Why do temporary employees matter and can there be a compromise?
GM-UAW Negotiations Update
Let me start out by giving a little bit of a high-level history lesson. Ten years ago, in 2009, GM and FCA were tasked by the U.S. federal government to reduce their overall labor costs to competitive levels in order to receive government assistance. At that time, the yardstick utilized for competitive labor costs was estimated U.S. Transplant (international producers in the U.S.) labor costs which were pegged at $49 per hour. To address the competitive labor cost gap (> $10 per hour), the parties more or less contemplated two major options. Option 1 would have required significant cuts to the wages and benefits of existing UAW employees. For example, this may have meant cutting the non-skilled employee base wage rate from $28 per hour at that time down to a more competitive wage rate of ~$24 per hour plus increasing employee cost share relative to healthcare benefits. The automakers and UAW realized that this type of deal would have created a lot of animosity in the workforce and would have been quite difficult to ratify. Therefore, rather than directly impacting existing UAW members through significant wage and benefit cuts, the parties elected to go with Option 2. Option 2 was much less intrusive on existing UAW members – it effectively removed lucrative contract provisions such as Cost of Living Allowances (COLA) and Jobs Bank, concepts that are for the most part, unheard of today. In addition, Option 2 addressed many of the cost reduction targets prospectively by focusing on a lower wage and benefit package for new hires (effectively a two-tier system). At that time, the understanding was that there would be a 25% cap on the number of second-tier employees at the expiration of the 2011 Agreement. For illustration purposes, assuming that there was a $20 per hour differential in all-in labor costs between traditional and new hire employees, this would create downward pressure of $5 per hour on all-in composite labor costs (i.e, $20 per hour x 25% cap).
Here is the problem today. The 2015 Agreements effectively removed this two-tier system as all permanent non-skilled employees now migrate to the maximum base wage rate of ~$30 per hour today. Therefore, the Detroit 3 automakers no longer have any significant downward pressure on their all-in labor costs due to the utilization of lower cost employees. This is a big deal because it was likely the best opportunity for the Detroit 3 to remain somewhat competitive with the U.S. Transplants. It should be noted here that, similar to the old Detroit 3 two-tier system, many of the U.S. Transplants regularly utilize lower cost full-time temporary employees to keep their all-in labor costs in check. As illustrated earlier, in theory, the Detroit 3’s lower cost two-tier wage and benefit structure, as defined in 2009, should have mitigated their all-in labor costs by approximately $5 per hour worked. Instead, according to the Center for Automotive Research (CAR), the U.S. Transplants now enjoy a $13 per hour competitive labor cost advantage over GM – this is largely due to their utilization of a significant number of temporary workers.
From GM’s perspective, the company requires an increase in their number of temporary employees for a number of reasons. The company requires flexibility in staffing in order to deal with challenges such as excessive absenteeism as well as the unpredictability associated with product demand. More importantly though, the company needs economic offsets in order to keep their labor costs competitive. Otherwise, how can the company be expected to fund higher base wages, higher profit-sharing bonuses and lower employee cost share with respect to healthcare than their competitors?
From the UAW’s perspective, there is pressure and frustration from the rank and file for a couple of reasons. Once temporary employees are hired into the company, they become frustrated that they are working side by side with a full-time employee and are not receiving equal pay for equal work. In addition, it appears that there is frustration with the fact that there is no clear path to a full-time position.
Is there any hope for a compromise? Perhaps, but both parties will likely need to bend quite a bit if they want to make this work. GM will need a long-term commitment from the UAW that will allow the company to utilize lower cost temporary employees at a specified cap (perhaps up to 25% of the workforce similar to the U.S. Transplants in order to be cost effective). In return, GM will have to establish a clear path for temporary employees to attain full-time status (including wages and benefits) over time. Here is the tricky part – GM may not be in a position to guarantee exactly when a temporary employee will flip to a full-time employee but perhaps as a compromise, the company can provide UAW temporary employees with assurances that they will receive credit for hours worked to date for purposes of wages and benefits when they do convert to full-time status.
Let’s look at an illustrative example. Let’s say a full-time employee starts at $18 per hour with an 8-year wage progression period that takes them to the maximum base wage rate of $30 per hour (eight increments of $1.50 per year). In addition, let’s assume that full-time employees are eligible for medical and prescription drug coverage after 90 days, dental coverage after 3 years and vision coverage after 5 years. If there is a 25% cap on temporary employees and if we assume that normal attrition is 4% per year, all things being equal, a temporary employee should expect to “graduate” to full-time status after working a little over 6 years. In this example, the employee’s pay rate would move to $27 per hour immediately ($18 start plus 6 years x $1.50) along with full healthcare benefits since they have worked more than 5 years. Alternatively, an employee graduating after 4 years would earn $24 per hour immediately along with all healthcare coverage with the exception of vision.
In this illustrative example, while the timing associated with the “clear path” to full-time status is not crystal clear, the path to the coveted wages and benefits of a full-time employee should be considered both more fair and better defined. Thousands and thousands of job seekers routinely apply for the temporary hourly positions advertised by the automakers. Therefore, one can conclude that the existing wage and benefit package for these temporary jobs is considered attractive. At a minimum, these jobs must be better than any other non-skilled jobs that are out there in the market. Once these temporary employees are hired, it will be up to the UAW to manage their expectations and remind them of what they signed up for, rather than succumbing to pressure and trying to bridge the gap to full-time status or full-time compensation levels in the next round of bargaining (i.e., déjà vu from 2015). At one point or another these temporary employees will become full-time employees and will receive credit for time worked as a temporary worker. This is not a new concept – the Detroit 3 automakers have thousands of salaried contract employees on staff who work diligently and often wait patiently for full-time positions to open up.
I am sure that GM and the UAW are already kicking around ideas like this. Hopefully, together they can solve this issue and also address rising healthcare costs in order to keep labor costs competitive and secure great-paying UAW jobs in the future.
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