Is Abood Irrelevant?

Abstract

Roughly half of U.S. states allow labor unions and public-sector employers to establish “agency shop” arrangements that cover state and local government workplaces. These arrangements require employees to pay agency fees to cover their local union’s collective-bargaining costs, regardless of whether the employee joins the union. Agency shop supporters justify these arrangements as a means of preventing non-union members from free-riding off the union’s bargaining efforts, while opponents contend that agency shop arrangements violate the First Amendment rights of non-union members forced to pay the agency fee. Although the Supreme Court permitted agency fees over First Amendment objections in Abood v. Detroit Board of Education (1977), the Court will reconsider that ruling in Friedrichs v. California Teachers Association in early 2016. Many observers predict the Court may use Friedrichs as an opportunity to overrule Abood, with the consequence that public-sector unions will lose the ability to deter free-riding by nonmembers.

We take no position on whether Abood will, or ought to, survive. Instead, we present a novel alternative mechanism to address the free-rider problem in public-sector workplaces — a mechanism that could be utilized even if Abood is overturned. We suggest that if a public-sector employer wants to make sure that a labor union is compensated for the cost of representing nonmembers, the employer can reimburse the union for those expenses directly. To offset the cost of this direct payment, the employer can reduce each employee’s salary by the employee’s pro rata share of the union’s bargaining expenses, while also freeing employees from the obligation to pay agency fees. This “direct payment alternative” would seem to accomplish the same objective as existing agency shop arrangements: it would prevent non-union members from reaping the benefits of union representation without sharing the costs. And while the wages of public-sector employees would be reduced by their pro rata share of their union’s bargaining costs, existing agency shop arrangements already reduce wages by that amount, because employees must pay their pro rata share in the form of union dues or agency fees.

In fact, our direct payment alternative might leave public-sector employers and employees better off than existing agency shop arrangements. First, the direct payment alternative eases the First Amendment concerns raised in Friedrichs: a direct payment to the union would likely qualify as “government speech,” and would thus be subject to less stringent scrutiny under present First Amendment doctrine. Second, the direct payment alternative would bring with it favorable federal tax consequences for state and local government employees. An employee’s pro rata share of union bargaining expenses would not be included in gross pay for purposes of Social Security and Medicare taxes, and would not be included in adjusted gross income for purposes of personal federal income taxes. Most public-sector employees would fare better on an after-tax basis if their employers adopted the direct payment alternative instead of the agency shop arrangement.

In this short essay, we compare and contrast the basic features of the agency shop and the direct payment alternative, considering the constitutional, economic, and political factors that might lead state and local governments and public-sector unions to choose one approach over the other. We present several hypotheses drawn from behavioral economics and political psychology — and, in particular, from the emerging literature on the “salience” of taxes and fees — that might explain why employers and unions have thus far opted for agency shops. We close by considering the practical consequences of a possible Supreme Court decision overruling Abood. We conclude that while Abood is not entirely irrelevant, the availability of the direct payment alternative suggests that the impact of overruling Abood may be muted.

Keywords: labor unions, agency shops, First Amendment, government speech, tax salience

JEL Classification: K31, K34, H71, H72, J01, J08, J21, J31, J32, J33, J38, J41, J50, J51, J53