How Does Protecting Employees Affect the Success of a Business?

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Over the years, employee protection laws have seen several amendments. Most of these laws advocate for fair treatment of employees and protection of their rights in the workplace. Typically, these laws are meant to benefit the well-being of employees and ensure the success of the business at large. However, some of these laws have been shown to negatively impact business growth by limiting business flexibility and decision-making.

The push for employee rights has resulted in a series of laws, both new and amended, which several workers rely on when facing work-related safety and benefits issues, as well as hiring and promotion challenges. To date, the United States Department of Labor enforces nearly 180 employee protection laws, which include work termination, pay requirements, rights to paid and non-paid leave, etc.

Before we look at how employee protection laws impact business success, let's first see the most popular laws that protect employees.

Employee protection laws have evolved over the years to become what they are today. These laws are active and enforced both at federal and state levels. However, some are supervised by government agencies such as the United States Equal Employment Opportunity Commission and the Occupation Safety and Health Administration (OSHA). That said, here are the common employee protection laws:

  • Minimum Wage –The Fair Labor Standards Act (FLSA) ensures that workers receive a minimum wage of at least $7.25 per hour. This law requires both private and public employers to comply with the minimum wage; otherwise, they will have to pay fines and penalties. Additionally, nonexempt workers are entitled to time and a half for overtime under the act.

  • Employment-based discrimination – Title VII of the Civil Rights Act of 1964 makes it illegal for any business to discriminate based on sex, color, race, religion, or national origin. Similarly, the Lilly Ledbetter Fair pay Act of 2009 prohibits wage discrimination against women and minorities.

  • Health Coverage – The Affordable Care Act passed in 2010 requires employers with 50 or more full-time employees (those working more than 30 hours a week) to offer the minimum level of health insurance or, otherwise, pay a substantial penalty.

  • Social Security – Social security benefits are funded by payroll taxes that allows retirees to earn an average of $1,544 or $1,277 for citizens with disabilities every month.

  • Workplace Safety – These are laws that work towards minimizing dangers in the workplace. The legislation provides several industry-specific safety guidelines, including a "General Duty Clause," which prohibits any workplace practice that presents a clear risk to employees.

  • Unemployment benefits – The law allows unemployed citizens who have lost their jobs for reasons outside their control to receive benefits for up to 26 weeks. However, specific federal guidelines apply to each state regarding how much and how long the benefits will last.

The other laws and legislations in this category include the whistle-blower protection laws, the Family and Medical Leave Act, the Americans with Disabilities Acts, etc. While all these laws play a critical role in enhancing the safety and security of the employees, they also restrict business operations to some extent. To understand this even better, let's look at the Employment-At-Will doctrine that's deeply rooted in the U.S. labor market.

Employment-At-Will Doctrine

At-will employment is a legal term, which refers to an employment arrangement where employment is specified for an indefinite time and may be terminated either by the employee or employer, at any time, and with no obligations. While this doctrine gives employers some extent of freedom to fire employees at any time and for any reason, there are some exceptions to which termination could be considered wrongful. Such exemptions vary by state, and employment lawyers will always advise whether termination is legal or illegal.

For decades now, employment-at-will has been a center of discussion on whether it supports a good cause or not in the workplace environment. One study found that employment policies, while they often protect workers from harm, can have undue negative consequences. In the 1950s, several states began drafting and passing legislation to limit at-will employment to protect workers not covered from unfair dismissal practices.

While these regulations benefited workers, they negatively impacted business investment and growth. According to a recent research study published in Harvard Business Review, authors John Bai, Douglas Fairhurst, and Matthew Serfling explain that restricting the employers' freedom to fire workers comes with both positive and negative impacts -- as far as business investment and growth are concerned.

Negative Impacts

One of the negative impacts cited by the research authors is reduced operating flexibility due to strict regulations on when, why, and how to fire employees. By not being able to fire non-performing or redundant workers, it becomes costly for a business to scale back or divest poorly performing projects.

As explained in the study, failing to fire redundant workers make it difficult to cut investments, which reduces the projects' terminal cash flows. The results are fewer projects with positive NPV (Net Present Value), hence reducing the overall business investment. Similarly, reduced operating flexibility may constrain investments by making it challenging for a business to raise external capital, e.g.., through equities and debt.

One of the far-reaching restrictions to at-will employment is the "good faith" exception, based in common law, which in simple terms, prohibits the employer from firing an employee out of bad faith, retaliation, and malice. Under this law, the worker's contractual rights are also covered. For instance, an employee can sue the employer for wrongful termination if the employer fires him/her just before a due pension or commission.

While the researchers didn't find a direct correlation between increased employment protection and lower investments due to constrained access to capital, they found solid supporting evidence that employment protection makes it difficult for firms to downsize projects. This, in turn, reduces operating flexibility and consequently decreases investment. As indicated in the research, businesses in states with at-will employment exceptions had a lower corporate investment in fixed assets. This resulted in a slowdown in company growth.

Positive Impacts

According to the research, insulating workers from wrongful termination drives away the fear of being fired, allowing them to focus on their duties to the extent of taking innovative risks and building skills that could improve the employer's performance. As a result, this enhances productivity, attracting new opportunities with a resultant increase in investment.

Another of the employee protection laws cited in the research is the increase in the R&D expenditures after adopting good-faith exceptions. This shows that while greater employment protections discourage investments, particularly in fixed assets, it promotes investments in intangible assets. For example, businesses encouraged employees to engage in innovative risk-taking, creating value in the long run.

Closing Comments

Employee protection laws create a sense of security, which enhances workplace productivity, boosts employee morale, and improves engagement. On the other hand, these laws can have a negative impact on investment and business growth.

And while the study doesn't recommend abolishing employment protection, it advocates for a keen analysis of how employment protection affects business success while also accounting for the employees' feedback. By keenly looking at the positive and negative impacts of employee protection, it's possible to quantify how much is too much before working on the journey to moderation, where tradeoffs are not only justifiable and socially acceptable but also economically desirable.