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NLRB Reiterates that an Employer's Implementation of Proposal to Apply "Marketplace Pay" is Unlawful

October 11, 2003

It is well settled under the National Labor Relations Act (the "NLRA") that, after bargaining to a good faith impasse with the union that represents its employees, an employer has the right to unilaterally implement proposals that concern mandatory subjects of bargaining. Generally, as wages are a core mandatory subject, an employer which bargains over a proposal concerning wages may, at impasse, implement its final proposal. In a long series of decisions, however, the National Labor Relations Board ("NLRB") has ruled that an employer may not lawfully implement a proposal which reserves to the employer's discretion the right to award wage increases on the basis of individual merit or other criteria which have not been bargained with the union. In its most recent decision on the subject, upon remand from the United States Court of Appeals for the First Circuit, the NLRB set forth in detail the reasons for its earlier holding that an employer's implementation of a wage proposal under which it would pay affected employees according to its own "marketplace pay practices" violated the NLRA. Edward S. Quirk Co., d/b/a Quirk Tire, 340 N.L.R.B. No. 33 ( September 24, 2003 ).

The case law leading to the Quirk decision originated with Colorado - Ute Electric Assn., Inc., 295 N.L.R.B. 607 (1989), enf. denied, 939 F.2d. 1392 (10th Cir. 1991), where the NLRB created an exception to the "implementation upon impasse" rule. In that case, the NLRB ruled that, even after bargaining to impasse, an employer could not lawfully implement its merit pay proposal where: (1) the only criteria for increases would be the employees' "individual performance" and "contribution to their job"; (2) the proposal did not specify the timing of increases; and (3) the proposal excluded wage increase decisions from challenge under the grievance procedure. Finding that implementation of such a proposal violated the employer's duty to bargain under Section 8 (a)(5) of the NLRA, the NLRB reasoned that the employer could not lawfully reserve to itself the unfettered discretion to determine the amount and timing of future increases where the union had not agreed to waive its statutory rights to bargain over these subjects. On appeal, the U.S. Court of Appeals for the Tenth Circuit disagreed. The court found no violation because the employer's proposal to retain discretion over merit increases was a mandatory subject of bargaining, observing that a contrary holding would effectively grant the union a veto over wage terms.

Several years later, after another rebuke by the Court of Appeals for the District of Columbia Circuit, the NLRB, in McClatchy Newspapers Inc., 321 N.L.R.B. 1386 (1996), enf'd, 131 F.3d 1026 (D.C. Cir. 1997) ("McClatchy II"), again ruled that an employer's merit pay proposal, in which it retained discretion over wage increases without limitation as to timing, criteria or the union's agreement, could not be lawfully implemented even after bargaining to a good faith impasse. McClatchy II made clear that although an employer may bargain to impasse over a discretionary merit pay proposal, it may not lawfully implement such a proposal. The NLRB's reformulated rationale for this exception to the "implementation upon impasse" rule centered on its judgment that implementation of this kind of proposal, concerning the vital subject of wages, was inherently destructive of fundamental principles of collective bargaining and inimical to the policies of the NLRA. The NLRB in McClatchy II also instructed that if an employer wishes to implement a merit pay system that affords it discretion to determine the amount of merit increases, it must include in its proposal "definable objective procedures and criteria" governing such increases, and then negotiate over the criteria to impasse. On review, the D.C. Circuit enforced the NLRB's decision, emphasizing "that the [NLRB]'s decision does not prevent an employer from implementing a merit pay proposal post impasse … so long as the proposal defines 'merit with objective criteria'." 131 F.3d 1026 (D.C. Cir. 1997).

Since McClatchy II, the NLRB has been presented with several cases in which employers have implemented merit wage proposals affording them varying degrees of discretion. In no case, however, has the NLRB found that the terms of the proposal limited the employer's discretion to a sufficient degree to make the unilateral implementation of the proposal lawful under McClatchy II, although its decisions continue to receive a mixed reception upon review in the Circuit courts. See, e.g., Liquor Industry Bargaining Group, 333 N.L.R.B. No. 137 (2001), enf'd, 2002 WL 31236400 (D.C. Cir., October 4, 2002) (finding violation where employer's proposal afforded it complete discretion to set wages and exempted wage decisions from grievance and arbitration procedures); Anderson Enterprises, 329 N.L.R.B. No. 71 (1999), enf'd, 2001 WL 59043 (D.C. Cir., January 9, 2001) (finding violation where employer's proposal gave it right to set hourly and flat rates, determine each employee's job classification, decide whether to transfer employees between job classifications, advance employees on the basis of "ability and performance" and, which, under one plan, exempted wage decisions from grievance and arbitration procedures); Detroit Newspaper Agency, 326 N.L.R.B. 700 (1998), enf. denied, 216 F.3d 109 (D.C. Cir. 2000)(NLRB found violation where employer's proposal set forth the dates upon which increases would go into effect and the average amount of the increases, and permitted the union to grieve, but not arbitrate, the amount of the increases, but did not include criteria by which the amounts would be determined).

It was against this background that the NLRB issued its recent decision in Quirk. In its first decision in the case, in 2000, the NLRB ruled that the employer violated the NLRA by unilaterally implementing a discretionary wage plan which provided that employees would be paid "at a base rate of not less than $8.90 an hour, however, the Company may continue its current marketplace pay practices for the [contract] term." In its decision denying enforcement of the NLRB's order, the Court of Appeals remanded the case to the NLRB to provide "something more of a reasoned explanation of where it draws the line (with regard to the McClatchy exception) and why the line has been crossed in this instance." Edward S. Quirk Co. v. NLRB, 241 F.3d 41, 45 (1st Cir. 2001).

Following the remand, the NLRB in its second Quirk decision adhered to its earlier decision finding that implementation of the employer's wage proposal was unlawful, and declared that implementation of the proposal was illegal because it conferred on the employer the ability to make recurring unilateral decisions over employee wages, in particular by allowing the employer to "choose between marketplace pay and $8.90 per hour." The NLRB further explained that because the proposal contained the word "may" with respect to the determination of whether to pay each employee $8.90 an hour or marketplace pay, the company was reserving to itself the unfettered discretion to determine whether and when to increase wages and, in fact, whether to cut wages at any point to $8.90 (all of the employees affected were already making in excess of $8.90). The NLRB also reiterated its theme from McClatchy II that this kind of proposal would undermine the union's ability to bargain by creating uncertainty about prevailing terms and observed that, over time, the implementation of the proposal "could reasonably cause employees to conclude that the Union did not possess any real bargaining ability over the issue of wages."

The recent decision in Quirk demonstrates the NLRB's continued adherence to the McClatchy II exception to the rule that, after bargaining to a good faith impasse, an employer may unilaterally implement its proposal on a mandatory subject of bargaining. The decision also underscores the NLRB's continuing reluctance to find that an employer's merit pay proposal contains sufficient limits on the employer's discretion to pass muster under the McClatchy II standard. Accordingly, while achieving a provision for merit pay in a collective bargaining agreement is a legitimate goal, and one which an employer may bargain to the point of impasse, there remains a significant risk that the implementation of such a proposal over the union's objection will result in a finding that the employer violated its duty to bargain. Clearly, any employer seeking to incorporate merit pay or other discretionary elements into the wage provision of its collective bargaining agreement should proceed with caution.