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Human resource management consists of the attraction, selection, retention, utilization, motivation, rewarding, and disciplining of employees in organizations—in short, the management of people at work. During the last century or so, profound shifts have occurred in the industrial mix of the economy, the nature and extent of competition, and the types of work that employees perform. In particular, economic activity has shifted from agriculture to manufacturing and from manufacturing to services, with more and more employees performing relatively higher level analytical, professional, and technical work, and fewer employees performing relatively low-level, low-skill, and manual work. In the wake of these shifts, it has become common for businesses to claim that they (increasingly) compete based on intellectual or human capital rather than physical capital or “hard” assets (Pfeffer, 1994).
The phrase “human resource management,” which supplanted the earlier “personnel management,” conveys a sense of these shifts in that employees—people—are viewed as resources whose active management can positively contribute to organizational success. In this sense, human resources are akin to customers, financial resources, operating systems, and technology, each of which constitutes a main input into organizations, which then mix and transform these inputs for the purpose of producing major outputs—generically, goods and services and combinations thereof. The quantity and quality of such goods and services are constrained by (operate within the context of) an organization’s strategic objectives. In companies, these objectives typically include rate of return on invested capital, revenue growth, market share and, if publicly traded, share price. As with other inputs or assets, therefore, human resources must be managed strategically for the longer term and not just operationally for the short term or on a day-to-day basis.
This view of human resource management clearly indicates that those who lead and manage business (and nonbusiness) enterprises as well as component units and departments must be skilled in the management of people. At the same time and as organizations grow larger, they usually establish a formal human resources function (that is, a department) staffed by executives and professionals who specialize and assist the organization in managing its employees. An “HR department” typically develops, specifies, and monitors operating policies and practices regarding hiring, job placement, pay and fringe benefits, performance appraisal, promotion, training and development, work-life balance, and discipline and due process. However, because of the large amount of human resource/employment legislation, an HR department typically also specifies and monitors operating policies and practices regarding payroll deductions, workplace safety, equal employment opportunity, employee leave plans, employee savings and benefit plans, and employee health care and wellness plans (Jackson & Schuler, 2003).
Contemporary human resource management occurs in a world that is much different from that which existed only a relatively short time ago. A leading development in this regard is the change in employment contracting, specifically, from permanent or continuous employment to employability. During the 40-year period dating from the end of World War II to about the mid- 1980s, the majority of employees worked continuously for the companies that employed them, were covered by pension plans, and received a stream of pension benefits once they retired from employment with those companies. Under this arrangement, employees were paid less than the value of their productivity early on and more than the value of their productivity later on, with employers gaining an economic rent during the former period and employees gaining an economic rent during the latter period. At virtually any point during this period of continuous or permanent employment, therefore, one party had an obligation to the other party. These obligations were generally not put in writing, however, which is why this arrangement is referred to as implicit employment contracting (Lewin & Mitchell, 1995, pp. 194-196). These contracts, it should be noted, applied largely to male employees who in a more traditional era were regarded as the breadwinners—the sole breadwinners—for their families.
With the onset in about 1980 and the subsequent rapid spread of global economic competition, deregulation, and technological change, the employment landscape shifted markedly. Whereas earlier on in an era of mutual and reciprocal obligations employers responded to economic recessions by laying off employees and then rehiring them when economic conditions improved, during the 1980s employers began systematically to reduce their workforces in order to achieve long-term, permanent labor cost reductions. So pervasive was this trend that even companies with the strongest reputations for continuous employment such as IBM, Kodak, 3M, Polaroid, and Xerox followed suit. Such actions sent a clear message to both current employees and new workforce entrants that continuous (and surely permanent) employment with the same company was increasingly unlikely (Osterman, 1988). During the 1990s, especially the “go-go” second half of that decade, which featured major economic expansion fueled by high-technology companies and the commercialization of the Internet, labor markets were very tight, and therefore competition for labor—human resources—was especially keen. Consequently, employee quit rates rose markedly and frequent job-changing (even job-hopping) became the order of the day. This development reinforced the message of the 1980s, namely, that continuous or permanent employment was the wave of the past rather than the present and, even more likely, the future. From an analytical perspective, employability became the order of the day, employees were paid the value of their productivity at any point in time, and implicit long-term employment contracting gave way to shorter term, often explicit, commodity type “labor” contracting, including most notably through outsourcing. These trends continued, even sharpened, into the first decade of the 21st century (Effron, Gandossy, & Goldsmith, 2003).
Another key trend of direct relevance to human resource management that occurred during the past quarter-century— indeed, during the past half-century—is the decline of private-sector unionization and collective bargaining, not only in the United States but also in most other nations.
Whereas about one third of the U.S. nonagricultural private-sector labor force once belonged to unions and worked under terms and conditions of employment that were explicitly spelled out in collective bargaining agreements that had been negotiated by company executives and union officials, today only 7.4% of private-sector employees belong to unions and less than 10% are covered by collective bargaining agreements (Greenhouse, 2007). The same fundamental forces, namely, global economic competition, deregulation, and technological change, that led to greatly reduced use of long-term implicit employment contracting also led to the decline of unionism and collective bargaining. Each of these forces served to increase both product market and labor market competition, which made it markedly more difficult for unions to negotiate economic rents for their members. Whereas unions in general and certain unions in particular were once able to negotiate wage and benefit rates well above those prevailing in labor markets more broadly, they became increasingly unable to do so when bargaining with companies in highly competitive industries rather than companies in industries characterized by oligopoly or monopoly. This, in turn, meant that union members and potential union members were unlikely to obtain a wage premium that at least offset the cost of union dues. As a result, fewer and fewer workers chose to belong to unions and more and more companies sought to avoid unions by moving operations elsewhere, including offshore, and by substituting capital and technology for (relatively more expensive) labor. Correspondingly, the incidence of company labor relations departments specializing in the negotiation and administration of collective agreements declined, and the incidence of company human resource departments specializing in the management and administration of individually oriented employment relationships increased (Budd, 2005).
Another key development regarding human resource management is the body of research that seeks to measure the effects of human resource management practices on organizational performance. Ironically, this work can be analytically linked to research that assesses the impacts of unions on wages, fringe benefits, and ultimately company financial performance. In particular, union impact research is grounded in microeconomic analysis in which collectively bargained pay and benefit rates are compared with prevailing market-based pay and benefit rates to determine the size of the resultant premiums. Within this analytical framework, labor cost increases resulting from collective bargaining have to be offset by corresponding productivity gains in order for unit labor costs to remain unchanged and for unionized firms to compete with nonunion firms in the same industry. If such offsetting productivity gains are not forthcoming, the unionized firm has clear incentives to reduce the use of unionized labor and substitute other factors of production for unionized labor. The underlying analysis in this regard is identical to the analysis of, for example, federally legislated increases in the minimum wage, municipally legislated increases in the living wage, and the like (Rees, 1977).
But whereas there is a well-developed and clearly defined analytical framework for assessing the impacts of unions and collective bargaining on company financial performance, there was until just recently no comparable framework for assessing the impacts of human resource management practices on company financial performance. This began to change in 1990, however, when Mitchell, Lewin and Lawler published an article that estimated the effects of employee participation in decision making, employee participation in variable pay plans, and certain other human resource management practices on company financial performance. Using a sample of 495 business units of publicly traded U.S.-based corporations, these authors found that the extent of employee participation in decision making, including through the use of workplace teams and quality circles, and the extent of employee participation in/coverage by profit sharing, bonus, and stock ownership plans were significantly positively associated with changes in company return on assets, return on investment, and revenue per employee. In short, this research appeared to confirm that employee financial and nonfinancial participation in the enterprise “paid off” in terms of company financial performance.
During the ensuing decade and a half, an impressive array of articles and books appeared that substantially expanded the analysis and evidence about the effects of human resource management practices on organizational performance (Wall & Wood, 2005). A leading characteristic of this work is its conceptualization of human resource management practices as bundles or packages, which were then shown empirically to have larger and more statistically significant positive effects on company financial performance than the effects of any single human resource management practice. From this research there emerged a set of “high-involvement” human resource management practices consisting of (a) employment security, (b) selective hiring, (c) workplace teams and organizational decentralization, (d) high pay contingent on organizational performance, (e) employee training and development, (f) low-status differentials, and (g) information sharing with employees. These high-involvement human resource management practices are claimed to substantially and significantly enhance organizational performance when adopted and implemented together and sustained over a relatively long period (Pfeffer & Veiga, 1999). It is this research in particular that has been invoked to support the claim that expenditures on employees can best be regarded as investments in human resources (or human assets or intellectual capital) that yield positive economic returns.
But if this is in fact so, it is not universally so; another, even more recent body of research indicates that there are also positive outcomes for organizations that emanate from what has been termed “low-involvement” human resource management practices. This research focuses on company uses of outsourcing, part-time employment, temporary employment, fixed (and typically short-term) employment contracting, and vendoring—the movement of employees of a company to one or another of its suppliers. Several studies have shown that employees in these types of work are significantly less likely to be managed by high-involvement human resource practices than employees who work full time, work in teams, have well-defined career paths, and possess promotion as well as training and development opportunities (e.g., Lewin, 2003). Identical to research on high-involvement human resource management practices, the research on low-involvement human resource management practices attempts to measure the effects of these practices on company financial performance (Lewin, 2001b). The findings from this research are significant in a statistical sense and important in terms of practice. Specifically, the empirical evidence shows that the extent of low-involvement human resource management practices is significantly positively associated with company financial performance, measured, for example, by stock price, and with business unit financial performance, measured, for example, by return on investment. Such low-involvement human resource management practices are also significantly negatively associated with manufacturing plant labor costs and with sales and service field office payroll costs, thereby having overall positive effects on financial performance at these organizational levels. Furthermore, low-involvement human resource management practices remain significant in terms of their positive associations with organizational financial performance when account is taken of the use of high-involvement human resource management practices for other employees of these organizations (Lewin, 2003). It is this research in particular that has been invoked to support the claim that expenditures on some employees can best be regarded as containing or reducing labor costs, thereby contributing to overall organizational performance.
When these two streams of research are combined, they lead to what can best be termed a “dual theory” of human resource management and organizational performance. This theory posits that some employees performing certain types of work are best managed by investing in high-involvement practices, while other employees performing other types of work are best managed through low-involvement practices. The former set of employees can be thought of as core employees, while the latter set of employees can be thought of as peripheral employees. Both types of employees and both sets of human resource management practices can positively contribute to organizational performance. Perhaps the larger question in this regard is, “What is the appropriate or best balance of core and peripheral employees for an organization?”
Though the answer to this question is likely to differ from industry to industry and organization to organization, one overall estimate is that a combination of two-thirds core employment and one-third peripheral employment is optimal in terms of organizational financial performance. Stated differently, an organization can add value (to its financial performance) by increasing its ratio of peripheral to total employees from, say, one sixth to one fifth or from one quarter to one third, but will likely lose value (in terms of its financial performance) by increasing its ratio of peripheral to total employees from, say, one third to two fifths or to one half (Lewin, 2002); in other words, this relationship is curvilinear.
Even though research and practitioner attention has increasingly been devoted to managing human resources for competitive advantage—organizational financial performance—considerable attention has also been paid to employment dispute resolution. In this regard, the decline of unionism and collective bargaining should not be taken to me that there has been a corresponding decline in employment-related conflict in organizations. To the contrary, and as indicated by both the adoption by nonunion organizations of what have come to be known as alternative dispute resolution (ADR) systems and the substantial amount of employment/human resource management legislation that has been enacted by the federal government and state governments during the past several decades, conflict is an enduring, ever-present characteristic of employment relationships (Colvin, 2004). Hence, any informed treatment of contemporary human resource management must consider the nature of such conflict, the practices that have been undertaken in attempting to resolve such conflict, and the effectiveness of such practices.
While it is well known that the bulk of employment-related disputes are resolved in informal discussions between “aggrieved” employees and their immediate supervisors/managers, often using open-door and hotline policies and practices, a growing proportion of nonunion companies—perhaps more than 50%—have adopted formal employment dispute resolution systems (Colvin, 2003). These systems require that grievances (or complaints) be put in writing, and they specify a series of steps, usually three to four steps, for the processing and resolution of such grievances. Unlike grievance systems in unionized settings in which all but a handful end in binding third-party arbitration (known as rights arbitration), nonunion grievance systems vary in terms of their specified final steps. Examples of such final steps in nonunion employment dispute resolution systems include Chief Executive Officer (CEO), Chief Administrative Officer (CAO), a Senior Management Committee, peer review, and, in about 20% of the systems, binding third-party arbitration (Lewin, 2007). In addition, these systems also vary considerably in terms of speed of grievance processing, scope of employment-related issues subject to grievances, and employee eligibility to use grievance procedures. Notably, whereas in unionized settings only employees who are represented by a union—known as the bargaining unit—are eligible to file grievances, in nonunion settings the scope of employee eligibility is typically wider and may even include first-line and mid-level managers. This apparently means that more, perhaps considerably more, nonunion than unionized employees who have employment-related conflicts can invoke their respective organizations’ employment dispute resolution systems. But this also means that, unlike in unionized settings, the determination of grievance steps, speed of grievance settlement, scope of grievance issues and scope of employee eligibility to use the grievance procedure in nonunion settings is determined solely by the employer (Colvin, Klass, & Mahony, 2006). These features of nonunion ADR systems together with the fact that nonunion employers pay the costs of arbitration when this method is used has elicited considerable criticism from specialists in this area—the main criticism being that this type of system is one sided and hence unfair (Wheeler, Klass, & Mahony, 2004).
Empirical evidence shows that nonunion employees who are eligible to use organizational grievance systems do in fact do so, though their grievance filing rates are about half as large as those of unionized employees. A substantial proportion of nonunion employee grievances, between 80% and 90%, are settled at early steps of the grievance procedure, which is quite similar to what occurs among unionized employees. Only a small percentage, 2% to 3% on average, of both nonunion and unionized employee grievances are settled at the final step of the grievance procedure irrespective of what that step may be (for example, peer review or arbitration). Among male employees, whether unionized or nonunion, the issues most frequently in dispute and hence the subject of grievances are job assignment, pay rate, and discipline, including discharge from employment. Among female employees, by contrast and again whether unionized or nonunion, the issues most frequently in dispute and hence the subject of grievances are promotion, training and development, and discrimination/harassment (Lewin, 1999).
An especially important stream of research in the area of nonunion grievance systems focuses on what has been termed post dispute resolution outcomes. In particular, these outcomes include employee job performance ratings, promotion rates, work attendance rates, and turnover rates (Lewin & Peterson, 1999). The dominant analytical approach used in this research is quasi-experimental, involving comparisons of samples of nonunion employees who subsequently do and do not file grievances, respectively, under their organizations’ employment dispute resolution systems; the former are referred to as grievance filers and the latter as grievance nonfilers. For these two employee groups, their job performance ratings, promotion rates, and work attendance rates are compared before, during, and after a period of grievance filing and settlement, and their turnover rates are compared after grievance settlement. The main findings from this research are that comparably matched samples of nonunion employees do not differ significantly in job performance ratings, promotion rates, and work attendance rates prior to and during grievance filing and settlement but differ markedly thereafter, with the first two of these three measures being significantly lower (and the third being insignificantly lower) for grievance filers than for nonfilers. Further, both voluntary and involuntary employee turnover rates in 1-to-3-year periods following grievance settlement are significantly higher for grievance filers than for nonfilers. Moreover, a very similar pattern of findings has been reported for samples of supervisors of grievance filers compared with samples of supervisors of nongrievance filers (Klass & DeNisi, 1989; Lewin, 1997; Olson-Buchanan, 1996, 1997).
When it comes to explaining these findings, two main alternatives have been proposed: the retaliation explanation and the revealed performance explanation. The retaliation explanation is relatively straightforward in claiming that nonunion employees who actually use their organizations’ dispute resolution systems suffer retaliation for doing so—and the same is true of their supervisors. This explanation is consistent with organizational punishment/industrial discipline theory and is also supported by related survey research showing that employee fear of retaliation is significantly negatively associated with nonunion employees’ use of grievance procedures (Boroff & Lewin, 1997; O’Reilly & Weitz, 1980). The revealed performance explanation is relatively less straightforward in claiming that employee grievance filing spurs or shocks company management into paying closer attention to employee performance and performance evaluation; once that occurs, management learns (ex post facto) that grievance filers and their supervisors are relatively poorer performers than nongrievance filers and their supervisors. This explanation is consistent with the shock theory of unionism—that is, unionization shocks management into improving productivity and organizational performance more broadly—and with the considerable evidence that company performance evaluation systems yield evaluation results that are in general significantly upwardly biased (Lewin, 2005; Peterson & Lewin, 2000).
In sum, the main findings from research on contemporary nonunion employment dispute resolution systems suggests that, contrary to the stated strategic, information gathering, and problem identification and diagnosis rationale underlying nonunion companies’ adoption of such systems (Lipsky, Seeber, & Fincher, 2003; Feuille & Delaney, 1992), the actual use of such systems by nonunion employees leads to further deterioration of their employment relationships rather than to the resuscitation of such relationships and that the same is true for the supervisors of these grievance-filing employees. Hence, from a larger perspective, these nonunion employment dispute resolution systems are fundamentally reactive in nature and are largely incapable of ameliorating conflict and of restoring or reinstating employees—and their supervisors—such that they can be productive and contribute positively to their organizations’ performance (Lewin, 2004). It is at this point, however, that human resource management research and practice can be joined with employment dispute resolution research and practice (Lewin, 2001a). Specifically, and as noted earlier, contemporary human resource management has concentrated on developing and sustaining high-involvement practices aimed at proactively engaging employees in the performance of the enterprises that employ them. Such practices typically focus on employment continuity, selective hiring, teamwork and decentralized decision making, high pay contingent on organizational performance, training and development to improve employee performance, reduction of status differentials to promote organizational egalitarianism, and business information sharing with employees. Therefore, and looking ahead, it may be asked, why can’t this set of “best” human resource management practices be enhanced by adding to it proactive employment dispute identification, diagnosis and resolution, including through early-stage employee consultation in workplace and organizational decisions; targeted internal employee-as-customer research, including through electronic online surveys, to learn and gauge the depth of employees’ workplace and organizational concerns; and even new and deeper initiatives at work-family life balance to address employee issues and concerns that manifest themselves as employment-related disputes but that have their origins in internal family disputes (Kaminski, 1999)? Merely posing this multifaceted question implies that human resource management in the 21st century will require deeper thought, theory development, empirical research and clinical insight than have prevailed heretofore—especially if human resources are to be used for competitive advantage by business and nonbusiness enterprises.
If new initiatives at integrating internal organizational conflict management with human resource management practices are not forthcoming or are not effective, then external regulatory approaches and methods for resolving employment relationship conflicts will continue apace and perhaps deepen. Although unlike many other developed countries the United States does not have a national employee rights law, during the second half of the 20th century much legislation was enacted to regulate one or another aspect of private sector employment relationships. The leading (U.S.) federal statutes in this regard included the 1963 Equal Pay Act, 1967 Age Discrimination in Employment Act, 1964 Civil Rights Act, 1970 Occupational Safety and Health Act, 1973 Rehabilitation Act, 1974 Employee Retirement Income Security Act, 1974 Trade Act, 1988 Worker Adjustment and Retraining Notification Act, 1990 Americans with Disabilities Act, and 1993 Family and Medical Leave Act. As explicitly indicated by some of their titles, the bulk of these laws are aimed at curbing and providing remedies for employment discrimination based on, as examples, ethnicity, gender, national origin, age, and disability. By most scholarly accounts, such laws have been effective in combating overt employment discrimination, but have been less effective in promoting workforce diversity within business enterprises (Lewin & Mitchell, 1995). This is not surprising because legislation is typically more effective in preventing than promoting certain types of organizational and human behavior. Nevertheless, during the last half-century or so, company workforces have become more diverse, especially in terms of gender and ethnicity. This development, however, has primarily been driven by company efforts to match workforce diversity with customer diversity and by the increasingly diverse labor pools from which companies recruit and select their workforces, rather than by legislation, per se (Kochan et al., 2003).
Regarding employment dispute resolution under one or another of the statutes just noted, a lawsuit that pits an individual employee or a group (known as a class) of employees against an employer commonly results. Although some of these cases have gone all the way through trial to judicial verdicts, most such cases are settled before trial and conclude with negotiated settlements between employees and the companies/employers in question. While on their face these settlements seemingly resolve the disputes that initially gave rise to them, when the issues in dispute involve workforce reductions or termination from employment the settlements only rarely result in the reestablishment of the original employment relationships or the reinstatement of employees to their jobs. Instead, the aggrieved employees receive a monetary payment in satisfaction of their discrimination claims and then move on to seek employment elsewhere (Lewin, 1999).
By contrast, some employment disputes do result in the reinstatement of employees to their jobs, notably in cases in which state courts have determined that implicit employment contracts exist. In such “wrongful termination” cases, the courts give considerable weight to such factors as an employee’s length of service with a company/employer and the employee’s record of job performance, promotions, and pay increases. Generally speaking, a long-term employee who has rendered good-to-excellent job performance and who has received promotions and pay increases on a more or less regular basis is most likely to be reinstated to his or her job under the judicial doctrine of wrongful termination. In reaching such a decision, a court basically concludes that the employer and employee in question had an implicit employment contract that assured continuous employment unless the employee underperformed. In response to judicial decisions favoring employees in several prominent wrongful termination cases, many employers revised their human resource policies, including those spelled out in employee handbooks, to state that they are at-will employers, meaning that the employer and/or the employee are free to end the employment relationship at any time. But as subsequent judicial decisions made clear, even an employer’s explicit employment-at-will policy does not necessarily prevent the courts from reinstating terminated employees to their jobs, especially when such terminations constitute employer retaliation against employee whistleblowers (Lewin, 1994).
Even though some long-service employees and some employees who have blown the whistle on their employers’ fraudulent behavior have been reinstated to their jobs as a result of state court decisions, more recent decisions of the U.S. Supreme Court in employment dispute cases, specifically in Gilmer v. Interstate/Johnson Lane (1991) and Circuit City v. Adams (2001), are especially significant and far reaching. In these cases, the court ruled that the entire range of U.S. employment laws, including Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, and the Americans with Disabilities Act, is subject to arbitration provisions contained in employment contracts between employers and employees. So strong is this deferral to arbitration doctrine that it apparently requires the “diversion of all employment litigation . . . into an employer-designed arbitration procedure from which there is no right of appeal or only very limited possibility of court review” (Colvin, 2003). Hence, it is not surprising that this type of internal arbitration has been widely adopted by employers, especially nonunion employers, or that it has become the main alternative to litigation as an employment dispute resolution method (Lipsky, Seeber, & Fincher, 2003). It is therefore also not surprising, as noted earlier, that internal arbitration type ADR is criticized for its one-sidedness and for its failure adequately and neutrally to protect employee rights (Wheeler, Klass, & Mahony, 2004).
If the management of human resources involves a substantial element of complying with relatively new human resources and employment regulation, it also involves complying with older, longer standing regulation. A leading example in this regard is the 1938 Fair Labor Standards Act (FLSA), which contains provisions specifying minimum wage, female and child labor protection, and overtime pay eligibility and requirements. The leading example of a new challenge to this “old” law is the spate of managerial misclassification cases that have been filed during the last decade or so. In brief, these cases, which are predominantly class actions filed against retail trade employers in the supermarket and restaurant industries, involve allegations that employees holding such job titles as store manager, department manager, and location manager and who are paid annual salaries rather than hourly wages in fact perform predominantly employee rather than managerial work and, therefore, should receive or have received overtime pay for all hours worked beyond 40 in a week and, in California, beyond 8 in a day. As documented by Levine and Lewin (2006), the volume of managerial misclassification cases has increased dramatically and the potential monetary damages in some of these cases runs to the 10s and even 100s of millions of dollars.
Under the FLSA as well as state wage and hour laws, employees who do not qualify for overtime pay are referred to as “exempt” and employees who do qualify for overtime pay are referred to as “nonexempt” (meaning that they are included under—covered by—the overtime pay provisions of these laws). As originally written, the FLSA identified certain types of exempt employees, as examples, executives, professionals, and certain administrative employees. At the time the FLSA and many of the state wage and hour laws were passed, the United States was still in the midst of the Great Depression, unemployment was very high, and the majority of employees worked in manufacturing. The Congress reasoned that if employers had to pay a 50% premium for hours worked beyond 40 in a week, they would almost certainly not do so but, instead, would hire additional employees who would be paid “regular” hourly wage rates. Not only was such expanded hiring forecasted to reduce unemployment, newly hired employees were predicted to spend all that they earned, thereby resulting in more demand for goods and services, which would help the country move out of economic recession. Neither of these predictions subsequently turned out to be supported by empirical evidence. Further, and as economic transformation ensued over subsequent decades, manufacturing employment declined, service sector employment substantially increased, and proportionately larger segments of the U.S. workforce became employed as executives, professionals, and administrators—the types of occupations and work that were exempt from overtime pay provisions of the FLSA and state wage and hour laws. Nevertheless, these laws remain in place today and the recent legal disputes that have arisen under them focus on whether employees who hold these job titles, especially managerial job titles, primarily perform predominately managerial work or employee work (Levine & Lewin, 2006).
From a human resource management perspective, the key question in this regard is “Why have managerial misclassification cases exploded?” The multifaceted answer to this question is as follows. First, and especially important to recognize, every business enterprise starts out as a small enterprise with relatively little financial capital and operates in one or a few locations with few customers and few employees. If the business survives its start-up phase—and many do not—it moves into a growth phase in which it adds financial capital, customers and employees, achieves operating profit and, most important, expands its locations. In the start-up phase, those who manage the business’s few locations and facilities (and who may be members of a business founder’s family) perform predominantly managerial work. To illustrate, in a retail business, managers decide when the store will open and close, the suppliers/vendors from whom goods will be purchased, the prices at which goods will be sold to customers, the type and extent of advertising and promotion, and the hiring, utilization, and disciplining of employees.
Second, as this prototypical retail business grows larger and opens more stores in widespread locations, the responsibility for deciding store operating hours, vendors, prices, advertising, and employment moves from the individual store and store manager to higher levels, for example, regions and divisions headed by regional managers and divisional managers, respectively. In other words, store operating policies and practices come to be determined and monitored on a more centralized basis, and decision-making responsibility consequently moves away from the store level to higher levels, including the headquarters level. Adding to this tendency are initiatives aimed at optimizing supply chain management in which decisions about which vendors to use, the terms of contracts with chosen vendors, and the scheduling of vendors’ deliveries to stores are made at higher organizational levels rather than at the store level.
Third and as the business grows still larger, standard operating policies (SOPs) are put in place by top management to govern most if not all aspects of individual store functioning. Such policies closely circumscribe the behavior of store managers regarding product displays, stocking and restocking of shelves, product pricing, special attractions and discounts, work shifts, employee job assignment, inventory control, customer service, and much more. The basic concept underlying such standardization, known as replication, is that a customer will have the same experience irrespective of which store (or restaurant or other establishment) he or she enters or where the store is located. Also consistent with this policy of standardization is the concept of national, even global, branding which means, for example, that a customer of Wal-Mart or McDonald’s can expect the same type of products or food to be available and to receive the same level of service regardless of location.
Fourth, in virtually all large retail businesses, individual store and location managers are compensated through a combination of base salary and bonus. Under this type of compensation plan, the bonus is typically based on the difference between a store’s budgeted labor costs and its actual labor costs; the larger the excess of budgeted over actual labor costs, the larger the store manager’s bonus. With this compensation plan in place, salaried store managers have a clear incentive to substitute their “labor” for the hourly paid labor of their employees. Stated differently, additional hours worked by salaried store managers cost the employer nothing whereas additional hours worked by hourly paid employees cost the employer additional hourly wages and, especially in high-demand periods, overtime pay. Therefore, a store manager who seeks to maximize his or her bonus will perform some and perhaps many nonmanagerial employee tasks and, in effect, replace hourly employees when doing so (Levine & Lewin, 2006).
In sum, the recent explosion of managerial misclassification cases can be explained by a combination of strategic, organizational, supply chain management, marketing, and compensation initiatives on the part of companies, especially retail trade companies, that, on the one hand, make good sense from a business performance perspective but, on the other hand, expose these companies to potentially large legal damages because they have failed adequately to address the changes in lower level management jobs emanating from otherwise well-meaning and well-founded strategic initiatives. Such legal exposure, in turn, raises questions about the role of the human resource management function in these retail businesses. If human resource executives of these enterprises have, so to speak, a seat at the business strategy table, then the potential consequences of the aforementioned strategic initiatives for changes in lower level store manager jobs and the overtime pay claims resulting there from could have perhaps been anticipated and dealt with exante. But if human resource executives in these enterprises do not have a seat at the business strategy table and were largely relegated to operational roles, then they are left to pick up the pieces in attempting expost to assist their enterprises in defending themselves against claims of managerial misclassification.
Once again from a human resource management perspective, this development in an increasingly important sector—the retail sector—of the U.S. economy calls into question the role and influence of the human resource function and leaders of this function in the business enterprise. Many scholars and practitioners claim that human resources—HR—is a strategic business function that should fundamentally be a business partner in the same way that finance, marketing, and operations are business partners in the enterprise (Ulrich, Losey, & Lake, 1997). Yet there are many other roles and purposes that HR functions and those who lead these functions serve in modern business enterprises, including complying with human resource/labor regulation (newer and older regulation), enforcing organizational and employment policies and practices, measuring employee performance, providing services and assistance to employees, maintaining employee personnel files, monitoring workplace safety, handling employee relocation, including abroad, and even maintaining a union-free environment. With this menu of potential duties and responsibilities, it is understandable that many HR functions in modern business enterprises are considered to be largely operational functions rather than strategic functions. But if the claim that business enterprises increasingly compete on the basis of their intellectual or human capital is at all valid, then the main challenge regarding human resource management in the 21st century is for HR functions and HR leaders to keep their eye on the prize of a strategic role in these enterprises while also performing the necessary operational role—roles—that HR functions and leaders must inevitably undertake.
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