Contracts, forced exchanges and workers

It is quite wrong to force anyone to work. That's why working relationships are based on free agreement from both sides.

As each morning comes, the employee is free to decide not to work, the employer to decide not to receive him…Hardly any of the personal civil rights is higher than that of free will in forming and continuing the relation of master and servant.

State v Kreutzberg (1903)

​In 1903, in the golden age of freedom of contract, it seemed pretty obvious to courts that the employment contract was based on free will on both sides of the transaction. Nobody was a slave, so they could quit at any time without facing penalties. Similarly anyone who wanted to hire workers could change their mind at any time, without facing penalties. The contract to offer and pay for work was not fixed on either side. This was a vast improvement on slavery and servitude, when workers could not quit.

​Well, it’s not 1903 anymore and many people now regard the notion of free will in forming and continuing the relation of master and servant (or ‘employer and employee’ as we should say today) as quite embarrassing. Now we live in a second-best world where compromises are necessary: the law must introduce a bit of give and take, a bit of social engineering here and there, to avoid a situation where people are being fired when they still want to work.

So sometimes it is necessary to have a bit of forced hiring and some mandatory rules and regulations. A good example would be the rules that forbid exploitation of children. Banning torture and the cruel and unusual treatment of children is a good starting point, but it doesn’t clearly explain when we are still clearly within the realm of practices that should be banned; it also doesn’t tell us how much or how little we should do by way of compromise between free contracting and free suffering.

Perhaps it would be helpful to begin by identifying the problems that arise in work relationships. First it is clear that employer and employee need each other, so in that sense the relationship is mutual. This makes the idea of contract perfectly suited to work relationships. People who need each other and have something valuable to offer each other can just get together and agree on the terms. But at the same time, most of us need the boss more than the boss needs us, so in that sense the relationship has a built-in power imbalance. Most workers would immediately starve to death if they were summarily fired, whereas it’s fair to say that many bosses wouldn’t even notice, much less miss a single meal, if one of the workers summarily quit. As Adam Smith put it, ‘In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate’. So sometimes a bit of legal intervention is nice, especially if the law can help to save a vulnerable life or two:

The workers who suffered most from exhaustion by long hours in the early days of modern industry were the unorganized women and children; and though the miners and the seamen had their unions, these were far from being able to protect them from the hazards of life and limb to which the day’s work exposed them. “Is it not optional with the miners to go into the pit?” an English mine-owner asked, when a miners’ leader was describing the dangers of work underground. “Certainly,” the miners’ leader replied, “but it is also optional with them to starve if they do not.”

EH Phelps Brown, 45.
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Now, markets can fix this power imbalance if every worker finds the employer who needs them every bit as much as they need the job so that the commitment on both sides is matched, and if workers seek out the good employers and avoid the bad ones. But we know that markets are not perfectly competitive, and the costs of people finding perfect matches are prohibitive. Here’s where the law comes in. But exactly what role should law play? Glass half full: just enforce contracts? Or glass half empty: force people to make specific types of contracts with specific types of people on specified terms and conditions? Or something in between?

There are two main considerations to bear in mind when answering these questions. The first is that we cannot simply decide what to do based on our good intentions. Decisions based only on good intentions are risky, because the best intentions don’t always produce the best outcomes. The better approach is to figure out whether the law leaves everyone better off or worse off, an idea often referred to as maximizing social welfare. There’s no point making a few people better off and leaving the rest worse off. But neither is it a matter of simply doing whatever the majority prefers. The goal of achieving the greatest good for the greatest number must be subject to the greatest caution in imposing any restrictions on individual liberty and freedom of contract. That means such restrictions require to be justified on a principled basis and not simply by reference to the worthy goals those restrictions are intended to achieve.

If wages are ordinarily subject to agreement between​ employer and employee, then legal restrictions on wage specifications require to be justified on a principled basis. Such restrictions target both the lowest and the highest ends of the pay spectrum, on the assumption that if people are left to make their own agreements wages will end up being too low or too high. The lowest end is regulated by minimum wage legislation and the highest end by legislation restricting executive pay. Often these regulations are taken to be self-evidently a vast improvement on freedom of contract, and to require no further justification. We assume that these laws will reduce the wage gap and make people more equal and hence more happy. Minimum wage legislation will ensure that employers don't pay too little and executive pay regulation will ensure that executives don't pay themselves too much.

These goals may be worthy, but the worthiness of the intended goal does not by itself justify restricting freedom of contract. We don't evaluate law solely by reference to the intentions behind it, especially given the propensity for law to yield results far removed from the intended consequences. The question must still be addressed, whether such law promotes the greater public good without unduly encroaching upon individual liberty. Even supposing that reducing the wage gap would advance the public good, the public good cannot be delinked from the principle of individual liberty of each person.