Labor unions try to provide an institutionalized way of handling disputes between an employer and staff. The goal is to improve working conditions for their members, particularly concerning safety concerns, worker rights, and standardizing working conditions.
Union negotiation and labor dispute resolution should be beneficial to all the involved parties. However, that’s not always the case. If negotiations and disputes aren’t resolved amicably, they can escalate, leading to strikes, dismissals, and legal action. Naturally, that means disruptions to your business operations. But more importantly, it could affect your bottom line.
Understanding Union Negotiations and Labor Disputes
Union negotiations are generally undertaken between your company’s management and union representatives to define employment conditions, or address a grievance. Ideally, the results of these negotiations should be accepted by both sides.
There are two broad types of disputes. Interest disputes arise from disagreements about pay, bonuses, vacation time, etc. Rights disputes concern staff expectations around work standards, such as fair wages and working conditions.
But why would you need to have these kinds of negotiations? There are a number of reasons that your employees may want to dispute their pay or working conditions. These include, but are not limited to:
- Incorrect employee classification. Worker classification impacts an employee’s taxes, and misclassifying your staff can affect their access to benefits, and increase their tax liability.
- Inefficient record-keeping. Not keeping track of your staff’s working hours – especially for overtime and deductions – can also complicate their taxes, leading to possible legal action and penalties.
- Inconsistent pay schedules. Not sticking to a regular payment schedule, or delaying or withholding payments can affect your employees’ financial health.
- Breaking contractual obligations. If you do not honor the contract drawn up with staff, you may face disputes and legal ramifications.
- Unsafe work environments. If your staff’s physical, emotional, or mental health is jeopardized while working, this could be cause for a dispute.
The role of unions in the corporate environment
The National Labor Relations Act encourages employers and staff to find a compromised solution to any disputes together. Unions generally work as ‘middlemen’ in these situations, as they negotiate on behalf of employees.
This has several benefits for unionized employees. For example, according to the Economic Policy Institute, states with more unions have higher minimum wages, higher unemployment insurance coverage, and better paid sick leave than states with little union activity. Unionized workers generally have better access to skills development and training, and can impact corporate policy and strategy.
Despite the benefits secured for workers, labor unions are sometimes accused of being detrimental to employers. After all, they have the ability to influence the workplace, and the broader corporate landscape. Some critics accuse unions of making businesses less competitive, due to increased labor costs, wage setting, and more rigid rules around working conditions. However, these aren’t the only costs associated with labor unions.
Financial Considerations in Union Negotiations
Unionization comes at a cost to both you and your staff. For an employee to join a union, they must pay union dues, which are a contribution of their earnings – usually as a percentage, or a set fee. These dues ensure that your staff has representation in collective bargaining and during labor grievances, along with established rules on wages, benefits, job security, and scheduling. On the flip side, this also means your staff lose the ability to speak to management on their own, and can be forced to go on strike.
Unfortunately, as per the Bureau of Labor Statistics (BLS), the cost is significantly higher for businesses. Unionization usually translates to an average increase of 25% in your business’ operating expenses. And the majority of this is for increased payroll and benefits.
For example, union-free employees were paid an average of $25.43 an hour in 2021, while union employers were paid $30.24 an hour. Similarly, unionized workers got $20.49 an hour in benefits, while union-free employers paid only $10.03 an hour per employee.
A single unionization campaign can cost your company a lot. This includes legal counsel, resources dedicated to conforming to union demands, and training for managing a unionized environment. Moreover, should any grievance turn into a strike, you’ll need to consider the cost of lost productivity or sales. This includes covering missing staff with short-term or temporary hires, security, and decreased customer confidence.
Another significant aspect of union negotiations and labor disputes is the impact on your business valuation. Generally, the greater the level of unionization in a business, the lower the profitability and returns to shareholders.
Accounting for Costs Associated with Labor Disputes
On a practical level, it’s essential to categorize the costs of labor disputes and union negotiations into direct and indirect expenses.
Direct costs
These are expenses tied directly to disputes and negotiations. As such, they’re more straightforward to quantify. Such costs include legal fees incurred during negotiations or disputes, hiring consultants or mediators, and the financial impact of any wage increases or enhanced benefits packages.
For instance, you may need to make increased contributions to employee retirement accounts or vacations, or allowances for paid leave.
When reconciling these costs, they should be listed under specific expense categories related to the dispute or negotiation process.
Indirect costs
These are less tangible expenses, as they are usually related to employee and employer behaviors. However, they still have a financial impact. They can include expenses surrounding the closure of facilities, or severance packages when letting go of staff.
Indirect costs also account for lost productivity or reputational damage to your company. For instance, you may need to hire a PR firm to address negative publicity, which could lead to diverted resources and disrupted operations.
That can make reconciliation challenging, as such expenses can be allocated differently, and may require estimation.
Impact on Financial Statements
Labor disputes and union negotiations can affect your financial statements. For example, the above-mentioned costs will be recorded as expenses on your business’s income statement. Depending on the nature of these expenses, this could result in a decreased net income for your company, with a direct impact on your revenue. At the same time, these costs translate to increased liability on your balance sheet.
And then there’s your cash flow statement. The many disruptions caused by labor disputes and negotiations would primarily impact the cash flow from your operating activities. This can be direct (through legal fees and settlement payments) or indirect (through lost revenue and productivity).
However, any long-term financial impacts may also affect your investing and financing activities. For example, you may need to reduce capital expenditures, or to adjust dividends and buybacks.
Disclosure requirements related to labor disputes
Regulation S-K of the Securities and Exchange Commission (SEC) covers the financial disclosure requirements for companies involved in labor disputes.
Basically, you’ll need to disclose whether a dispute causes any changes to your material cash requirements and liquidity and capital resources. You’ll need to include any known trends and uncertainties, as well as critical accounting estimates.
Risk Management and Contingency Planning
While not always possible, your company should try to avoid labor disputes. This requires careful planning, record-keeping, and clear communication.
For example, you’ll need to ensure that you have clear outlines of job responsibilities and expectations when hiring staff, including details about remuneration. Your pay and benefit packages should be aligned with current market trends for your industry. This may require an internal audit of your payroll policies and pay scales.
However, even with preparation, you might still have to deal with labor disputes. As such, it’s a good idea to invest in risk management and contingency planning.
- Start with a risk assessment to identify any vulnerabilities and potential impacts of labor disputes. That way, you can allocate resources effectively in the event of escalation.
- Draw up a communication strategy for employees, customers, suppliers, and other stakeholders during any labor issues.
- Consider alternative work arrangements to cover any shortages during strikes. This might include having a temporary staffing firm on hand, or investing in additional training for current staff.
- Create a reserve fund to cover potential losses, or unforeseen expenses. All strategies and reserves should be based on current market conditions.
It’s also always good to reach out to financial and legal experts if you’re ever in doubt.
Legal and regulatory considerations
There are several legal and regulatory considerations around labor disputes. For example, the National Labor Relations Act forbids employers from interfering with, restraining, or coercing employees from joining a union or participating in labor disputes. The same law also forbids unions from forcing employees to exercise these rights.
It’s worth noting that laws relating to labor disputes and regulations can change frequently. For example, recent legislation such as the PRO Act makes it much easier for remote workers to join unions, too.
As such, it’s essential that you stay updated on the laws and accounting practices that govern labor disputes.
If you need advice about accounting for labor disputes, schedule a Discovery Call with one of our CPAs.
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