“Regulation by Shaming”—What is the Impact on the Economy? (Part 2)

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
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As discussed in the prior blog post on this topic, the Occupational Safety and Health Administration (OSHA) has embarked on an enforcement campaign, aptly described as “regulation by shaming.” This includes multiple citations, high penalties, and press releases that brand employers as “bad actors” who do not care about the welfare of their employees. Continue reading this sequel post for a case study of “shaming” in action and an evaluation of regulation by shaming from a policy perspective.

“Shaming” in Action:  A Case Study

For small businesses, the effects of “shaming” are particularly harsh. The following example is based on a case that I handled last year. A pseudonym is used for the company name.

ABC Company fabricates materials at a plant in the Northeast. ABC opened in 2005 and employs approximately 45 employees. ABC is privately held, and as is typical of many start-ups, has struggled to turn a profit, particularly in the current economy. In 2008 and 2009, ABC’s losses caused it to increase its line of credit, but it was able to do so only with a significant personal guarantee from one of the officers. Although that influx of capital helped, ABC was forced to lay-off 25 percent of its workforce in June 2010.

OSHA issued citations (along with the now requisite press release disparaging the company) to ABC alleging 41 “serious” violations as well as 3 “willful” violations. Even with a discount for its size, the total proposed penalties were over $200,000. As is typical under the current leadership at OSHA, the citations were duplicative in that multiple standards addressing the same hazards were cited. In fact, a single corrective action resulted in abatement of well over half of the citations. The citations did not result from an accident and no employees were alleged to have suffered any ill health effects.

ABC sought legal counsel for two reasons. First, although it was not a major part of its business, ABC did have government contracts and was concerned that “willful” violations might affect its ability to obtain future contracts. This concern was clearly valid given the “High Road Contracting” initiative championed by the Obama administration, which would require the consideration of OSHA violations in the awarding of federal contracts. Second, ABC simply could not pay the penalty without endangering its bottom line, even to the point where additional lay-offs would be necessary.

As is often the case, the question of whether the violations were truly “willful” was difficult to answer. The Occupational Safety and Health Act contains no definition of what constitutes a “willful” violation. The test applied by the Occupational Safety and Health Review Commission continues to be whether the employer engaged in an “intentional, knowing, or voluntary disregard for the requirements of the Act” or showed “plain indifference to employee safety.” Kaspar Wire Works, Inc.

The result for ABC under this test was not entirely clear. On the one hand, ABC hired an outside safety consultant to assess many of the hazards OSHA ultimately found, and ABC made significant efforts to comply with the cited standards. On the other hand, although ABC discussed the timing of recommended changes to equipment and policies with the safety consultant, some of those changes had not been implemented when OSHA showed up on the first day of the inspection. Instead, many of the changes were set to be implemented approximately four months later when ABC had a planned shutdown. Given that there is no “bright line” test for what constitutes a “willful” violation, it was not clear whether ABC would prevail if it elected to litigate the case.

OSHA’s issuance of “willful” citations also illustrates the adage that “no good deed goes unpunished.” OSHA based its allegations that the violations were willful on the fact that ABC did not immediately shut down the process and implement the recommendations of the safety consultant and chose instead to use interim measures to protect employees. Ironically, ABC likely would have been better off not using a safety consultant at all. OSHA’s use of voluntary measures, such as retaining a safety consultant, to support allegedly willful violations has become all too common.

Throughout the settlement negotiations with OSHA, ABC emphasized that it had already abated all of the cited hazards and was willing to certify to OSHA that all hazards had been abated. In addition, ABC provided information to OSHA regarding its efforts to comply with the cited standards, including a detailed position statement and a timeline regarding those efforts. ABC also provided data, such as audited financial statements and tax returns, to show that its fiscal condition was shaky at best. OSHA was unmoved, even when ABC explained that 25 percent of the workforce had recently been laid off. In fact, OSHA openly disparaged the financial information ABC provided as suspect, and—remarkably—continually asked why ABC could not simply borrow more money from the bank to pay the OSHA penalties.

Ultimately, OSHA agreed to recharacterize the willful citations as serious, and ABC agreed to pay $180,000 in penalties over a three-year period. While that amount, particularly over a three-year period, would be minimal to most larger companies, it continues to have a significant financial impact on ABC. More broadly, ABC’s response to the situation was necessarily different than the response of a large company with significant resources would be. ABC could not afford to litigate the case, particularly given that the outcome was uncertain. OSHA knew that and was therefore able to put the company squarely between a rock and a hard place. At the end of the day, ABC was forced to pay a penalty far higher than its profits in recent years.

Is “Regulation by Shaming” Good Policy?

From a policy standpoint, there is certainly support for the proposition that employers that do not maintain safe working conditions for employees simply should not be in business. Also, OSHA is not required to consider the financial condition of an employer that has been “shamed.” In addition, there is no question that willful violations are intended to have a punitive effect on employers.

At the same time, the impact of “shaming” on employers of all sizes can be devastating. When employers are hit with these sorts of allegations from OSHA, they should recognize that the allegations are simply that—allegations.  No neutral party has assessed whether OSHA’s allegations have merit, and OSHA certainly does not issue a press release when the employer prevails in litigation or OSHA enters into a settlement favorable to the employer. Moreover, OSHA has typically shown indifference (and even hostility) when presented with financial information from small employers that are willing to correct hazards, but simply cannot pay the steep penalties OSHA demands. The result is a system where a few federal regulators are essentially dictating policy decisions regarding whether a small business can afford to expand, thereby helping an anemic economy or whether it is forced to postpone growth, lay-off workers, or even close its doors.

Finally, as press releases labeling employers as “bad actors” continue to proliferate, OSHA may face something of a credibility gap. The regulated community—including peers and customers of those employers who have been “shamed”—are beginning to view press releases and associated penalties as politically motivated, rather than an indicator that the cited employer is truly a bad actor. Also, some local OSHA enforcement officials are sometimes uncomfortable with the unpleasant language attributed to them and are admitting to employers that the press releases are being imposed from “on high.” The attitude of many is that OSHA is beginning to care more about the press releases than the facts of a particular case. All of this casts doubt on Dr. Michaels’s claim that “regulation by shaming” is a worthwhile concept.

Melissa A. Bailey is a shareholder in the Washington, D.C. office of Ogletree Deakins.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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