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Human Resources Management in the 21st Century

Human resource management consists of the attraction, selection, retention,

utilization, motivation, rewarding, and disciplining of employees in organizationsin
short, the management of people at work. During the last century or so, profound
shifts have occurred in the industrial mix of the economy, the nature and extent of
competition, and the types of work that employees perform. In particular, economic
activity has shifted from agriculture to manufacturing and from manufacturing to
services, with more and more employees performing relatively higher level analytical,
professional, and technical work, and fewer employees performing relatively lowlevel, low-skill, and manual work. In the wake of these shifts, it has become common
for businesses to claim that they (increasingly) compete based on intellectual or
human capital rather than physical capital or hard assets (Pfeffer, 1994).
The phrase human resource management, which supplanted the earlier personnel
management, conveys a sense of these shifts in that employeespeopleare viewed
as resources whose active management can positively contribute to organizational
success. In this sense, human resources are akin to customers, financial resources,
operating systems, and technology, each of which constitutes a main input into
organizations, which then mix and transform these inputs for the purpose of
producing major outputsgenerically, goods and services and combinations thereof.
The quantity and quality of such goods and services are constrained by (operate
within the context of) an organizations strategic objectives. In companies, these
objectives typically include rate of return on invested capital, revenue growth, market
share and, if publicly traded, share price. As with other inputs or assets, therefore,
human resources must be managed strategically for the longer term and not just
operationally for the short term or on a day-to-day basis.
This view of human resource management clearly indicates that those who lead and
manage business (and nonbusiness) enterprises as well as component units and
departments must be skilled in the management of people. At the same time and as
organizations grow larger, they usually establish a formal human resources function
(that is, a department) staffed by executives and professionals who specialize and
assist the organization in managing its employees. An HR department typically
develops, specifies, and monitors operating policies and practices regarding hiring,
job placement, pay and fringe benefits, performance appraisal, promotion, training
and development, work-life balance, and discipline and due process. However,
because of the large amount of human resource/employment legislation, an HR
department typically also specifies and monitors operating policies and practices
regarding payroll deductions, workplace safety, equal employment opportunity,
employee leave plans, employee savings and benefit plans, and employee health care
and wellness plans (Jackson & Schuler, 2003).
Contemporary human resource management occurs in a world that is much different
from that which existed only a relatively short time ago. A leading development in
this regard is the change in employment contracting, specifically, from permanent or
continuous employment to employability. During the 40-year period dating from the
end of World War II to about the mid-1980s, the majority of employees worked

continuously for the companies that employed them, were covered by pension plans,
and received a stream of pension benefits once they retired from employment with
those companies. Under this arrangement, employees were paid less than the value of
their productivity early on and more than the value of their productivity later on, with
employers gaining an economic rent during the former period and employees gaining
an economic rent during the latter period. At virtually any point during this period of
continuous or permanent employment, therefore, one party had an obligation to the
other party. These obligations were generally not put in writing, however, which is
why this arrangement is referred to as implicit employment contracting (Lewin &
Mitchell, 1995, pp. 194196). These contracts, it should be noted, applied largely to
male employees who in a more traditional era were regarded as the breadwinners
the sole breadwinnersfor their families.
With the onset in about 1980 and the subsequent rapid spread of global economic
competition, deregulation, and technological change, the employment landscape
shifted markedly. Whereas earlier on in an era of mutual and reciprocal obligations
employers responded to economic recessions by laying off employees and then
rehiring them when economic conditions improved, during the 1980s employers
began systematically to reduce their workforces in order to achieve long-term,
permanent labor cost reductions. So pervasive was this trend that even companies
with the strongest reputations for continuous employment such as IBM, Kodak, 3M,
Polaroid, and Xerox followed suit. Such actions sent a clear message to both current
employees and new workforce entrants that continuous (and surely permanent)
employment with the same company was increasingly unlikely (Osterman, 1988).
During the 1990s, especially the go-go second half of that decade, which featured
major economic expansion fueled by high-technology companies and the
commercialization of the Internet, labor markets were very tight, and therefore
competition for laborhuman resourceswas especially keen. Consequently,
employee quit rates rose markedly and frequent job-changing (even job-hopping)
became the order of the day. This development reinforced the message of the 1980s,
namely, that continuous or permanent employment was the wave of the past rather
than the present and, even more likely, the future. From an analytical perspective,
employability became the order of the day, employees were paid the value of their
productivity at any point in time, and implicit long-term employment contracting gave
way to shorter term, often explicit, commodity type labor contracting, including
most notably through outsourcing. These trends continued, even sharpened, into the
first decade of the 21st century (Effron, Gandossy, & Goldsmith, 2003).
Another key trend of direct relevance to human resource management that occurred
during the past quarter-century indeed, during the past half-centuryis the decline
of private-sector unionization and collective bargaining, not only in the United States
but also in most other nations.
Whereas about one third of the U.S. nonagricultural private-sector labor force once
belonged to unions and worked under terms and conditions of employment that were
explicitly spelled out in collective bargaining agreements that had been negotiated by
company executives and union officials, today only 7.4% of private-sector employees
belong to unions and less than 10% are covered by collective bargaining agreements
(Greenhouse, 2007). The same fundamental forces, namely, global economic
competition, deregulation, and technological change, that led to greatly reduced use of

long-term implicit employment contracting also led to the decline of unionism and
collective bargaining. Each of these forces served to increase both product market and
labor market competition, which made it markedly more difficult for unions to
negotiate economic rents for their members. Whereas unions in general and certain
unions in particular were once able to negotiate wage and benefit rates well above
those prevailing in labor markets more broadly, they became increasingly unable to do
so when bargaining with companies in highly competitive industries rather than
companies in industries characterized by oligopoly or monopoly. This, in turn, meant
that union members and potential union members were unlikely to obtain a wage
premium that at least offset the cost of union dues. As a result, fewer and fewer
workers chose to belong to unions and more and more companies sought to avoid
unions by moving operations elsewhere, including offshore, and by substituting
capital and technology for (relatively more expensive) labor. Correspondingly, the
incidence of company labor relations departments specializing in the negotiation and
administration of collective agreements declined, and the incidence of company
human resource departments specializing in the management and administration of
individually oriented employment relationships increased (Budd, 2005).
Another key development regarding human resource management is the body of
research that seeks to measure the effects of human resource management practices on
organizational performance. Ironically, this work can be analytically linked to
research that assesses the impacts of unions on wages, fringe benefits, and ultimately
company financial performance. In particular, union impact research is grounded in
microeconomic analysis in which collectively bargained pay and benefit rates are
compared with prevailing market-based pay and benefit rates to determine the size of
the resultant premiums. Within this analytical framework, labor cost increases
resulting from collective bargaining have to be offset by corresponding productivity
gains in order for unit labor costs to remain unchanged and for unionized firms to
compete with nonunion firms in the same industry. If such offsetting productivity
gains are not forthcoming, the unionized firm has clear incentives to reduce the use of
unionized labor and substitute other factors of production for unionized labor. The
underlying analysis in this regard is identical to the analysis of, for example, federally
legislated increases in the minimum wage, municipally legislated increases in the
living wage, and the like (Rees, 1977).
But whereas there is a well-developed and clearly defined analytical framework for
assessing the impacts of unions and collective bargaining on company financial
performance, there was until just recently no comparable framework for assessing the
impacts of human resource management practices on company financial performance.
This began to change in 1990, however, when Mitchell, Lewin and Lawler published
an article that estimated the effects of employee participation in decision making,
employee participation in variable pay plans, and certain other human resource
management practices on company financial performance. Using a sample of 495
business units of publicly traded U.S.-based corporations, these authors found that the
extent of employee participation in decision making, including through the use of
workplace teams and quality circles, and the extent of employee participation
in/coverage by profit sharing, bonus, and stock ownership plans were significantly
positively associated with changes in company return on assets, return on investment,
and revenue per employee. In short, this research appeared to confirm that employee

financial and nonfinancial participation in the enterprise paid off in terms of

company financial performance.
During the ensuing decade and a half, an impressive array of articles and books
appeared that substantially expanded the analysis and evidence about the effects of
human resource management practices on organizational performance (Wall & Wood,
2005). A leading characteristic of this work is its conceptualization of human resource
management practices as bundles or packages, which were then shown empirically to
have larger and more statistically significant positive effects on company financial
performance than the effects of any single human resource management practice.
From this research there emerged a set of high-involvement human resource
management practices consisting of (a) employment security, (b) selective hiring, (c)
workplace teams and organizational decentralization, (d) high pay contingent on
organizational performance, (e) employee training and development, (f) low-status
differentials, and (g) information sharing with employees. These high-involvement
human resource management practices are claimed to substantially and significantly
enhance organizational performance when adopted and implemented together and
sustained over a relatively long period (Pfeffer & Veiga, 1999). It is this research in
particular that has been invoked to support the claim that expenditures on employees
can best be regarded as investments in human resources (or human assets or
intellectual capital) that yield positive economic returns.
But if this is in fact so, it is not universally so; another, even more recent body of
research indicates that there are also positive outcomes for organizations that emanate
from what has been termed low-involvement human resource management
practices. This research focuses on company uses of outsourcing, part-time
employment, temporary employment, fixed (and typically short-term) employment
contracting, and vendoringthe movement of employees of a company to one or
another of its suppliers. Several studies have shown that employees in these types of
work are significantly less likely to be managed by highinvolvement human resource
practices than employees who work full time, work in teams, have well-defined career
paths, and possess promotion as well as training and development opportunities (e.g.,
Lewin, 2003). Identical to research on high-involvement human resource management
practices, the research on low-involvement human resource management practices
attempts to measure the effects of these practices on company financial performance
(Lewin, 2001b). The findings from this research are significant in a statistical sense
and important in terms of practice. Specifically, the empirical evidence shows that the
extent of low-involvement human resource management practices is significantly
positively associated with company financial performance, measured, for example, by
stock price, and with business unit financial performance, measured, for example, by
return on investment. Such low-involvement human resource management practices
are also significantly negatively associated with manufacturing plant labor costs and
with sales and service field office payroll costs, thereby having overall positive effects
on financial performance at these organizational levels. Furthermore, lowinvolvement human resource management practices remain significant in terms of
their positive associations with organizational financial performance when account is
taken of the use of high-involvement human resource management practices for other
employees of these organizations (Lewin, 2003). It is this research in particular that
has been invoked to support the claim that expenditures on some employees can best

be regarded as containing or reducing labor costs, thereby contributing to overall

organizational performance.
When these two streams of research are combined, they lead to what can best be
termed a dual theory of human resource management and organizational
performance. This theory posits that some employees performing certain types of
work are best managed by investing in high-involvement practices, while other
employees performing other types of work are best managed through lowinvolvement practices. The former set of employees can be thought of as core
employees, while the latter set of employees can be thought of as peripheral
employees. Both types of employees and both sets of human resource management
practices can positively contribute to organizational performance. Perhaps the larger
question in this regard is, What is the appropriate or best balance of core and
peripheral employees for an organization?
Though the answer to this question is likely to differ from industry to industry and
organization to organization, one overall estimate is that a combination of two-thirds
core employment and one-third peripheral employment is optimal in terms of
organizational financial performance. Stated differently, an organization can add value
(to its financial performance) by increasing its ratio of peripheral to total employees
from, say, one sixth to one fifth or from one quarter to one third, but will likely lose
value (in terms of its financial performance) by increasing its ratio of peripheral to
total employees from, say, one third to two fifths or to one half (Lewin, 2002); in
other words, this relationship is curvilinear.
Even though research and practitioner attention has increasingly been devoted to
managing human resources for competitive advantageorganizational financial
performanceconsiderable attention has also been paid to employment dispute
resolution. In this regard, the decline of unionism and collective bargaining should not
be taken to me that there has been a corresponding decline in employment-related
conflict in organizations. To the contrary, and as indicated by both the adoption by
nonunion organizations of what have come to be known as alternative dispute
resolution (ADR) systems and the substantial amount of employment/human resource
management legislation that has been enacted by the federal government and state
governments during the past several decades, conflict is an enduring, ever-present
characteristic of employment relationships (Colvin, 2004). Hence, any informed
treatment of contemporary human resource management must consider the nature of
such conflict, the practices that have been undertaken in attempting to resolve such
conflict, and the effectiveness of such practices.
While it is well known that the bulk of employmentrelated disputes are resolved in
informal discussions between aggrieved employees and their immediate
supervisors/managers, often using open-door and hotline policies and practices, a
growing proportion of nonunion companiesperhaps more than 50%have adopted
formal employment dispute resolution systems (Colvin, 2003). These systems require
that grievances (or complaints) be put in writing, and they specify a series of steps,
usually three to four steps, for the processing and resolution of such grievances.
Unlike grievance systems in unionized settings in which all but a handful end in
binding third-party arbitration (known as rights arbitration), nonunion grievance
systems vary in terms of their specified final steps. Examples of such final steps in

nonunion employment dispute resolution systems include Chief Executive Officer

(CEO), Chief Administrative Officer (CAO), a Senior Management Committee, peer
review, and, in about 20% of the systems, binding third-party arbitration (Lewin,
2007). In addition, these systems also vary considerably in terms of speed of
grievance processing, scope of employment-related issues subject to grievances, and
employee eligibility to use grievance procedures. Notably, whereas in unionized
settings only employees who are represented by a unionknown as the bargaining
unitare eligible to file grievances, in nonunion settings the scope of employee
eligibility is typically wider and may even include first-line and mid-level managers.
This apparently means that more, perhaps considerably more, nonunion than
unionized employees who have employment-related conflicts can invoke their
respective organizations employment dispute resolution systems. But this also means
that, unlike in unionized settings, the determination of grievance steps, speed of
grievance settlement, scope of grievance issues and scope of employee eligibility to
use the grievance procedure in nonunion settings is determined solely by the employer
(Colvin, Klass, & Mahony, 2006). These features of nonunion ADR systems together
with the fact that nonunion employers pay the costs of arbitration when this method is
used has elicited considerable criticism from specialists in this areathe main
criticism being that this type of system is one sided and hence unfair (Wheeler, Klass,
& Mahony, 2004).
Empirical evidence shows that nonunion employees who are eligible to use
organizational grievance systems do in fact do so, though their grievance filing rates
are about half as large as those of unionized employees. A substantial proportion of
nonunion employee grievances, between 80% and 90%, are settled at early steps of
the grievance procedure, which is quite similar to what occurs among unionized
employees. Only a small percentage, 2% to 3% on average, of both nonunion and
unionized employee grievances are settled at the final step of the grievance procedure
irrespective of what that step may be (for example, peer review or arbitration). Among
male employees, whether unionized or nonunion, the issues most frequently in dispute
and hence the subject of grievances are job assignment, pay rate, and discipline,
including discharge from employment. Among female employees, by contrast and
again whether unionized or nonunion, the issues most frequently in dispute and hence
the subject of grievances are promotion, training and development, and
discrimination/harassment (Lewin, 1999).
An especially important stream of research in the area of nonunion grievance systems
focuses on what has been termed postdispute resolution outcomes. In particular, these
outcomes include employee job performance ratings, promotion rates, work
attendance rates, and turnover rates (Lewin & Peterson, 1999). The dominant
analytical approach used in this research is quasi-experimental, involving
comparisons of samples of nonunion employees who subsequently do and do not file
grievances, respectively, under their organizations employment dispute resolution
systems; the former are referred to as grievance filers and the latter as grievance
nonfilers. For these two employee groups, their job performance ratings, promotion
rates, and work attendance rates are compared before, during, and after a period of
grievance filing and settlement, and their turnover rates are compared after grievance
settlement. The main findings from this research are that comparably matched
samples of nonunion employees do not differ significantly in job performance ratings,
promotion rates, and work attendance rates prior to and during grievance filing and

settlement but differ markedly thereafter, with the first two of these three measures
being significantly lower (and the third being insignificantly lower) for grievance
filers than for nonfilers. Further, both voluntary and involuntary employee turnover
rates in 1-to-3-year periods following grievance settlement are significantly higher for
grievance filers than for nonfilers. Moreover, a very similar pattern of findings has
been reported for samples of supervisors of grievance filers compared with samples of
supervisors of nongrievance filers (Klass & DeNisi, 1989; Lewin, 1997; OlsonBuchanan, 1996, 1997).
When it comes to explaining these findings, two main alternatives have been
proposed: the retaliation explanation and the revealed performance explanation. The
retaliation explanation is relatively straightforward in claiming that nonunion
employees who actually use their organizations dispute resolution systems suffer
retaliation for doing soand the same is true of their supervisors. This explanation is
consistent with organizational punishment/industrial discipline theory and is also
supported by related survey research showing that employee fear of retaliation is
significantly negatively associated with nonunion employees use of grievance
procedures (Boroff & Lewin, 1997; OReilly & Weitz, 1980). The revealed
performance explanation is relatively less straightforward in claiming that employee
grievance filing spurs or shocks company management into paying closer attention to
employee performance and performance evaluation; once that occurs, management
learns (ex post facto) that grievance filers and their supervisors are relatively poorer
performers than nongrievance filers and their supervisors. This explanation is
consistent with the shock theory of unionismthat is, unionization shocks
management into improving productivity and organizational performance more
broadlyand with the considerable evidence that company performance evaluation
systems yield evaluation results that are in general significantly upwardly biased
(Lewin, 2005; Peterson & Lewin, 2000).
In sum, the main findings from research on contemporary nonunion employment
dispute resolution systems suggests that, contrary to the stated strategic, information
gathering, and problem identification and diagnosis rationale underlying nonunion
companies adoption of such systems (Lipsky, Seeber, & Fincher, 2003; Feuille &
Delaney, 1992), the actual use of such systems by nonunion employees leads to
further deterioration of their employment relationships rather than to the resuscitation
of such relationships and that the same is true for the supervisors of these grievancefiling employees. Hence, from a larger perspective, these nonunion employment
dispute resolution systems are fundamentally reactive in nature and are largely
incapable of ameliorating conflict and of restoring or reinstating employeesand
their supervisorssuch that they can be productive and contribute positively to their
organizations performance (Lewin, 2004). It is at this point, however, that human
resource management research and practice can be joined with employment dispute
resolution research and practice (Lewin, 2001a). Specifically, and as noted earlier,
contemporary human resource management has concentrated on developing and
sustaining high-involvement practices aimed at proactively engaging employees in the
performance of the enterprises that employ them. Such practices typically focus on
employment continuity, selective hiring, teamwork and decentralized decision
making, high pay contingent on organizational performance, training and
development to improve employee performance, reduction of status differentials to
promote organizational egalitarianism, and business information sharing with

employees. Therefore, and looking ahead, it may be asked, why cant this set of
best human resource management practices be enhanced by adding to it proactive
employment dispute identification, diagnosis and resolution, including through earlystage employee consultation in workplace and organizational decisions; targeted
internal employee-as-customer research, including through electronic online surveys,
to learn and gauge the depth of employees workplace and organizational concerns;
and even new and deeper initiatives at work-family life balance to address employee
issues and concerns that manifest themselves as employment-related disputes but that
have their origins in internal family disputes (Kaminski, 1999)? Merely posing this
multifaceted question implies that human resource management in the 21st century
will require deeper thought, theory development, empirical research and clinical
insight than have prevailed heretoforeespecially if human resources are to be used
for competitive advantage by business and nonbusiness enterprises.
If new initiatives at integrating internal organizational conflict management with
human resource management practices are not forthcoming or are not effective, then
external regulatory approaches and methods for resolving employment relationship
conflicts will continue apace and perhaps deepen. Although unlike many other
developed countries the United States does not have a national employee rights law,
during the second half of the 20th century much legislation was enacted to regulate
one or another aspect of private sector employment relationships. The leading (U.S.)
federal statutes in this regard included the 1963 Equal Pay Act, 1967 Age
Discrimination in Employment Act, 1964 Civil Rights Act, 1970 Occupational Safety
and Health Act, 1973 Rehabilitation Act, 1974 Employee Retirement Income Security
Act, 1974 Trade Act, 1988 Worker Adjustment and Retraining Notification Act, 1990
Americans with Disabilities Act, and 1993 Family and Medical Leave Act. As
explicitly indicated by some of their titles, the bulk of these laws are aimed at curbing
and providing remedies for employment discrimination based on, as examples,
ethnicity, gender, national origin, age, and disability. By most scholarly accounts, such
laws have been effective in combating overt employment discrimination, but have
been less effective in promoting workforce diversity within business enterprises
(Lewin & Mitchell, 1995). This is not surprising because legislation is typically more
effective in preventing than promoting certain types of organizational and human
behavior. Nevertheless, during the last half-century or so, company workforces have
become more diverse, especially in terms of gender and ethnicity. This development,
however, has primarily been driven by company efforts to match workforce diversity
with customer diversity and by the increasingly diverse labor pools from which
companies recruit and select their workforces, rather than by legislation, per se
(Kochan et al., 2003).
Regarding employment dispute resolution under one or another of the statutes just
noted, a lawsuit that pits an individual employee or a group (known as a class) of
employees against an employer commonly results. Although some of these cases have
gone all the way through trial to judicial verdicts, most such cases are settled before
trial and conclude with negotiated settlements between employees and the
companies/employers in question. While on their face these settlements seemingly
resolve the disputes that initially gave rise to them, when the issues in dispute involve
workforce reductions or termination from employment the settlements only rarely
result in the reestablishment of the original employment relationships or the
reinstatement of employees to their jobs. Instead, the aggrieved employees receive a

monetary payment in satisfaction of their discrimination claims and then move on to

seek employment elsewhere (Lewin, 1999).
By contrast, some employment disputes do result in the reinstatement of employees to
their jobs, notably in cases in which state courts have determined that implicit
employment contracts exist. In such wrongful termination cases, the courts give
considerable weight to such factors as an employees length of service with a
company/employer and the employees record of job performance, promotions, and
pay increases. Generally speaking, a long-term employee who has rendered good-toexcellent job performance and who has received promotions and pay increases on a
more or less regular basis is most likely to be reinstated to his or her job under the
judicial doctrine of wrongful termination. In reaching such a decision, a court
basically concludes that the employer and employee in question had an implicit
employment contract that assured continuous employment unless the employee
underperformed. In response to judicial decisions favoring employees in several
prominent wrongful termination cases, many employers revised their human resource
policies, including those spelled out in employee handbooks, to state that they are atwill employers, meaning that the employer and/or the employee are free to end the
employment relationship at any time. But as subsequent judicial decisions made clear,
even an employers explicit employment-at-will policy does not necessarily prevent
the courts from reinstating terminated employees to their jobs, especially when such
terminations constitute employer retaliation against employee whistleblowers (Lewin,
Even though some long-service employees and some employees who have blown the
whistle on their employers fraudulent behavior have been reinstated to their jobs as a
result of state court decisions, more recent decisions of the U.S. Supreme Court in
employment dispute cases, specifically in Gilmer v. Interstate/Johnson Lane (1991)
and Circuit City v. Adams (2001), are especially significant and far reaching. In these
cases, the court ruled that the entire range of U.S. employment laws, including Title
VII of the Civil Rights Act, the Age Discrimination in Employment Act, and the
Americans with Disabilities Act, is subject to arbitration provisions contained in
employment contracts between employers and employees. So strong is this deferral to
arbitration doctrine that it apparently requires the diversion of all employment
litigation into an employerdesigned arbitration procedure from which there is no
right of appeal or only very limited possibility of court review (Colvin, 2003).
Hence, it is not surprising that this type of internal arbitration has been widely
adopted by employers, especially nonunion employers, or that it has become the main
alternative to litigation as an employment dispute resolution method (Lipsky, Seeber,
& Fincher, 2003). It is therefore also not surprising, as noted earlier, that internal
arbitration type ADR is criticized for its one-sidedness and for its failure adequately
and neutrally to protect employee rights (Wheeler, Klass, & Mahony, 2004).
If the management of human resources involves a substantial element of complying
with relatively new human resources and employment regulation, it also involves
complying with older, longer standing regulation. A leading example in this regard is
the 1938 Fair Labor Standards Act (FLSA), which contains provisions specifying
minimum wage, female and child labor protection, and overtime pay eligibility and
requirements. The leading example of a new challenge to this old law is the spate of
managerial misclassification cases that have been filed during the last decade or so. In

brief, these cases, which are predominantly class actions filed against retail trade
employers in the supermarket and restaurant industries, involve allegations that
employees holding such job titles as store manager, department manager, and location
manager and who are paid annual salaries rather than hourly wages in fact perform
predominantly employee rather than managerial work and, therefore, should receive
or have received overtime pay for all hours worked beyond 40 in a week and, in
California, beyond 8 in a day. As documented by Levine and Lewin (2006), the
volume of managerial misclassification cases has increased dramatically and the
potential monetary damages in some of these cases runs to the 10s and even 100s of
millions of dollars.
Under the FLSA as well as state wage and hour laws, employees who do not qualify
for overtime pay are referred to as exempt and employees who do qualify for
overtime pay are referred to as nonexempt (meaning that they are included under
covered bythe overtime pay provisions of these laws). As originally written, the
FLSA identified certain types of exempt employees, as examples, executives,
professionals, and certain administrative employees. At the time the FLSA and many
of the state wage and hour laws were passed, the United States was still in the midst
of the Great Depression, unemployment was very high, and the majority of employees
worked in manufacturing. The Congress reasoned that if employers had to pay a 50%
premium for hours worked beyond 40 in a week, they would almost certainly not do
so but, instead, would hire additional employees who would be paid regular hourly
wage rates. Not only was such expanded hiring forecasted to reduce unemployment,
newly hired employees were predicted to spend all that they earned, thereby resulting
in more demand for goods and services, which would help the country move out of
economic recession. Neither of these predictions subsequently turned out to be
supported by empirical evidence. Further, and as economic transformation ensued
over subsequent decades, manufacturing employment declined, service sector
employment substantially increased, and proportionately larger segments of the U.S.
workforce became employed as executives, professionals, and administratorsthe
types of occupations and work that were exempt from overtime pay provisions of the
FLSA and state wage and hour laws. Nevertheless, these laws remain in place today
and the recent legal disputes that have arisen under them focus on whether employees
who hold these job titles, especially managerial job titles, primarily perform
predominately managerial work or employee work (Levine & Lewin, 2006).
From a human resource management perspective, the key question in this regard is
Why have managerial misclassification cases exploded? The multifaceted answer to
this question is as follows. First, and especially important to recognize, every business
enterprise starts out as a small enterprise with relatively little financial capital and
operates in one or a few locations with few customers and few employees. If the
business survives its start-up phaseand many do notit moves into a growth phase
in which it adds financial capital, customers and employees, achieves operating profit
and, most important, expands its locations. In the start-up phase, those who manage
the businesss few locations and facilities (and who may be members of a business
founders family) perform predominantly managerial work. To illustrate, in a retail
business, managers decide when the store will open and close, the suppliers/vendors
from whom goods will be purchased, the prices at which goods will be sold to
customers, the type and extent of advertising and promotion, and the hiring,
utilization, and disciplining of employees.

Second, as this prototypical retail business grows larger and opens more stores in
widespread locations, the responsibility for deciding store operating hours, vendors,
prices, advertising, and employment moves from the individual store and store
manager to higher levels, for example, regions and divisions headed by regional
managers and divisional managers, respectively. In other words, store operating
policies and practices come to be determined and monitored on a more centralized
basis, and decisionmaking responsibility consequently moves away from the store
level to higher levels, including the headquarters level. Adding to this tendency are
initiatives aimed at optimizing supply chain management in which decisions about
which vendors to use, the terms of contracts with chosen vendors, and the scheduling
of vendors deliveries to stores are made at higher organizational levels rather than at
the store level.
Third and as the business grows still larger, standard operating policies (SOPs) are put
in place by top management to govern most if not all aspects of individual store
functioning. Such policies closely circumscribe the behavior of store managers
regarding product displays, stocking and restocking of shelves, product pricing,
special attractions and discounts, work shifts, employee job assignment, inventory
control, customer service, and much more. The basic concept underlying such
standardization, known as replication, is that a customer will have the same
experience irrespective of which store (or restaurant or other establishment) he or she
enters or where the store is located. Also consistent with this policy of standardization
is the concept of national, even global, branding which means, for example, that a
customer of Wal-Mart or McDonalds can expect the same type of products or food to
be available and to receive the same level of service regardless of location.
Fourth, in virtually all large retail businesses, individual store and location managers
are compensated through a combination of base salary and bonus. Under this type of
compensation plan, the bonus is typically based on the difference between a stores
budgeted labor costs and its actual labor costs; the larger the excess of budgeted over
actual labor costs, the larger the store managers bonus. With this compensation plan
in place, salaried store managers have a clear incentive to substitute their labor for
the hourly paid labor of their employees. Stated differently, additional hours worked
by salaried store managers cost the employer nothing whereas additional hours
worked by hourly paid employees cost the employer additional hourly wages and,
especially in high-demand periods, overtime pay. Therefore, a store manager who
seeks to maximize his or her bonus will perform some and perhaps many
nonmanagerial employee tasks and, in effect, replace hourly employees when doing
so (Levine & Lewin, 2006).
In sum, the recent explosion of managerial misclassification cases can be explained
by a combination of strategic, organizational, supply chain management, marketing,
and compensation initiatives on the part of companies, especially retail trade
companies, that, on the one hand, make good sense from a business performance
perspective but, on the other hand, expose these companies to potentially large legal
damages because they have failed adequately to address the changes in lower level
management jobs emanating from otherwise well-meaning and well-founded strategic
initiatives. Such legal exposure, in turn, raises questions about the role of the human
resource management function in these retail businesses. If human resource
executives of these enterprises have, so to speak, a seat at the business strategy table,

then the potential consequences of the aforementioned strategic initiatives for changes
in lower level store manager jobs and the overtime pay claims resulting there from
could have perhaps been anticipated and dealt with exante. But if human resource
executives in these enterprises do not have a seat at the business strategy table and
were largely relegated to operational roles, then they are left to pick up the pieces in
attempting expost to assist their enterprises in defending themselves against claims of
managerial misclassification.
Once again from a human resource management perspective, this development in an
increasingly important sectorthe retail sectorof the U.S. economy calls into
question the role and influence of the human resource function and leaders of this
function in the business enterprise. Many scholars and practitioners claim that human
resourcesHRis a strategic business function that should fundamentally be a
business partner in the same way that finance, marketing, and operations are business
partners in the enterprise (Ulrich, Losey, & Lake, 1997). Yet there are many other
roles and purposes that HR functions and those who lead these functions serve in
modern business enterprises, including complying with human resource/labor
regulation (newer and older regulation), enforcing organizational and employment
policies and practices, measuring employee performance, providing services and
assistance to employees, maintaining employee personnel files, monitoring workplace
safety, handling employee relocation, including abroad, and even maintaining a
union-free environment. With this menu of potential duties and responsibilities, it is
understandable that many HR functions in modern business enterprises are considered
to be largely operational functions rather than strategic functions. But if the claim that
business enterprises increasingly compete on the basis of their intellectual or human
capital is at all valid, then the main challenge regarding human resource management
in the 21st century is for HR functions and HR leaders to keep their eye on the prize
of a strategic role in these enterprises while also performing the necessary operational
rolerolesthat HR functions and leaders must inevitably undertake.
David Lewin
Further Readings

Entry Citation:
Lewin, David. "Human Resources Management in the 21st Century." 21st Century
Management: A Reference Handbook. 2007. SAGE Publications. 16 Apr. 2010.