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Business - Defense of Contracts at Will.docx

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Philosophy 2074F/G
Michael Herbert

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DEFENSE OF THE CONTRACT AT WILL – EPSTEIN  The persistent tension between private ordering and government regulation exists in virtuall every area known to the law and in none has that tension been more pronounced than in the law of employer and employee relations  I examine the contract in light of three dominant standards that have emerged as the test of the soundness of any legal doctrine: intrinsic fairness, effects upon utility or wealth and distributional consequences  Freedom of contract is an aspect of individual liberty  People who are competent enough to marry, vote, and pray are not unable to protect themselves in their day to day business transactions  Courts and legislatures have intervened so often in private contractual relations that it may seem almost quixotic to insist that they bear a heavy burden of justification every time they wish to substitute their own judgment of that of the immediate parties to the transactions  The basic principle of autonomy, moreover, is not limited to some areas of individual conduct and wholly inapplicable to others  The principle of freedom of contract also rules out the use of force or fraud in obtaining advantages during contractual negotiations and it limits taking advantage of the young, the feeble minded and the insane  Fraud is not a frequent occurrence in employment contracts, especially where workers and employers engage in repeat transactions  Necessary to display the structural strengths of the contract at will that explain why rational people would enter into such a contract if not all the time then at least most of it  The task is to explain how and why the at will contracting arrangement in sharp contrast to slavery typically works to the mutual advantage of the parties  The inquiry into mutual benefit in turn requires an examination of the full range of costs and benefits that arise from collaborative ventures  The rights under the contract at will are fully bilateral so that the employee can use the contract as a means to control the firm, just as the firm uses it to control the worker  The firm must contend with the recurrent problem of employee theft and with the related problems of unauthorized use of firm equipment and employee kickback arrangements  The problem of management then is to identify the forms of social control that are best able to minimize these agency costs  Internal auditors may help control some forms of abuse and simple observation by coworkers may well monitor employee activities  Promotions, bonuses and wages are also critical in shaping the level of employee performance  Within the employment context firing does not require a disruption of firm operations much less an expensive division of its assets  The contract at will also contains powerful limitations on employers abuses of power  There is no fixed period of employment. The employer is free to demand whatever he wants of the employee, who in turn is free to withdraw for good reason, bad reason or no reason at all  Matters are very different where the employer makes increased demands under a contract at will  That threat turns out to be the most effective when the employer’s opportunistic behavior is the greatest because the situation is one in which the worker has least to lose  The size of these losses tends to differ systematically between employers and employees – to the advantage of the employee  The large employer has more to gain if he dismisses undesirable employees for this ordinarily acts as an implicit increase in wages to the other employees who are no longer burdened with uncooperative or obtuse coworkers  The law may tolerate arbitrary behavior but private pressures effectively limit its scope  Risk diversification and imperfect information  The contract at will is designed in part to offset the concentration of individual investment in a single job by allowing diversification among employers over time  The contract at will is also a sensible private adaptation to the problem of imperfect information over time  The at will contract is an essential part of that planning because it allows both sides to take a wait and see attitude to their relationship so their new and more accurate choices can be made on the strength of improved information  Enough has been said to show that there is no principled reason of fairness or utility to disturb the common law’s longstanding presumption in favor of the contract at all  At every wage level, there is presumably some differential in worker’s output  The distributional issues, moreover, become further clouded once it is recognized that any individual employee will have interests on both sides of the employment relation  The possible gains from redistribution even on the most favorable of assumptions about the diminishing marginal utility of money, are simply not pr
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