Volume 8, Number 1, Winter-Spring 1999
What is a dicey term like "labor" doing in a place called "risk?" Plenty. Its presence in a risk management forum can be traced to creditors' assessing loan applicants in terms of such success characteristics as production management ability and adoption of improved methods. Those who want to control their lending risks tend to appreciate borrowers who can effectively manage their production risks, among which are significant risks related to engaging and managing human resources.
Keeping creditors happy is not the only reason, of course, for wanting to manage risks well. Producers have their own keen in6terests in achieving good bottom-line results and a modicum of serenity in their personal lives.
Work performed by people is critical to all agricultural production, and about one-fourth of total operating expenses on California farms each year goes to pay for it. This kind of aggregate measure, though, and the use of cost-per-acre averages in farm budgeting, obscure the significance of countless decisions that farmers make in managing labor. Crop budget sheets, for all their benefits, can do a disservice in implying that labor contributions and the costs for them are kind of fixed by formula. Not so. Those numbers on the labor line of a crop budget sheet are not for sure. Labor expenses and the returns to them are quite variable. Two farms with the same crop mix and equal payrolls may have very different business results.
Some of the forces that affect labor costs and production outcomes are external to the farm, part of the business environment, and others are within the farm business organization. The risks that all represent can be managed, and speakers at the October seminar discussed potential effects and ways of dealing with both sorts. In the first session, the focus was mostly on the external factors - the legal and regulatory environment and the farm labor market. In the second session, we homed in on the effects of organizational design and personnel management practices within the farm.
The Labor-related Risks
What is this thing called "risk" that managers are constantly grappling with? It might be formally defined as the value of the difference between an optimal outcome and one that is actually realized. We can see risk more plainly as a chance that something will go wrong, that something "bad" will happen. With respect to labor, unfortunately, there is a rich assortment of possibilities. Consider five types of labor-related risks, or occurrences that may affect business results by raising costs or lowering revenues.
The classic labor-related risk, the first one most farmers think of and that's always lurking, is the chance that essential tasks will not get done. Fields might be left unplanted, plants not protected or cultivated at critical times, or ripe crops left in the field or orchard. Things like this could happen if, for example, there are fewer workers than jobs in the local labor market, specific jobs are not attractive to workers who have alternatives, ineligible employees are abruptly removed from the workplace or depart in fear, or workers take a collective job action. Not having people around to do the work certainly alleviates your costs, but it's murder on your revenues.
A second type is the chance that the work will be done, but poorly or not on time, thus raising unit labor costs or lowering product value. Physical results take such forms as bruised produce in the bin, wilting transplants, a mastitis epidemic in the dairy herd, and butchered trees and vines. The possible causes? Instructions may be unclear, workers lacking essential job skills, tools outdated or lousy, the pay system designed to reward the wrong kind of performance, or employees trying to get even for a real or perceived injustice.
Third is the risk of incurring high indirect labor expenses, often associated with turnover, absenteeism, or mandatory benefits. Instability of the workforce increases total costs of finding, hiring, orienting, and supervising personnel. In addition, frequent turnover and accidents raise experience ratings that affect workers' compensation and unemployment insurance premiums for years. Indirect costs more subtly connected to labor management may take the form of avoidable equipment damage, wasted feed or chemicals, and missing tools.
While risks in a fourth category - conflict with employees - may lead to or accompany any of the three above, they are worthy of a separate identification. Workers have many legal grounds on which to base charges of employer wrongdoing, and defending against them is expensive, win or lose. Furthermore, discord does not have to develop into a formal complaint or litigation, or to otherwise involve third parties, to be costly. Even quiet disgruntlement takes its toll in employee performance, overall workforce stability, and managerial time. What can give rise to dysfunctional conflict? Various factors, including inattention to employees' needs for basic information, blockages in communication channels, unrealistic performance expectations, abusive first-line supervision, and ignorance of legal mandates and prohibitions.
Finally, also often linked to other types, is the risk of the government taking your time, assessing fines, or imposing other penalties for a violation of laws and regulations. Some penalties are corollary to complaints filed by employees, and others are strictly between employers and agencies. You know this kind of risk has been realized when, for example, you receive a notice of missed or improper tax reporting, a letter strongly suggesting that you dismiss certain employees with bogus social security numbers, or repeated visits from an inspector.
Management decisions and practices can change both the odds of these outcomes occurring and the costs of bearing those that do. Panelists at the risk management seminar examined all these types and sources of risk, and they discussed ways to reduce risk ahead of time or recover from adverse outcomes.
The "Labor Shortage" Issue
There has been much public controversy of late about the size and extent of the first type of risk. "Labor shortage" is the term typically used to name that classic risk - not enough people available when needed to perform tasks throughout the production cycle, particularly for harvest, which in most specialty crops is the time of greatest need for human resources. The production "technology" of most crops requires that lots of work and dollars be expended before a rather brief payoff period that no one wants to miss and few can afford to.
This risk has been at the core of heated debate between proponents and opponents of new visa provisions for agricultural workers. Familiar arguments have been revisited over the past few years. Growers have reported greater difficulty in recruiting and retaining workers, and their concerns have found expression in a series of legislative proposals for temporarily increasing the farm labor supply. "Guestworker program" advocates have contended that (1) field jobs are admittedly difficult, sometimes dangerous, and often of short duration; (2) most people with options cannot or will not do them; and (3) it is bad public policy, as well as disconcerting to employers, to depend so much on unauthorized workers to perform these jobs.
In response, farm worker representatives and other opponents have all but proclaimed, "Balderdash." They have characterized the proposed measures as nothing better than a reincarnated Bracero program simply designed to keep wages down and workers powerless. Lots of people here are available for these jobs, they maintain, and more would be if market forces were allowed to work and induce employers to offer better job terms. Their concerns have been expressed in a vigorous public opinion and lobbying campaign that carried the day in last year's Congress.
Ironically, those on both sides of the argument have cited a report by the General Accounting Office released on December 31, 1997 (http://are.berkeley.edu/APMP/pubs/gao-h2a.pdf). Congress had asked the GAO to help sort out the claims and counterclaims, to bring light and data to these issues. The GAO study addressed: (a) the likelihood of a farm labor shortage, (b) the need for non-immigrant guestworkers in agriculture, and (c) the capacity of the current H-2A visa program to meet the need for such guests and at the same time protect workers, both U.S. residents and foreign nationals who enter with work visas.
This existing H-2A program is a vehicle by which agricultural employers facing a certified labor shortage may recruit workers abroad to work on a temporary basis. It was codified in the Immigration Reform and Control Act of 1986 as one of the mitigations to potential effects of the new ban on hiring unauthorized workers. But it has been little used and is generally regarded as unsuited to the practical needs of specialty crop agriculture.
The initial speaker, Al French, has had a good seat for the recent debates and legislative activity. As the USDA Labor Affairs Coordinator, he has heard all the analyses, contributed some of his own, and developed a rich stock of knowledge about not only the legislative machinations but also conditions in farm labor markets throughout the country. Mr. French reviewed the reasoning of the proponents and opponents of the work visa legislation in this Congress, the attempts last year to craft provisions meeting the interests of employer and worker groups, his own outlook of the current labor market, and his assessment of the H-2A program. He outlines the requirements and procedures for obtaining guestworkers under the H-2A program in his article on page 3.
Recruiting and Workers' Risks
Governmental language and H-2A requirements notwithstanding, an economist may insist that there is no such thing as a labor shortage, only a wrong price. Supply of agricultural labor is not a number but rather a function. The quantity of labor available is elastic with respect to the price (wage and benefits, to a large extent) offered for it. The higher the price, the more units of labor become available, even if by way of moving over from other industries.
So where has the price been? Pretty low, on the whole, according to findings of the USDA quarterly survey of farm employers. The average farm wage rate in California has increased nominally since 1980, but not in real terms (after considering inflation; see graph #1), despite a mild upward trend after 1995. Real wages for field and livestock jobs have declined a bit more than for manufacturing jobs from their 1980 levels (down 14% vs. 11% in manufacturing) but by less than manufacturing from their respective values in subsequent years. Two-point comparisons like this are quite sensitive to the choice of base year. Relative to their 1983 levels, real wage values in 1998 were 4% lower in agriculture and 13% in manufacturing; relative to 1990, the 1998 wage was the same in agriculture but down 5% in manufacturing. Compared to 1995, the 1998 wage values were 8% higher in agriculture and 1% in manufacturing. Despite a trend upward since 1993, the ratio of farm to manufacturing wages in California has remained little more than 1 to 2 for a very long time (see graph #2).
Regardless of the wage averages and aggregate numbers of workers in a region, the key labor market condition to me if I am a business operator is the availability of people to work at my farm. If there are a lot of people with few options in the local market, an operator does not have to try hard to get jobs filled. But if not, or if the operator cares about how long employees stay and how well they perform, some planning and effort are needed. A good place to start is to understand who makes up the workforce, their needs, interests, values and communication patterns.
Ed Kissam presented a description of the current agricultural workforce, identified differences in its composition from previous years, and shared his many insights about the values and motivation of people within the workforce. He reminded us that lenders and business operators are not the only ones in agriculture who have risks to manage. Workers too are interested in avoiding bad or costly things - such as physical injury, indignity, poverty, and uncertainty itself. Dr. Kissam discussed risks and hardships in agricultural employment from workers' perspectives, and he offered suggestions for employers interested in helping workers better control their risks. Among his points is that the existing farm workforce has underused capacity. More effective means to match workers and seasonal jobs could improve stability of both earnings opportunity for workers and labor supply for growers.
Knowing and Navigating the Rules
Personnel management is not only about dealing with workers anymore, if it ever was. Mainly to protect - or to reduce risks for - workers and society as a whole, the body politic has established a bewildering array of rules affecting terms of employment and interaction processes between employers and employees. Laws and regulations that set boundaries for farmers when they are making labor management decisions are indeed a major source of risk. They are extremely difficult to keep track of, no less to comply with, and have become a virtual obsession for many farmers.
As the California State Labor Commissioner until recently, José Millan headed the Division of Labor Standards Enforcement (in the Department of Industrial Relations) and was responsible for enforcing many of the rules. He did so with at least as much emphasis on education and public information as on the citations and subpoenas. Mr. Millan was instrumental in developing the Targeted Industries Partnership Program, which joins DIR with other state and federal agencies in education and enforcement efforts that carry out this commitment. His comments at the seminar, summarized in this issue on pages 12-13, illuminated how the TIPP operates and provided guidance on how to reduce exposure to penalties emanating from a compliance inspection. (Steve Sutter also offers several specific suggestions in his TIPP preparation guide, published in the LMD Winter-Spring 1998 issue [Vol. 7, No. 1] and available at http://are.berkeley.edu/APMP/pubs/lmd/lmd.html in the APMP website.
Employers surely can take steps to reduce the risk of incurring fines and other penalties assessed by the government. Fundamental to managing this kind of risk is being aware of the rules. Their sheer volume and complexity, however, have added to many growers' urge to throw up their hands and contract with external specialists to obtain and manage labor for farm tasks. About three in five California growers turn to farm labor contractors, custom harvesters, or pesticide applicators to supplement or substitute for workers they hire directly as employees. Practical reasons for engaging labor through contractors stem from farm production technology, with its seasonal variations in the types and amount of work for which people are needed, and from cultural and language differences that compound challenges of growers directly recruiting, selecting, instructing, and supervising workers. But the desire for relief from legal obligations, costs, and exposures to liability has also contributed to the use of contractors.
There are legitimate and increasing doubts about whether farmers actually reduce their legal risks as employers by purchasing labor services from contractors. While noting that growers who do business with poorly equipped or unscrupulous contractors leave themselves open to joint liability for legal violations, Earl Hall illustrated how FLCs who operate properly serve to lessen risks for both growers and workers. He explained the importance of growers' carefully selecting their contractors, clarifying terms of agreement with them, and sticking by those terms, particularly the payment schedule. Mr. Hall's comments and those of Jim Bogart, the next speaker, are summarized by Steve Sutter on pages 14-15.
Concurring that responsible contractors help farm operators control their risks, Mr. Bogart strongly recommended that growers and FLCs put their agreements in writing, both to help avoid misunderstandings and to manifest the independence of the two entities. In addition, he examined intricacies of determining whether employment by the FLC employees is to be considered joint with the grower.
In 1997 the U.S. Department of Labor expanded the range of circumstances under which the FLC's client (i.e., the grower) is deemed a joint employer under the Migrant and Seasonal Agricultural Worker Protection Act. "Economic realities" of the relationship among grower, contractor, and worker now weigh more heavily. Much uncertainty about this new standard remains, and case law over time will better define both its meaning within MSAWPA and its potential influence on the determination of joint employment under other laws.
Not at all uncertain, observed Mr. Bogart, is an upswing in litigation brought by workers against agricultural employers. Most evident to him in the Central Coast area have been complaints of age discrimination, sexual harassment, unsafe work conditions, and failure to pay overtime premiums.
Managing Beyond Compliance
Finally, Gregory Billikopf reminded us that while dealing with workers is not the whole of labor management, neither is it of minor significance. So after you have complied with everything and you have taken care of all of those many legal exposures, he asked rhetorically, are there any risks left? His affirmative answer came with a rich set of illustrations about type #2 risk outcomes - a tank full of bacteria-infected milk, a new vineyard of rootstock planted upside-down, prematurely baled and rotted hay that would have been worth $70,000 if left to dry longer, and a family pet dog getting both its ears notched the same as the hogs.
Harmful outcomes like these may be toughest to take because the risk of them occurring is most subject to an employer's control. The management decisions that growers make influence the abilities, motivation, and therefore performance of workers. And their effects, of course, extend to results that have been associated with the other types of risk in this discussion. You cannot do much about the aggregate number of people looking for agricultural jobs at a given time in California, but you definitely can do a lot to attract, retain, and elicit good work from those around your operation.
What labor management choices do farmers face? How to formally engage labor - through direct employment, farm labor contractors and other service providers, or independent contractor agreements - is a basic one. Others are which tasks and duties to combine into jobs, how to group jobs within crews or other organizational units, what rates of pay and fringe benefits to offer, where to recruit for workers, and how to select employees for specific positions and assignments. Once employees are hired, managers and supervisors decide how to orient them to work conditions and expectations, help them to develop skills, tap their effort in farm operations, keep them informed, act on their ideas and complaints, and correct performance problems. Such decisions can be made rather casually or through variously structured methods.
The legal environment is obviously complex and volatile, and prudent agricultural employers try to keep abreast of its requirements. Violations of law can result in embarrassment, wasted time, and costly penalties. In determined efforts to stay within bounds, unfortunately, many growers have adopted a compliance mentality with regard to personnel management. Their policies and practices are influenced disproportionately by legal constraints to the relative exclusion of other important factors. Some perfectly legal managerial moves, however, can yield very poor outcomes. Farmers, contractors, and other managers of agricultural personnel have to think well beyond compliance if they plan to reduce their labor risks, control their costs, and build high performance into their businesses.