Memorandum by Dr Wanjiru Njoya
RESPONSE TO
QUESTIONS 2 AND
3
Question 2. Employment security
What is the extent of employment security in the
UK?
1. The current law governing the termination
of employment provides relatively weak employment security when
workers are dismissed for economic reasons.
2. The justification for this approach is
that when employing entities undergo organizational restructuring,
the firm's economic success must take priority over job security.
Recognizing the importance of unregulated dismissal in enhancing
flexibility, the law generally respects the "managerial prerogative"
to dismiss workers as a cost-cutting measure.
3. This approach is reflected across international
law, European law, and UK law. For instance the International
Labour Organization acknowledges that the "operational requirements
of the undertaking" may justify termination of employment
(ILO Recommendation No 119 of 1963, Art 2(1) and Art 12). European
law generally allows dismissal for "economic, technical or
organizational reasons" as a defence to an unfair dismissal
claim (the Acquired Rights Directive). At common law, in the words
of Lord Hoffmann: "Employment law requires a balancing of
the interests of employers and employees, with proper regard not
only to the individual dignity and worth of the employees but
also to the general economic interest" (Johnson v Unisys
[2003] 1 A.C. 518 at par 37). Similarly, in the United States
economic dismissals are justifiable on grounds of "business
necessity" (National Labour Relations Act, 29 U.S.C. §§
151-169).
What could be the benefits of changing the present
arrangements for employment security?
1. The current law governing employment
security already contains ample scope for flexibility, and should
not be changed to the detriment of job security.
2. In drawing the boundaries of its regulatory
scope the law does, and should continue to, recognize that not
all dismissals which take place during corporate restructuring
are justifiable: see especially the Transfer of Undertakings (Protection
of Employment) Regulations 2006.
3. It is important however to address more
directly the concerns raised by the EU Green Paper about the possible
detrimental impact of employment protection legislation, one of
the key concerns being the protection of "insiders"
at the expense of "outsiders".
3.1 The perceived problem of permanently
employed "insiders". The EU Green Paper reflects
the concern that job security for the employed might allow them
to become entrenched in their positions, resulting in rigid labour
markets where certain marginalized groups are perpetually unemployed.
3.2 The Commission suggests that job
security should therefore be understood as simply extending to
the availability of jobs in the economy as a whole, and especially
widening access to employment opportunities, rather than with
job protection for the employed in their specific or current positions.
3.3 The Organization for Economic
Co-operation and Development (OECD) also notes that employment
protection legislation may impede the creation of new jobs, as
such legislation potentially "increases the costs for the
employer of adjusting their workforce and can create a barrier
to hiring" (Employment Outlook, 2006, par. 3.3).
4. While the concern about entrenched "insiders"
is understandable, recent empirical studies published by the OECD
"generally have not found robust evidence for a significant
direct effect of [employment protection legislation] on unemployment"
(Employment Outlook, par 3.3). It therefore seems likely
that there is no direct link between employment protection legislation
and rising or persistent levels of unemployment. The OECD found
that evidence of indirect effects on job creation remains ambiguous.
The risks of adverse effects on opportunities for the unemployed
appear to arise only when job protection is "too strict",
and not simply from the mere existence of job protection.
5. Unlike the law in other EU member states
UK job protection law cannot be described as "too strict'.
The UK is second only to the United States in having the lowest
levels of employment security legislation in the world (see the
date in Employment Outlook).
In which ways, if any, could changes in labour
law help with this?
1. Employment security should not be understood
simply as workers being "adaptable" and "employable"
in different jobs. Instead it should be understood as "a
form of regulatory intervention designed to protect workers against
arbitrary managerial decision-making", a protection which
recognizes the valuable long-term relationships which arise between
employees and the firms for which they work, giving workers an
entitlement to legal protection of their firm-specific human capital
investments (Deakin and Morris, Labour Law (4th ed.) at
388; Njoya, Property in Work, Ashgate: Aldershot, 2007).
2. The statement in Employment in Europe
(2006, p 81 et seq), cited in the EU Green Paper, that
"workers feel better protected by a support system in case
of unemployment than by employment protection legislation' cannot
be considered reliable. It remains the case that job security
in the job actually held is paramount: "a secure job is still
an essential aspect, for most individuals, of their long-term
economic security" (Deakin and Morris, Labour Law,
at 569).
3. The law should therefore be based on
a firm commitment to employment protection legislation, subject
to conducting a careful assessment of the appropriate degree of
protective legislation. The OECD recommends that the implementation
of such legislation should be "quick, predictable and distort
labour turnover as little as possible", and "should
be carefully coordinated with reforms to the unemployment benefits
system ... so as to reconcile so far as is possible labour market
flexibility with security for workers" (par. 3.3.)
Question 3. The concept of "flexicurity"
How helpful do you think is the Commission's concept
of "flexicurity" seeking to combine the ideals of a
flexible labour market with those of employment security?
1. Although the Commission still refers
to "full employment", this is giving way unduly to concepts
such as adaptability, responsiveness, and employability. Flexibility
on the workers' side is understood as the workers' capacity to
anticipate change and move readily from one type of job to another.
As European employment policy emphasizes the creation of "more
and better jobs" the focus is on ensuring that workers who
lose their jobs will find alternative opportunities within a dynamic
and vibrant economy.
2. While these are worthwhile goals, the
concept of "flexicurity" as depicted in the Green Paper
does not in fact retain a sufficient focus on employment security.
How practical could it be to strike a balance
between these two ideals and where should such a balance be struck?
1. It must be accepted that there are inevitably
situations where it is not possible to "balance" both
ideals. In these difficult cases, this response suggests prioritizing
security over flexibility, in order to avoid unacceptable social
costs of job loss.
2. Social Cost of Job Loss: Once
a job is lost it may prove difficult or impossible to find an
alternative of comparable worth, an effect often felt for the
remainder of the worker's career. Empirical studies demonstrate
"substantial and long-lasting effects of job loss on annual
earnings and wages" over the long term, from which many workers
never recover (Topel, "Specific Capital and Unemployment:
Measuring the Costs and Consequences of Job Loss" (1990)
33 Carnegie-Rochester Conference Series on Public Policy
181-214 at 181).
3. If the next best alternative is worth
far less than the job lost, then the cost of job loss may well
prove too high. Economists define the cost of job loss as the
difference between the utility value of being in the current job
and that of the next best alternative. The utility gained from
the current job is primarily determined by the wage received,
while the alternative level of utility is affected by the wages
on offer, the chances of securing another job, and whatever utility
is derived, in terms of both replacement income and leisure time,
from unemployment (Green and McIntosh, "Union Power, Cost
of Job Loss and Workers' Effort" (1998) 51 Industrial
& Labor Relations Review 363-83 at 365-6).
4. The social costs of job losses are severe:
"The loss of a job... may be far more hurtful than a term
in jail. When these deprivations are inflicted arbitrarily, and
there is no recourse, a gap in the legal order exists. We become
more sensitive to that gap when the decisions are made by organizations
that seem large, powerful and impersonal" (Selznick, Law,
Society and Industrial Justice (New York: Russell Sage Foundation,
1969) at 38).
5. This has been recognized in the context
of unfair dismissal litigation in the UK, Lord Millett observing
that "many people build their lives round their jobs and
plan their future in the expectation that they will continue.
For many workers dismissal is a disaster" (Johnson v Unisys
[2003] 1 A.C. 518 at par 72).
6. The social cost of job losses cannot
invariably or uncritically be assumed to be necessary in the interests
of efficiency or overall wealth benefits to society. During corporate
restructuring substantial gains for shareholders are often made
at the expense of employment and wage losses. When this happens
the corporation is "effectively transferring to the public
sector the costs of maintaining these displaced workers"
(Singer, "Jobs and Justice: Rethinking the Stakeholder Debate"
(1993) 43 University of Toronto Law Journal 475-731 at
496); large scale dismissals associated with corporate restructuring
enhance private profits for the corporation while imposing the
costs onto the taxpayer.
In which ways, if any, could changes in labour
law help with this?
1. Workers generally accept that employing
entities need to be flexible and respond quickly to changes in
the global market. Nevertheless there is sometimes a real choice
to be made between shareholder and employee interests, particularly
where job cuts are intended solely to boost a firm's share price
on the market in response to what may be a temporary dip in the
market. Therefore:
2. In balancing shareholders' interest in
profit maximization with the workers' interest in job security
the new focus in UK company law on "enlightened shareholder
value" (see the Companies Act 2006, Part 10) may provide
a blueprint for labour law: managers should not allow a short
term gain in stock-market value to take priority over the long-term
interests of the firm. Job losses should not be prompted simply
by an undue focus on the firm's short term share value.
3. It should be explicitly recognized that
in the long term the firm's value is tied to its workers, and
this should be a factor which employing entities are required
to take into account during corporate restructuring.
30 March 2007
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