, 2013

A New York judge recently ruled that Fox Searchlight Pictures must pay two of its former “interns” for work they did on the set of the 2011 film “Black Swan” back wages for work that the interns didn’t know that they were performing. Despite being told that they were interns, the two workers in question did all of the ordinary work that people are normally paid to do, and in fact they actually did so alongside other paid workers. The only difference between the “interns” and the paid staff was that the interns were told, and probably really thought, that they didn’t need to be paid.

This case, Eric Glatt et. al v. Fox Searchlight Pictures, has enormous implications for businesses and for the thousands of Americans either in school, or just leaving school, who are applying to or currently participating in unpaid internships. Not because the case signals some radical new change in the law – the law has been remarkably consistent on unpaid internships for years – but because now people might actually start to know the law on unpaid internships.

Fox Searchlight Pictures’ lawyers, just like the lawyers for the large companies that pull in thousands of unpaid interns every year, have to know the law on this one because the law is very plain: you must pay your workers. This is especially true in the private sector. The Fair Labor Standards Act, the flagship legislation in this field, only exempts very specific kinds of volunteer work for government, religious, and humanitarian agencies. The private sector has no such exemptions, and even those exemptions for charitable organizations are strictly defined. Otherwise, if somebody does work for you, you have to pay them.

So the question then becomes, what separates a “worker” from an “intern?” I’ll give you a hint: it is not just the difference between being called an “intern” instead of a “worker.” The rule that employers do not get to unilaterally make legal determinations about your status as a worker is consistent across several aspects of the worker: your employer does not get to unilaterally decide if you are entitled to overtime pay or not, your employer does not get to unilaterally decide that you are an at-will employee, and your employer does not get to unilaterally decide that you do not need to be compensated for your work.

The Department of Labor has issued some extremely clear guidance on this matter, and looking back over my own past, the unpaid “internships” I’ve done, it becomes pretty clear that very few so-called private sector “internships” are anything but evasions of the obligation to pay workers for their time, intentional or otherwise. According to the Department of Labor, In order to actually qualify as an internship that doesn’t need compensation, for the purposes of the Fair Labor Standards Act:

1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;

This means that the internship where you primarily get or make coffee, make photocopies, or do work like the paid office temp is doing, will likely not meet this criterion. Nobody takes classes in college on the Starbucks order.

2. The internship experience is for the benefit of the intern;

This sounds fairly easy qualification for the employer to meet, since it’s rather broad. All that running to Starbucks is for the “benefit” of the employee, right? But this part of the test speaks to benefit in the sense that an education is for your benefit: you’re putting work into it, and getting a benefit from it, with a direct proportion between them. Fact Sheet #71 contemplates an apprenticeship model for the unpaid internship: it is supposed to be like a classroom on the job. The harder you work at it, the more you get out of it, not the more your employer gets out of it.

3. The intern does not displace regular employees, but works under close supervision of existing staff;

This speaks to the real policy agenda of Fact Sheet #71. You might have been jokingly referred to as “slave labor” when you worked your unpaid internship. That isn’t far from the truth. The policy agenda behind Fact Sheet #71 is to forbid employers from depressing wages, sabotaging the employment rate, and hurting skilled workers by replacing them with students. The Department of Labor doesn’t want your sincere desire to learn to take precedence over the life and livelihood of a skilled, experienced, paid worker, letting employers save on their labor costs at the expense of the entire rest of the economy.

4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;

This is the one your unpaid internship is most likely to trip. Did your employer ever actually lose anything from your being an unpaid intern? Did they set aside space for you, or the time of a staffer, that cut into their operations? And while they were doing that, did they gain nothing – nothing from you?

There is some ambiguity in this part of the guidelines, though. Does it mean that the employer gains no advantage whatsoever – not even so much as getting a cup of coffee that your boss might have had to set aside time to go get herself? Or does it mean that the employer gains no advantage in net – your boss might have gotten her coffee, saving her five billable hours over the course of the summer, but she also spent ten billable hours teaching you about your area of study, and so, in net, she gained no immediate advantage? I don’t know the answer to that question, but I think it likely that most unpaid internships are extremely lopsided one way or the other, either with the unpaid internship being little more than an employee in all but paycheck, or the internship being a genuinely student-like apprentice.

5. The intern is not necessarily entitled to a job at the conclusion of the internship; 

This one is included to make the point that, if you have an on-the-job training period for wherever you end up working, you should get paid for that training period. Most of the time, what you call a learning period with a job guaranteed afterward is a “training period.” This is included in the fact sheet to prevent employers from getting to reduce their labor costs at the expense of trainees by calling them “interns,” consistent with the principle that employers do not have unilateral power to make legal determinations about their legal relations with and obligations to others. As an aside, there’s an interesting economic incentive lurking behind the necessity that employees must be paid for on-the-job training: it incentivizes companies to seek out employees who are already trained or skilled, thereby encouraging workers to incur the costs of training on themselves by going to school and discouraging employers from bringing unskilled workers into the skilled labor force. Interesting, I suppose, but only relevant to you if your internship is in economics.

6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Your employer, of course, will always “understand” that the internship is not entitled to wages, but do you? Have you ever known someone who got hours or even days into an internship before asking when payday was, only to be “reminded” that the internship is unpaid? That person is illegally unpaid.

The main takeaway from the Fox Searchlight case is not a legal point, since the law is clear and consistent. Minimum wage and overtime laws make no allowance for unilateral determination by employers that their workers should be exempt from those laws. The proper unpaid internship follows is a hybrid apprenticeship/classroom model. The proper unpaid internship is not just training for an inevitable job. The internship should be fixed in duration, and done under the supervision of people who have something to teach you, not just staffers whose job and wages you undercut.

Rather, the takeaway is that interns have the same rights as any other workers, and the only thing between private sector wage violators and a torrent of lawsuits is knowledge. Knowledge you now have.

The NFL teaches everyone a valuable lesson about labor relations

September 25, 2012

Let me begin my making my biases clear: my father was a union man, his father was a union man, and the only thing I don’t like about my chosen profession is that I won’t be able to be a union man. I think that unions play a vital role in correcting the economic inefficiencies that arise from unequal bargaining power between employers and employees. No matter how much value you can provide to a business, whether you’re scrubbing the toilets, welding the widgets, building the building, or fixing the printers, a business will always be able to undercut that value by finding someone desperate enough to do the same job, contributing the same value, for less pay. That is why nations impose laws like minimum wages, collective action protections, and equal pay statutes: because they hurt the market.

But what is this doing on a skeptical blog, you ask? Because I, as a skeptic, am a dedicated foe of pseudoscience, and I think that there is a lot of economic pseudoscience out there. A lot. And there are few economic models more pseudoscientific than those followed by the Scott Walkers and Paul Ryans of the world. Those are the models that say that unions are bad for the economy, and by extension bad for America.

The labor issue gripping America’s imagination most vividly today is that of the NFL referee lockout, coming right on the heels of the Chicago teachers’ union strike, so we’ll start there. Now, a lockout and a strike are significantly different: in a lockout is the employers enforcing a work stoppage, usually used as a preventative measure against a strike during labor negotiations, but in a strike, the workers themselves have decided (and at least one federal judge and the National Labor Relations Board agree) that the workers have no way to get their voices heard at the negotiating table other than to strike.

That is one defining feature of work stoppages that people sometimes forget: it isn’t just up to the workers to call a strike. For large strikes with the potential to paralyze local economies, as the Chicago teacher strike has, workers do not have the unilateral power to engage in a strike. In part because of the size of the strike, the critical importance of the industry in question, and the fact that the workers are public employees, they had to receive a judge’s approval, and the approval of the National Labor Relations Board, to strike. The Chicago teachers had to go through literally years of abuse at the hands of their managers before a judge would authorize the strike.

The National Labor Relations Board is, at least hypothetically, a five-member body that adjudicates labor disputes at their preliminary stages. Their general counsel investigates complaints and has virtually unilateral control over whose complaints get heard and whose do not. The Board itself makes calls on how to fix the problems described in the complaints, but both complainants and those accused of unfair labor practices (both workers and employers can commit unfair labor practices) have broad rights to appeal.

While the NFL and the Chicago labor disputes are different in the nature of the action taken by workers (striking and being locked out), their complaints are fundamentally the same: they feel that they do not have the kind of bargaining power that they need to secure fair working conditions and fair pay. The NFL’s lockout strategy has permitted them to hire strikebreakers or “scabs,” workers who will work while the aggrieved professionals wait for a court to force their employers to hear their demands. And the American public is very, very upset at the performance quality of the scabs.

That is one of the few advantages that workers have in labor disputes: their expertise. Striking workers are the ones who have worked at a business long enough to develop skills, and while the skill variance between workers and scabs is sometimes very low (a janitor, by and large, is a janitor), it is sometimes very high (not all referees are created equal). In a perfectly-functioning market, every employee would come with a little experience bar floating over their heads like in a video game that would broadcast the fair market value of their labor to any employer, who would mechanically pay exactly that amount for their services.

But how do you go about characterizing the fair market value of a referee’s work? The pseudoscientific model says: the fair market value of that labor is the lowest amount somebody would do the job for. And we’re seeing just how effective that model is at describing the value of an NFL referee. The scabs will work for less than the locked-out referees are asking, and so supposedly they should have as much value as the refs had before the lockout – but they don’t. The veritable uproar American football fans are expressing over a slew of bad calls shows that, in very real terms, a scab referee is giving less bang for his buck than an experienced referee.

The pseudoscientific model of labor relations makes this mistake because it makes the childish mistake that workers and employers negotiate fair and square over working conditions, that the worker and the boss are equal partners at the bargaining table and so if a worker doesn’t like her pay scale, she should demand a raise or find a job that will pay her more. This is the economic model that America followed in what we today call the Guilded Age, the late 19th- to early 20th-century period where a textile worker might make a million dollars worth of textiles over the course of her working life but end up making $50,000 for herself.

Read that again: a textile worker might have a lifetime output of one million dollars in widgets, and take home $50,000 over that lifetime. On what planet is this an efficient market that rewards hard work according to its merit? Scott Walker’s planet. Paul Ryan’s planet. It’s the same planet where minimum wage laws are unnecessary because labor is as valuable as the boss will pay for it! It’s the same planet where the American poverty rate cracked 25%, where the income gap between high-income and low-income earners hovered around 1,000%, where the market was free for employers and tightly controlled from above for workers.

The simple fact is that, from the original position, workers are at a disadvantage. There will always be more people looking for jobs than there are jobs, and so everybody will want to work for less than everybody else. This drives down wages, which puts less money in the pockets of customers, which puts less money in the pockets of businesses, which causes businesses to shed workers, who will work for less than everybody else because they need work, which drives down wages, which puts less money in the pockets of customers…

Think of it as a complicated iteration of the prisoner’s dilemma. It is to every business’s net advantage to pay every worker higher wages, because that way every customer has more money to spend. But it is also beneficial to the individual business to screw its own employees out of fair wages because that saves it money and lets it be more competitive by driving down the prices of its goods – but then other businesses have to follow suit or perish, so everyone else follows suit, and prices fall almost as fast as the wages, and in the end, everybody loses.

The trade-off that we are often told that we have to accept is that fairer labor laws will translate into a weaker economy. But that simply isn’t true. Minimum wage laws are fair labor laws, and they translate into a stronger economy (according to a group with very moderate overall opinions on minimum wages). Labor organization protections are fair labor laws, and they translate into a stronger economy for the same reason: they maintain market efficiency. Pure and simple.

That’s the other version of the premise we’re all told to accept: any government protection of workers is a de facto market inefficiency. But that just isn’t so: markets work best when they reward by outputs according to inputs. That is why a worker who makes a million dollars worth of textiles today wouldn’t make nearly a million dollars in a lifetime of work, since of course the employer takes a cut, the business takes a cut, fringe benefits take a cut, taxes take a cut, and so on, but they’ll be making a hell of a lot more than the lowest possible amount the employer can get away with.

In the efficient market, the government protects employees from having the fair market value of their labor artificially depreciated by contingent disparities between number of workers and number of jobs. Our minimum wage is far from high enough, the NLRB is far from protectionist enough, and labor protections are far from extensive enough, but they do a better job of modeling a truly free negotiation between workers and bosses than the pseudoscientific economics which says that, left to their own devices, bosses will make for a better market by themselves. Because I just do not think that what makes a market “free” is what makes a market free for the people who already have all of the capital to invest. A market is “free” when fair value is paid to everyone for everyone‘swork.

Myself, I am an entrepreneur. My private practice is service-oriented and we do not have any employees, we only have partners. My partners and I had the luxury of being able to sit down and freely negotiate the terms of our partnership agreement, which dictates virtually every aspect of the economics of our business and of our relationship with each other. Any of us could freely leave, refuse the terms, and end the business. But with regular employees, the business doesn’t end when it considers your own needs – it moves on to the next worker, who hopefully will work for less. The partnership model is the ideal model, since everybody agrees on the terms or the business never happens. In the employer-employee model, the employee gets by with what the employer allows. The second model is economic pseudoscience, one that we try to correct with labor and wage protections.