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Two-Tier Wage System Highlights Need for Labor Reform

Over the weekend, the eleven-day strike by more than 30,000 Stop & Shop employees ended. The grocery chain announced that it “has reached fair new tentative agreements with UFCW Locals 328, 371, 919, 1445 and 1459, which represent our 31,000 associates in Massachusetts, Connecticut and Rhode Island.”

The United Food & Commercial Workers Union (UFCW), which represents Stop & Shop employees, viewed reaching the tentative agreements as a “powerful victory.”

Details of the agreement are not publicly available, but a statement from UFCW locals provides a glimpse, “The agreement preserves health care and retirement benefits, provides wage increases, and maintains time-and-a-half pay on Sunday for current members.”

Importantly, the preservation of benefits and wage increases will only materialize for current workers, not new hires. As such, the contract is really only a powerful victory for current union members. Before the contract is ratified, union members at each local must vote to approve it.

Unfortunately for future Stop & Shop employees, they have no say in approving the contract, which creates a two-tier wage system. Under such a system, new hires—who may have the same skill and experience as current employees—earn less and receive reduced benefits. Current union members vote in favor of such agreements, which pay new hires less, and union officials sell such provisions as a way to reduce labor costs and protect present workers’ jobs.

If the contract is ratified by union members, new Stop & Shop employees will receive less in pension contributions and no longer earn time-and-a-half pay for Sunday work.

An important takeaway from this labor dispute and contract negotiation is that it exposes the downsides of union monopoly bargaining power. One longstanding principle of labor relations is “exclusive representation,” which grants unions monopoly status to represent and negotiate on behalf of all the employees at a workplace, members and non-members alike. This longstanding principle conflicts with every individual’s right to freedom of association.

Courts realized that granting the privilege of exclusive representation to unions could lead to the discrimination, by which the majority of the bargaining unit could advance its own interests at the expense of a minority of workers who are non-members.

To limit potential abuses of the bargaining-unit majority against the minority, the Supreme Court grafted on the principle of “duty of fair representation” onto labor relations law. As the Supreme Court ruled in Steele v. Louisville (1944), labor unions certified as the exclusive representative are required to represent all bargaining unit members “without hostile discrimination, fairly, impartially, and in good faith.”

Negotiating a two-tier wage system is in conflict with union’s duty of fair representation. Doing so creates a permanent sub-class of union members and non-members who earn inferior wages and benefits. It denies future hires fair representation and cuts against the union principle of “equal pay for equal work.”

Union officials offer this kind of rationale for agreeing to two-tier wage systems and subverting their duty of fair representation to new hires: “We traded the new hires to preserve things for our existing people.”

To date, courts have failed to extend the principle of fair representation to prospective employees. However, the lack of protection for new hires displays infirmities with the current labor relations legal framework.

A simple reform could lessen the harm of collective bargaining agreements that create a sub-class of bargaining unit members. Congress should consider eliminating exclusive representation.

First, most employees are compelled to accept union representation they did not vote for. As in the case of Stop & Shop prospective employees, all new hires will be forced to accept union representation and contract, which treats them as a second-class citizen, despite never having the chance to vote on whether they desire union representation. Worse, unions never stand for reelection, so new Stop & Shop workers are not provided with the opportunity to oust the incumbent union or select a different union that would protect their interests.

Second, exclusive representation preempts individual contracts that new hires may hope to make with their employer. Any new Stop & Shop employees is prohibited from negotiating an individual contract that is tailored to their needs. They must accept a contract that offers them inferior wages and benefits to their veteran colleagues.

Third, despite two-tier wage systems appearing to be in conflict with the duty of fair representation, courts have refused to extend such protections to new hires. This is an odd interpretation of the duty of fair representation, especially since union officials are overt in their rationale that they trade the interests of new hires for current employees. This seems discriminatory and would not be accepted in other scenarios. Consider, under the duty of fair representation, a union could not negotiate a contract that pays racial minorities less compared to white employees when they are hired. 

By eliminating exclusive representation these concerns melt away. No longer would an individual employee be forced to accept a union contract that discriminates against them and would be free to negotiate their own workplace conditions.

Providing individual employees with this freedom would also diminish the necessity for imposing the duty of fair representation on unions. Without a monopoly, unions would only represent employees who are members. As such, individual employees would have a choice upon entry to the workplace: accept union representation and its contract or choose to represent themselves. Further, even if an employee initially joins the union they would be free to opt-out at a later date and negotiate their own work conditions. Employees would no longer be trapped in a union they did not choose or want.

Eliminating exclusive representation is a far more equitable situation than granting unions monopoly power and forcing new hires to accept inferior pay just because a union was chosen by past employees.