Employees and the Boundaries of the Corporation

Abstract

Employees have no formal role in U.S. corporate law. According to most theories of the firm, however, employees play a critical role in differentiating firms from markets. This essay examines the disparity in treatment and seeks to understand the ramifications of the separation of employees from the corporation. After discussing the absence of employees from the corporate structure, the essay looks at the role of the employees in theories of the firm. In contrast to corporate law, these theories generally include employees within the core of the firm, and they often explain the nature and purpose of the firm in terms of the employer-employee relationship. Other areas of the law, such as intellectual property, torts, and tax, have followed these theories in demarcating the firm to include employees (and exclude most others). As a result of this divergent treatment, employees are rendered far more vulnerable within the corporation than their role would otherwise suggest. This essay argues that we need to recenter our theories of the corporation and corporate law around the firm - and, by extension, around the employer-employee relationship. Such a shift may eventually render employees better able to manage their economic vulnerability and reduce the need for employee-specific protections.

Keywords: Corporate Governance, Theory of the Firm, Employees, Employee Ownership

JEL Classification: J54, K22, L22