Obama's Executive Order Will Wipe Out California Jobs

By Hans Bader | August 26, 2014 | 2:45pm EDT

Earlier, we discussed President Obama’s recent Executive Order 13,673, which “will allow trial lawyers to extort larger settlements from companies, and enable bureaucratic agencies to extract costly settlements over conduct that may have been perfectly legal.”

But it turns out that President Obama’s executive order (which allows the Labor Department to cut off firms’ government contracts over state or federal employment law verdicts or fines against them) has another, more ironic effect: It penalizes companies based in states like California that vigorously enforce labor and civil-rights laws, leading to employers in those states racking up more fines and verdicts against them than similarly-behaving employers in other states. That’s the conclusion of Warren Meyer, the head of a campground-operation company based in Arizona, who recently closed his operations in neighboring California to avoid lawsuits.

He says that “government contractors would be insane to operate in California,” given its “regulatory and judicial culture that assumes businesses are guilty until proven innocent. If state labor violations or suits lead to loss of business at the national level, why the hell would a contractor ever want to have employees in California?”

Whether a large company is sued for discrimination or labor law violations often has more to do with its location than whether it violated the law. A recent study shows that “California has the most frequent incidences of [employment-practices] charges in the country, with a 42 percent higher chance of being sued by an employee for establishments . . . over the national average. Other states and jurisdictions where employers are at a high risk of employee suits include the District of Columbia (32% above the national average) [and] Illinois (26%).” It’s because of their location, not because California employers are more racist or anti-union than employers in other states (indeed, California employers spend more time and money on compliance mechanisms than employers elsewhere).

The president probably thought his order would incentivize compliance with federal labor norms (it allows contracts to be cut off for violations of federal labor laws and roughly “equivalent” state laws). But in effect it punishes employers in states that vigorously enforce civil-rights and labor norms through state laws that ban the same thing as federal law, but through much harsher penalties. (For example, federal law bans sex discrimination in hiring, but caps emotional distress and punitive damages for even the largest employers at $300,000 under Title VII of the Civil Rights Act. But California’s Fair Employment and Housing Act allows unlimited compensatory and punitive damages for the same exact discrimination, leading to multi-million dollar damage awards in some seemingly ordinary discrimination cases.)

The variation between California and other states in how often workers sue reflects the fact that some parts of the country are much more generous to workers who sue their employer than other parts of the country. How many lawsuits an employer faces is a function of how much workers and their lawyers expect to recover if they win a lawsuit.

California is quite generous to discrimination and labor law plaintiffs compared to other states. For example, in Green v. Rancho Santa Margarita Mortgage Co. (1994), the California Court of Appeal stated that emotional distress from merely being denied a loan could justify a $150,000 emotional distress damage award in a very minor discrimination case, even absent proof of any psychological injury. The Ninth Circuit Court of Appeals, which has jurisdiction over California and neighboring states, has upheld a $1,000,000 punitive damages award for racial harassment in the form of offensive “jokes” (Swinton v. Potomac).

By contrast, the Fifth Circuit Court of Appeals overturned as excessive a mere $40,000 emotional distress award to Texas plaintiffs who were fired and racially harassed in Patterson v. PHP Healthcare (1996), and reversed all punitive damages. And the Fourth Circuit Court of Appeals in Richmond limited the emotional distress damages of a Virginia woman who had been denied a promotion for retaliatory reasons, resulting in her getting a mere $15,000, in the case of Hetzel v. County of Prince William.

(Note, however, that California doesn’t just punish civil-rights and labor law violations more harshly than the feds, it also bans things that are entirely legal in many states and under federal law, including perfectly rational and fair employment practices. As Meyer notes, “California has a myriad of arcane labor laws (like break laws and heat stress laws) that are difficult to comply with, combined with a legislature that shifts the laws every year to make it hard to keep up.”)

The penalties for violating Obama’s executive order are so huge—theoretically it could cost a large company with millions of employees a multi-billion dollar contract for a single violation—that Meyer speculates it will be used as a means of economic sabotage by contractors’ competitors. As he notes, we “have a couple of smaller competitors who have sent employees into the parks we operate who then filed extensive, manufactured complaints to the government about our service, timed to make it difficult on us when we bid against them for the contract renewal. How tempting will it be for companies to place employees in their rival who then file serial labor complaints to undermine that rival in future contract awards?”

As we noted earlier, “Although it will increase the cost of government contracts (by making them legally riskier and less desirable), this sweeping executive order is supposedly grounded in efficiency. . .This efficiency rationale is false and absurd: One of the laws covered by the order, the Davis-Bacon Act, not only dramatically increases contracting costs and shrinks the economy, but had racist, anti-black origins. Other laws covered by the order seek to promote inclusion or social justice, not efficiency. For example, the Rehabilitation Act requires costly accommodations of the disabled that an efficient, profit-maximizing employer would not voluntarily make. Overtime rules contained in the FLSA increase employers’ costs and reduce flexibility in hours and scheduling.”

Moreover, even the most law-abiding employer can’t be certain it will not lose its government contracts under the order, since many labor and employment “laws are vague or expansive enough that even well-intended employees or managers can inadvertently run afoul of them (such as disabilities-rights laws that require costly, murky “reasonable accommodations” that trigger disagreements even among veteran judges as to what is “reasonable,” and overtime laws that are vague about what employees are covered versus exempt).”

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