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Since no one really seems to care to understand how the global financial crisis happened, I took it upon myself to find out why. There are two main factorthe June ruling in the case of Meacham vs Knolls Atomic Power Laboratory and the Subprime crisis. Most would be probably familiar with the second and would have never heard of the first. The ruling in Meacham vs Knolls Atomic Power Laboratory has affected companies in both the industrial East and the software West Coast of US.

Governor Schwarzenegger has cases pending against him because he tried to trim down the size of the government in California in August 2008 by laying off seasonal, part-time and temporary state employees and initiating pay cuts for others. ImagineA politician tries to cut down needless government expenditure and thus saves taxpayer money and the unions sue him for it! On December 1, 2008, the terminator declared financial emergency in California as the state would run out of money by February 2009 if they continue to keep deadbeats in the government. This is despite the fact that Californians are stuck with highest taxes in the USA, be it sales, corporate or income tax. This development should matter to Indians as the bulk of the IT industry is on the West Coast of the USA, especially in California. Moreover, what happens there will have a bearing on the Indian IT and ITES sectors. The crisis has been building up for sometime ever since the energy crisis of 2000.

So what exactly is the case of Meacham vs Knolls Atomic Power Laboratory?

In 1995, the US government ordered its contractor, defendant Knolls Laboratory of New York to reduce its workforce. In implementing the reduction in force, Knolls managers rated employees on various criteriaperformance, flexibility, experience, critical skills, and laid off thirty-one employeesthirty of whom were over the age of forty. Twenty-six of these employees decided to sue their former employer.

These former employees (Meacham and others) sued Knolls alleging that the criteria used had an unlawful adverse impact on older workers. The jury agreed with Meacham, awarding $6 mn in damages to the laid-off employees. However, the Second Circuit Court of Appeals reversed the jurys verdict because the plaintiffs had not proven that the criteria were unreasonable. Reversing the Appeals Court, the US Supreme Court made it clear that while employers may choose layoff criteria that have an adverse impact on older workers, the employer must demonstrate that its selected criteria are based on reasonable factors other than age.

This case will have a major impact on US employers and under California state law, the employers are bound by an even worse testthe Ninth Circuits rulings, which foreshadowed Meacham.

Simply put, lets assume two case scenarios

Scenario 1 Your company needs to get more efficient to cut losses. You lay off people and either automate their work or stop supply to an area where the majority of people are defaulting on payment and this results in excess workers.

Now you cannot do it as courts will use the Meacham vs Knolls ruling to make the employer prove it was a business necessity. Courts determine business necessity! By what standard? No one knows. Now, not even the state can lay off as governer Schwarzenegger tried to lay off employees to cut costs. He has lawsuits filed against him by state employee unions. Therefore, he is passing the burden to private companies and contractors. However, the government can demand that the subcontractors or companies who provide services to the state become leaner and meaner. The only way out is by filing for bankruptcy though whether you are fit for bankruptcy will be determined by the bankruptcy commission. Meanwhile, the business owner cannot lay off people, as it is illegal as a third party determines business necessity.

Therefore, if your business is labor intensive like the auto, utility companies or banks, then you would either have to file for bankruptcy and if denied beg the government for a loan which they will decide to grant or not. If they agree, they might decide to include atrocious clauses in the loan that gives them power to nationalize it. For tech companies, this is a problem as power and infrastructure is fundamental to their operations. If your local power company or your bank goes bust, this will affect you.

Scenario 2 The employer finds a person not competent enough or lazing around at work and wishes to lay him/her off.

The employer cannot do this as the employers definition of competence is now open to interpretation and the employers interpretation has to be proved right in court for the employer to lay off a person as per this ruling. Who determines it? No one really. Simply put, there has to be an enormous accident so you can fire the person for being technically incompetent but it will be too late as youll have a liability and damages suit filed on you for not preventing the accident in the first place!

The Greed Argument
It is simply monstrous. Any surprise the financial crisis is happening?

It is only natural that with such a monstrous Supreme Court ruling most of the top institutions and industries went under or were effectively nationalised by the government, since June 2008. All the while, we had economic experts tell us that it is due to some greedy people on Wall Street! Really? When did this greedy people suddenly decide to wreck their golden nest? Were these not the same greedy people who started the institutions, founded the companies, and developed it and made them rich? They didnt wave a wand but did it through hard work. Now we are supposed to believe all these greedy people woke up one day and decided they want to be poor or turn over their companies, so that it becomes government owned. Moreover, it is not just a few people but the entire bunch of industrialists, bankers and CEOs who are doing this suddenly in 2008. The greed argument does not make any sense. Even a respectable conspiracy theorist would not try to put forth such a stupid argument knowing that it defies all reason and all logic. However, here we are hearing it over and over again from respectable sources who are silent on Meacham case or the ones that came before it. It is much easier to blame the mythical few greedy CEOs whose very livelihood depends on the survival of the company/institution rather than take on unions who have been making unreasonable demands for the past decade.

Even in India, it has not come to that though a government organization can only suspend a worker and not fire him/her once made permanent. I dont know how this would pan out in India though as companies here arent even protected by bankruptcy laws. However, if the parent company in the USA has to suffer through this, it can either relocate to other countries or close shop. India has an opportunity here if we can throw out our antiquated tax system, and reform it to make it more investment friendly. However, this is highly unlikely as Indian politicians dislike and are extremely suspicious of industrialists. In addition, we have to re-haul and improve our infrastructure like power and other facilities that are fundamental to the functioning of companies. With the lack of power that is killing our manufacturing sector, it is optimistic of me to think we would be able to get the movers and shakers to shift here. Indian energy companies, especially private ones might consider manufacturing and selling small capacity power plants to the US. Maybe with upcoming elections and an awareness of what needs to be done, we will act and hence attract.

The author is the founder-moderator of the IndianWISE e-group.
(c) Deepa Kandaswamy. First Indian serial rights, CyberMedia 2008.
Any quotes or reprints from this article must link to this article and credit author Deepa Kandaswamy and Dataquest.
This article may not be distributed or resold in any manner without written consent from the author. Deepa Kandaswamy

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