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Unions and Bargaining Over Pay: Two-Tier Wage Systems, Explained

Nov. 16, 2021, 4:44 PM

Thousands of John Deere workers have been on strike for more than a month. Nearly 1,500 Kellogg’s workers likely will celebrate Thanksgiving on the picket line. More than 30,000 Kaiser Permanente workers narrowly avoided a strike this week through an 11th-hour deal with management.

The common thread? Tiered wage proposals that help companies cut costs but that unions say cheat new workers out of pay and retirement benefits.

At John Deere and Kaiser, organized labor prevailed in stripping tiered wage systems from the proposals during collective bargaining sessions—a big victory, but one that required each union to flex the nuclear threat of a strike.

1. What is a two-tier wage system?

As the name suggests, tiered wage systems create separate pay and benefit tracks depending on when an employee is hired. It’s used almost exclusively in union workplaces, where employers must negotiate over pay and benefits; in non-union shops, employers can make such changes unilaterally.

For instance, a two-tier collective bargaining agreement could give current employees a minimum of $25 an hour, a $2 annual raise for the next four years, and a guaranteed pension. But workers hired after a certain date in the future would only get $20 an hour, a $1 raise each year, and a less-lucrative 401(k) savings for retirement.

Employers favor tiered systems as a cost-cutting measure. Phasing out costly pensions and suppressing wages for new hires without taking away benefits from current workers can save millions every year, depending on the employer’s size.

Kaiser Permanente said last month its proposal would help contain health-care costs for consumers; union workers already earn 26% above average market wages, which contributed to ballooning prices, according to Arlene Peasnall, Kaiser’s senior vice president of human resources.

2. Why do unions dislike them?

Unions operate on a basic principle: Once you give something, you can’t take it away. And that’s exactly what two-tier wage systems ask them to do.

Tiered structures require unions to surrender pay and other benefits they spent decades fighting for. Kaiser’s plan would have slashed pay between 29% and 36% for workers hired in 2023 and beyond, its union said.

Tiered wage systems create a circumstance in which two people working side by side, doing the same job, could be paid very differently. Even when experience is factored in, wage caps often mean that the less senior of the two workers will never have a chance to make as much as his or her peer—creating a permanent underclass of workers and betraying the unions’ doctrine of solidarity.

3. When are two-tier systems used?

Two-tier systems grew in popularity during economic crises, notably the recession in the 1980s.

General Motors Co. and the United Auto Workers in 2007 agreed to a two-tier system to boost the automaker’s competitiveness with foreign companies—though that turned into a survival mission when the bottom fell out of the economy a year later. The tiered structure, which allowed newer employees to be paid at half the rate of more seasoned workers, enraged many UAW members and was scrapped from the contract after a six-week strike in 2019.

While it’s hard to say whether two-tier systems have become more popular during the pandemic, it’s clear that unions are less likely to tolerate the scheme when companies are doing well—and right now many are. Kaiser’s annual operating revenue reached $88.7 billion in 2020, compared to $47.9 billion in 2011. Deere & Co. already has reported record profits of $4.7 billion this year, and its CEO was awarded $15.6 million in 2020 compared to $6 million in 2019.

Unions at both companies were able strip out two-tier proposals through rounds of aggressive bargaining. Kellogg’s workers remain on strike.

To learn more:

—From Bloomberg Law

Kaiser Permanente Workers Rebel Against Two-Tier Wage System

‘Striketober’ Walkoffs and Worker Unrest: Labor Fights Explained

Kaiser Permanente Workers Deserve ‘Fair’ Deal: U.S. Senators

U.S. Labor Unions Are Having a Moment, With Covid-19 to Thank

—From Bloomberg News

Unions for 32,000 Kaiser Health Workers Plan West Coast Strike

Deere Union Workers Reject Labor Agreement, Extending Strike

To contact the reporter on this story: Ian Kullgren in Washington at ikullgren@bloombergindustry.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; John Lauinger at jlauinger@bloomberglaw.com

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