Hard cases make bad employment case law

Employment at will in most American states can easily be summarised as “you’re fired, I quit”. That law could not be simpler to understand, administer or add additional contractual provisions and protections.

An employee can be fired for a good reason, a bad or malicious reason or no reason at all. Employee can quit without notice as they dramatically do in many American movies and TV shows. The main exception to employment at will is from antidiscrimination laws.

Naturally, some extreme cases came forward to create the first public policy exceptions to this rule. In the USA, the first exception was for an employee was fired for refusing to perjure himself in a court case.

The British common law was similar. The first implied term of employment that built into the implied term of mutual trust and confidence was an implied term of employment that your employer will not run the corrupt and illegal business.

The BCCI bank was the bank of choice of drug traffickers and autocrats in the 1980s. It is private banking division ran a bespoke service for each one of its high-rolling clients. Bryan Cranston stared in a great film about this.

Naturally, after the police and customs raided the bank, the thousands of employees of that bank who did not work in the private banking division were also tainted in their future employment chances.

They sued the bankruptcy trustee managing the BCCI bank arguing that there is an implied term of every employment contract that the employer will not run a corrupt and illegal business. They won. Was this a hard case that made good law or bad?

If I was working for someone who asked me to perjure myself in a criminal case, that should be a strong incentive to quit. Likewise, sticking around in a bank that has a dubious reputation should not be rewarded by employment law. The House of Lords mentioned this in its judgement:

 It is against this background that the position of an innocent employee has to be considered. In my view, when an innocent employee of the bank learned the true nature of the bank’s business, from whatever source, he was entitled to say: “I wish to have nothing more to do with this organisation. I am not prepared to help this business, by working for it. I am leaving at once.” This is my intuitive response in the case of all innocent employees of the business, from the most senior to the most junior, from the most long serving to the most recently joined. No one could be expected to have to continue to work with and for such a company against his wish. 

The House of Lords did go on to reason that the employer was liable for damaging the future employment prospects of an employee by running a corrupt business because this breached a mutual obligation of trust.

I disagree. The least cost avoiders are unfortunately the employees in each of these cases. Allowing them to sue because the employer runs an illegal and corrupt business does not create much of an incentive to quit such a business when you start sniffing something bad.

Under the Coase theorem, the least-cost avoider in any situation is the party that can achieve a given reduction in damage or risk of damage at the lowest cost (in dollar terms). Guido Calabresi in his book The Costs of Accidents (1970) argues that it is still efficient to hold companies liable that produce greater wealth:

In the real world, where people cannot negotiate costlessly, there may be collective action problems of those who caused a nuisance, for instance by smoke emissions from a factory to many neighbouring farms, and so getting together to negotiate effectively can be difficult against a single polluter because of coordination problems. If it is efficient for the farmers to pay the factory to reduce its emissions, some of those farmers may hold off paying their fair share, hoping to get a free ride. The factory may be in a better position to know what measures to take to reduce harm, and can be the cheapest avoider, illustrating Coase’s argument.

Yes, some people will not know that there is a corrupt business out the back. Others will have suspicions and therefore should have reasons to move on. They should not be rewarded for sticking around when they can smell something amiss. Employees should pay attention.

This entry was posted in economics of crime, law and economics on by .

About Jim Rose

Utopia - you are standing in it promotes a classical liberal view of the world and champion the mass flourishing of humanity through capitalism and the rule of law. The origin of the blog is explained in the first blog post at https://utopiayouarestandinginit.wordpress.com/2014/03/12/why-call-my-blog-utopia-you-are-standing-in-it/

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