Thursday, January 29, 2009

Sounds Like Such a Good Idea

Today, President Obama signed into law the "Lilly Ledbetter" Fair Play Act. What the Act does is eliminate the existing statute of limitations on an employee's right to sue their employer for violations of the equal pay laws. Lilly Ledbetter worked in a tire factory for 19 years and, after retiring, sued her employer for 19 years for "pay discrimination." The Supreme Court held that Ms. Ledbetter had waited past the time allowed under the law. The legislation signed by the President today eliminates the time limit. Now, you can sue whenever you want. Even if you are dead, your heirs can sue.

What will be the effect of this law? It applies, by the way, mainly to blacks and hispanics, females and anyone over the age of 50, since these group are the main groups "protected" by existing legislation. The first impact is that anyone thinking about hiring anyone in the "protected" categories will have second thoughts. Why not hire someone not in the "protected" categories? Then there will be no lawsuits. Second, the Act itself is an additional cost for all employers no matter who they hire. It therefore makes employees less attractive. If the employer was thinking about outsourcing to India, then this will made that decision much easier, since employees in India are not covered by this legislation.

For companies that already have been public spirited enough to hire folks in the "protected" categories, they will be subject to a new source of lawsuits. While they may have treated an employee well, the employee's heirs may not agree and can sue even if the deceased employee would never have thought about suing! So, folks trying to do the right thing in the past will learn not to hire the "protected" category in the future.

The moral: if you provide a benefit to an employee, that becomes a cost to the employer and makes the employer less likely to hire that particular employee...simple economics. If you want to hurt a particular demographic's life chances, then "protect" them with this kind of legislation.

Another recent example of the law of unintended consequences is the bailout of AIG and GE. Both firms have received FDIC guarantees for their debt offerings. If, unlike AIG and GE, you were an insurance company that did not get into trouble with exotic derivatives, kept a clean balance sheet, and did not require a government bailout....too bad. Your debt is not selling. Buyers would rather buy the government guaranteed debt of AIG and GE. After all, if you did the right thing, you didn't need the government guarantee. Now, you can't sell debt. All of these guarantees direct capital to the worst examples of excess and mismanagement and away from sound management and sound finances. What a policy!