Getting Up to Speed on Interest Arbitration

It is probably safe to say that every labor relations professional—union side and management side—has been anxiously anticipating the spring of 2009. The reason is that most pundits believe that the election of Barack Obama and significant Democratic gains in the Senate are the harbingers of substantial changes to federal labor law in the form of passage of the Employee Free Choice Act.

The act, which was introduced in this session of Congress on March 10, has been proposed since at least 2005 but has not generated much traction with a Republican president and a Republican-controlled Senate. Most recently, in March 2007, it overwhelmingly passed in the House of Representatives but failed to overcome a Republican filibuster in the Senate. It is easy to see, then, that the probability of the Employee Free Choice Act becoming law has increased significantly now that the nation has a Democratic president and a Democrat-controlled Congress.

Reasonable people can, and will, debate the wisdom of the act as federal labor law. That is not the purpose of this article. Instead, this article focuses on one concept within the act that could bring about the most extensive change to federal labor law in 60 years.

One can easily find media coverage on the Employee Free Choice Act’s provision permitting a “card check” process to be an alternative to secret-ballot elections when determining whether employees desire union representation. But there is another major change within the act that has largely escaped notice. The act mandates interest arbitration for first labor contracts if the union and employer cannot reach a voluntary agreement in the 120 days following the union’s request to bargain.

The current law does not require an employer and a union to reach a first contract. Instead, the parties must bargain in good faith with a sincere desire to reach a labor contract. Under the act, however, if an employer and a union cannot agree on an initial labor contract and mandatory mediation has failed, the act provides that the Federal Mediation and Conciliation Service “shall refer the dispute to an arbitration board established in accordance with such regulations as may be prescribed by the Service. The arbitration panel shall render a decision settling the dispute and such decision shall be binding upon the parties for a period of 2 years, unless amended during such period by written consent of the parties.”

In other words, if the parties cannot reach an agreement, the government will refer “the dispute” to an arbitrator who will decide what will be included in the parties’ the labor contract.

Needless to say, right now there are more questions about the legal implications of this provision than answers. Two examples illustrate the uncertainty facing both employers and unions.

First, the provision states that the Federal Mediation and Conciliation Service will refer the dispute to an “arbitration board.” Right now we have no guidance on important questions such as who will be designated as a member of the arbitration board, whether the arbitration board will be made up of one person or several persons or whether the member or members will need specific experience in the employer’s industry to be qualified to sit on the “arbitration board.”

Second, the provision states that the arbitration board will “settle the dispute” and “render a decision.” What we do not yet know is whether the act intends the word “dispute” to mean the contract as a whole or only the open issues. Will the arbitrator have the authority to reverse the parties’ tentative agreements on specific issues in order to fashion an entire labor contract? We simply do not know yet.

What is known at this point is that employers who are unfamiliar with the process of interest arbitration would be well served to understand the basic concepts. To help you skip up the learning curve, we have generated a list of the top seven things we think you should know generally about interest arbitration:

  1. Interest arbitration is different from grievance arbitration. Interest arbitration is a legal process in which some or all contract terms are forced on both parties when the parties cannot agree. In contrast, grievance arbitration is the legal process in which an arbitrator decides whether a party to the contract violated the mutually agreed upon terms of the contract.

Some labor relations professionals think that one sign of a good labor contract is that both sides are unhappy with it. The thought is that the unhappiness is an indication that both sides compromised on important elements to arrive at an agreement.

Given our experience, we don’t think the same will be true when the terms of a labor contract are forced upon the parties. Just as before, both sides will be unhappy with the result, but with interest arbitration the unhappiness will stem from the forcing of the labor contract, not the necessary compromises that were made to get the deal done.

  1. The government is the arbitrator in interest arbitration. In the case of the Employee Free Choice Act, the arbitrators will likely be employed by or affiliated with the federal government. In other words, the government is placed in a position where it decides what contract terms are fair and make sense in a given business or operations. The government then mandates those terms into the contract.
  2. Interest arbitration is not quick. The idea behind interest arbitration in the Employee Free Choice Act is that employees who vote in a union will be certain to have a first labor contract very soon after contract negotiations begin. While this goal is admirable, we have seen statistics which suggest that it is not realistic. In 2007 study, “Interest Arbitration: Risky for Unions and Employers,” the Heritage Foundation looked at Michigan’s statute, which mandates interest arbitration in contract disputes in units of state police and firefighters. It found that, on average, interest arbitration took almost 15 months from the date that a request was filed to the date that a decision was reached.
  3. There are many different forms of interest arbitration. To resolve economic terms of the contract, the options for arbitration range from providing the arbitrator with a bracketed range of numbers acceptable to the parties, to “baseball arbitration,” in which both parties choose one and only one acceptable number, and the arbitrator selects one of the two submitted numbers.

Resolving disputes about contract language, rather than economics, proves trickier. Where we practice in Wisconsin, public-sector employers have contract terms (both economic and non-economic) decided by arbitrators using a method where each side submits its last-best final offer, and the arbitrator chooses one or the other.

  1. Interest arbitration can be expensive. Interest arbitration is a legal proceeding, just like grievance arbitration. The stakes, however, are potentially higher, as an arbitrator will have the power to impose an unfavorable labor contract on the parties. Avoiding such a result will require companies to present thoroughly prepared and researched arguments, undoubtedly at significant expense.
  2. Interest arbitrators often look to “comparable” employers when deciding what terms to impose. Both parties in an interest arbitration will likely differ on what employers are comparable. Unions will probably argue that the employer’s unionized competition is the appropriate comparable, while the employer will argue that nonunion employers are, in fact, comparable.

This raises the natural question of how employers will obtain information concerning the wages and benefits paid by their nonunion competitors in preparation for interest arbitration. Employers will likely have to subpoena such information, which will in turn raise privacy concerns from employees that are the subject of the subpoena. In the end, it is likely that many interest arbitration decisions will turn solely on the question of what companies are comparable and what companies are not.

  1. Interest arbitration radically changes the parties’ strategy and tactics in negotiations. In the private sector, employers and unions have the legal freedom to refuse proposals which they believe are unacceptable. If a deal cannot be reached, either or both parties can resort to the economic weapons of strike and lockout.

We think mandatory interest arbitration in the private sector will result in some employers quickly compromising on issues to avoid the risk of having an unfavorable labor contract forced on them in interest arbitration. Other employers, who will not accept unfavorable terms in a labor contract regardless of whether those unfavorable terms were the product of compromise or of interest arbitration, will adopt more aggressive tactics, including the use of offensive lockouts. Therefore, the interest arbitration provisions of the act may lead to more labor disputes, which was what Congress was trying to avoid when it passed the National Labor Relations Act in 1935.

The Employee Free Choice Act’s interest arbitration provision raises significantly more questions than answers. What is sure, however, is that passage of the act in its current form would radically alter the collective bargaining process as we know it.