Assistant Professor Daniel Hemel and UC Berkeley Jurisprudence & Social Policy Ph.D. candidate David Louk on next Monday’s Supreme Court oral argument in Friedrichs v. California Teachers Association:
The Supreme Court will soon decide whether public-sector employers can maintain “agency shops” in the roughly two dozen states that now allow these arrangements. In an “agency shop,” an employee who chooses not to join her local union must nevertheless pay the union an “agency fee” to cover her pro rata share of its collective bargaining expenses. Agency shop supporters justify these arrangements as a means of preventing non-union members from free-riding off the union’s bargaining efforts. Opponents—including the plaintiffs in Friedrichs—say that agency shop arrangements violate the First Amendment rights of non-union members who are forced to pay a fee to an organization whose views they reject.
In the 1977 case Abood v. Detroit Board of Education, the Supreme Court held that agency shop arrangements in public-sector workplaces do not violate the First Amendment as long as nonmembers’ fees are applied toward collective bargaining costs rather than unrelated “ideological activities.” More recent decisions have suggested that Abood may be ripe for reconsideration, and the question presented in Friedrichs explicitly asks whether Abood should be overruled. We take no position on that constitutional question. We do think, however, that the practical implications of overruling Abood could be more muted than either side recognizes. Even if Abood is overruled, public-sector employers in sympathetic states still will be able to ensure that unions are reimbursed for their collective bargaining costs (including the cost of representing nonmembers). They just might have to take a different (and more straightforward) approach than the agency shop.
In a new essay in the University of Chicago Law Review Dialogue, we explain in detail how this alternative arrangement might work, but here’s a quick synopsis: Let’s say a union in California represents a school district’s 100 teachers and has collective bargaining costs of $100,000 per year. To make things simple, let’s also assume that all teachers in the district earn $50,000 annually. Under the existing agency shop arrangement, every teacher must pay $1,000 to the union to cover her share of the union’s collective bargaining costs. (Union teachers also pay additional dues to cover expenses unrelated to collective bargaining.) So in our example, although teachers nominally earn $50,000, their effective pay is really $49,000, because each pays a minimum—and mandatory—$1,000 agency fee. A more straightforward way to accomplish the same result would be to adopt what we call the “direct payment alternative,” whereby the district would reimburse the union directly for its bargaining costs. To offset these costs, the district might then want to reduce each teacher’s salary from $50,000 to $49,000. The teachers, however, would be no worse off: They would no longer have to pay $1,000 in agency fees or union dues, so their net wage (before taxes) would be the same as in the agency shop arrangement.
Even if five justices vote to overrule Abood, it seems unlikely that the Court’s decision would prevent public-sector employers from adopting the direct payment alternative. Money may be considered speech under current First Amendment doctrine, but expenditures of government money count as “government speech.” And the Supreme Court’s “government speech” precedents, such as Rust v. Sullivan, establish that the government has wide latitude to make policy judgments when it chooses what speech to fund. Indeed, the direct payment alternative may actually be preferable for unions, even if the court declines to discard Abood. Under the court’s post-Abood decision in Lehnert v. Ferris Faculty Association, unions are subject to a number of constitutional limitations on how they may collect and spend agency fees. Those limitations would be unlikely to apply under a direct payment method, given the breadth of permissible government speech.
An added benefit of the direct payment alternative—at least from the perspective of public-sector employees—is that it would also result in most of them paying less in federal taxes. In the agency shop example above, each teacher’s adjusted gross income for federal tax purposes would be $50,000, and her wages for Social Security and Medicare tax purposes would be $50,000 as well. While union dues and agency fees are deductible for federal income tax purposes, many employees cannot take advantage of this benefit—either because they don’t itemize deductions on their returns or because they fall below the 2% floor on miscellaneous itemized deductions. Under the direct payment alternative, the school district’s reimbursements to the union would be excluded from employees’ income, and so teachers in our hypothetical school district would be taxed on $49,000 instead of $50,000. Even employees who itemize on their returns and whose miscellaneous deductions exceed the 2% floor would be better off under the direct payment alternative—both because the reduction in gross income would lower the 2% floor and because of the payroll tax savings.
Why, then, haven’t public-sector unions prodded employers to switch to the direct payment alternative already? The straightforward answer is that in roughly a dozen states with agency shops—including the Friedrichs plaintiffs’ state of California—direct payments from public-sector employers to labor unions are prohibited by state law. But states can change their laws, so this doesn’t explain why states maintain agency shop arrangements notwithstanding the availability of the direct payment alternative. Nor does it explain why states chose agency shop arrangements instead of the direct payment alternative in the first place.
One possible reason is that even though public-sector employees would be better off post-tax under the direct payment alternative, employees don’t realize that fact. The required payment to the union may be an example of what behavioral economists call a “low-salience” fee. In other words, an annual salary of $50,000 with a required agency fee of $1,000 might appear more lucrative than a $49,000 salary and no fee. This may be so even though under the direct payment alternative, a public-sector employee actually pays less in federal taxes and takes home more of her salary as a result. So public-sector employers may favor agency shop arrangements in order to inflate the sticker salary that they can offer potential employees—even though after-tax pay is lower under the agency shop than the direct payment setup.
A second—and perhaps more likely—reason is political: A direct payment alternative might initially be met with hostility from taxpayers and lawmakers alike. Voters and legislators might object to the appearance of states and municipalities subsidizing public-sector unions. But appearances can be deceiving—and revealing: state and local governments in agency shop states already subsidize public-sector unions when they require employees to pay agency fees. The direct payment alternative simply makes this subsidy more transparent.
Does the possibility of the direct payment alternative mean states could neutralize the effects of a decision to overrule Abood? In at least eight states with agency shops, we believe direct payments from public-sector employers to unions are arguably already legal. In those states, public-sector employers could minimize any potential fallout of Friedrichs without any change to state law—and they might want to do so regardless of the outcome for the reasons noted above.
In about a dozen more states with agency shop arrangements, direct payments from public-sector employers to unions are prohibited by law, and those laws would need to change. This might not be so difficult in some instances, since agency shops arrangement exist only in states that already look favorably on public-sector unions. As a result, political support for public-sector unions in those states may be so strong that a decision to overrule Abood would have limited practical effect: those same states that presently enable agency shop arrangements may just change their laws to allow direct payments instead.
To be sure, support for public-sector unions is not equally strong in all agency shop states. In California, for example, the state Senate, Assembly, and Governor’s mansion are all controlled by Democrats, and public-sector unions presumably would find powerful allies willing to support a direct payment alternative in the event Abood is overruled. Thus even if the Friedrichs plaintiffs win before the Supreme Court, California could very well implement the direct payment alternative instead, continuing to prevent the free-rider problem among non-union public employees. In other agency shop states, however, divided government might make Friedrichs’ holding more consequential. In Illinois, for example, it appears unlikely that Governor Bruce Rauner—who has clashed with public-sector unions throughout his tenure—would sign off on direct payments.
Does the availability of the direct payment alternative mean that the fight over agency shops is “much Abood about nothing”? We don’t think so: the outcome in Friedrichs really will determine whether public-sector unions in some states (e.g., Illinois) are reimbursed for the cost of representing nonmembers in collective bargaining. Moreover, the direct payment alternative and the agency shop differ meaningfully—in the way they are taxed and in the way they are perceived. We do think, though, that whichever way Friedrichs goes, states will still have the option of adopting arrangements that address the free-rider concern that motivated the agency shop to begin with. Not every state will adopt our direct payment alternative, but the chief obstacle will be political—not constitutional.