Litigation costs are only the most obvious costs. The consequences of abandoning employment-at-will also have significant impact upon the management of a business and the opportunities of employees. Everything from the employer's ability to manage the workplace, to the quality of the workforce, to the establishment of work incentives and rewards, to employee market mobility are affected by the straightjacket imposed by "just cause" protection. It is at the level of management and opportunity that some of the most significant and substantial costs are incurred.
To begin with, an unavoidable fact constraining all employment decisions when "good cause" or "public policy" protections exist is that employers and employees cannot at any one time know exactly which termination decisions are "legal" and which are not, since such determinations are always reached after the fact. Thus, employers desiring to avoid litigation inevitably exhibit more caution than the law in theory really requires. If there is uncertainty about the propriety of a termination, the risk-averse employer is likely to not terminate. With this comes loss to the operations of the employer, and loss to other employees. Managerial discretion, business efficiency, and employee opportunity are all negatively affected.
A significant microeconomic analysis of the impact of shifting away from employment-at-will was made by Professor Jeffrey Harrison. [59] Harrison found that the derogation of employment-at-will has effects on both the supply and demand sides of the labor market. As the old doctrine recedes, the cost of labor to the employer rises, causing the demand for labor to contract. In addition to an overall loss in jobs, the result is lower wages and less labor quality.
This becomes particularly problematic for the very workers whom the advocates of "just cause" employment are most interested in helping, namely workers caught in a labor market with inelastic supply and elastic demand. According to Professor Narrison, the increase in job security brought about by "just cause" protection "is likely to be paid for disproportionately by workers with low skills and few alternative employment opportunities. . . (T)he less affluent may pay what amounts to a regressive tax in order to finance the promotion of the public interest." [50]
Professor Narrison's analysis partially rebuts one of the myths surrounding the adoption of "just cause" protection. Many "just cause" advocateswill advance the argument that the costs of being forced to employ certain employees who don't work at maximum effectiveness is offset by the superior performance given by all of the remaining employees who bask in the knowledge of job security. Yet the experience of unions and civil service employees indicates quite the contrary. With job security comes the knowledge that maximum output on the job isn't necessary – that the job is guaranteed except in cases of complete ineptitude or wrongful behavior. Instead of an incentive to work with more dedication, job security works as a disincentive. Even those employees who might have pursued opportunity in an employment-at-will setting will experience disincentive, since the laggards will tend to receive the same rewards as the more energetic. Thus, there are no profit benefits from granting job security, but instead still more economic loss to the employer.
From the standpoint of the employee, basic mobility and opportunity are lost with the adoption of "just cause" protection. Going beyond the obvious fact that a position retained by an otherwise terminated employee is not available to a new employee, it should be clear that the overall mobility of the employee both with his/her immediate employer and with others is broadly constrained. This occurs because, as Professor Richard Epstein of the University of Chicago points out, "a rule that starts with modest ambitions will in the end regulate each and every aspect of the employment relationship." [61] Good performance can no longer be as readily rewarded, since "just cause" has made the entire work environment more static, with emphasis on equal treatment of employees, regardless of merit. Employees must be treated bureaucratically, without unique rewards or detriments to particular employees, in order to avoid the possibility of a lawsuit. Consequently, the pursuit of better and high paying jobs becomes more difficult, since the freedom of the employer to establish such positions has been hampered. Employees have less opportunity to excel, to the detriment of their occupational ambition and their income.
The static risk-averse employment atmosphere created by greater job security also harms the less ambitious or less attractive employee. As Professor Epstein points out:
Where an employer might have been more willing to take risky employees under an at-will rule, he will now be less willing to do so under the for-cause rule because any subsequent demotion or dismissal will be an open invitation to a lawsuit by an aggrieved employee... (I)t is hard to see how employees as a class benefit from a rule that can only hamper general mobility in labor markets.
As for the ability of the employer to run his/her business, the demise of employment-at-will is potentially devastating, depending on how far courts are willing to go toward making all employment decisions themselves. No business can operate efficiently and effectively without good management. One of the most important aspects of good management is the selection, administration, and replacement of personnel. If this fundamental right of employers is severely constrained, effective and efficient management is simply not possible. Not only will the employer be forced to live with less effective employees than the free market could provide, but the employer will even be "inhibited from critically evaluating (his/her) employees because of the constant threat of litigation." [62]
Constraints on the employer's ability to chose with whom to work becomes particularly troublesome at the managerial level. Not only is the responsibility of managerial employees for the welfare of the organization extremely high, but this level of employment is characterized by the need for very close interpersonal interaction, with an emphasis on trust and good communication. Inability to actively choose who will be a manager can be more than just disruptive – it can destroy the functional effectiveness of the employer. Even that ardent advocate of a judicial tort remedy for "abusive discharges", Professor Blades, warned:
The employer's evaluation of the higher ranking employee is usually a highly personalized, intuitive judgment, and, as such, is more difficult to translate into concrete reasons which someone else – a juryman – can readily understand and appreciate... Compromise of the employer's power to make such judgments about professional, managerial or other high-ranking employee ... Is especially undesirable. [63]
The impact of eliminating employment-at-will is thus not just a question of up-front litigation cost. The intangible costs of managerial timidity, employee immobility, lost employee incentive and opportunity, lower quality labor, and lower workplace morale are equally great. Freedom is replaced with uncertainty and the tyranny of the courtroom. Everything becomes risk, with the intervening hand of the law hovering over every decision. Employment relationships become imposed, instead of freely chosen. This is not good for the market, and it is not good for either employers or employees.
