What Does the Repeal of Right to Work and Reinstatement of Prevailing Wage Mean for Small Business?

By Brian Calley, SBAM President & CEO

Amid lots of controversy and drama, the legislature has passed both the reinstatement of Prevailing Wage laws and the repeal of Right to Work. This was expected, though SBAM and the broader business community opposed these actions. The Governor has indicated that she intends to sign both measures. 

So what does this mean for small businesses? 

Right to Work 

This is actually a very straight forward and simple law change, but it has big implications. Michigan’s Right to Work law (passed in 2012) said that employees could not be forced to pay union dues or agency fees to a union as a condition of their employment, even if their job was covered by a union contract. In other words, each individual employee could decide for themselves if they wished to join the union. Repeal of Right to Work means that all employees must pay the union to represent them if 50% + 1 of the employees decide to unionize.   

While this change probably does not have direct immediate impacts on most small businesses (as most small businesses are not unionized), there are quite likely to be broader impacts that affect the economic climate in our state. We have 9 full years of economic data since Right to Work passed at the end of 2012. Comparing those years to the 9 years before is striking. Labor force was down 350,657 people the 9 years before and was up 90,648 the 9 years after. Average inflation adjusted income was only up .6% (not 6%, but .6%) the 9 years before and was up 21.9% over inflation the 9 years after. The population of Michigan was down 120,401 the 9 years before and was up 130,060 the 9 years after.  

There were many things that changed in 2011 and 2012 to create a better environment for business and job growth. Right to Work was just one of them. But it was an important signal to the nation that Michigan was ready for growth and the data is clear that it worked. Michigan is the first state to repeal a Right to Work law in 60 years, so it’s hard to say precisely what the impact will be. We are in uncharted territory, but given recent population trends and Michigan’s economic results before and after Right to Work, it is safe to say that it will not be a positive economic change for workers or businesses. 

Perhaps the most telling statistics are those showing population migration in America recently. US Census Bureau numbers reveal that 867,104 people moved from non-Right to Work states to Right to Work states between 2020 and 2021. Naturally, people move for many reasons, but states with Right to Work laws tend to be growth-oriented states.  

A recent article by Warner Norcross + Judd pointed out some important details:

The new law goes into effect 91 days after the end of the current legislative session, which will be in March 2024. Because of the U.S. Supreme Court’s 2018 decision in Janus v. AFSCME, which held that the extraction of union dues by states and public-sector unions from nonconsenting employees was a violation of the employees’ First Amendment rights, the Right-to-Work repeal will not impact public sector jobs like police, fire and public school teachers. However, the repeal will impact unionized jobs in the private sectors, such as the auto industry, construction and manufacturing jobs. 

Private sector employers with unionized workforces should review their collective bargaining agreement to see if they contain union security clauses, require that security clauses become part of the contract upon repeal or invalidation of the Right-to-Work law, or require the reopening of the collective bargaining agreement in such a case. Employers who do not have union security clauses in their collective bargaining agreements should prepare to negotiate over union security when their current contracts expire. Similarly, employers who are in the process of or will soon begin to negotiate new collective bargaining agreements should be prepared for demands to include a union security clause in the agreement. 

Reinstatement of Prevailing Wage  

Prevailing Wage is a bit more complicated to explain, but we’ll break it down so you can get a clear understanding of the direct and indirect impacts of this change. 

This law change reverses an action taken in Michigan in 2018. This is a bit of an oversimplification, but essentially, Prevailing Wage laws require government construction contractors to pay “prevailing wages” that are set according to surveys of union contractor wages. So, in other words, any business bidding on a government construction contract must pay the wages determined in the union surveys. 

While this does raise the costs of construction, that’s not the biggest obstacle for many small contractors. You see, Prevailing Wage laws require extensive siloing of functions that are compensated at different rates. For example, imagine a small contractor building a new Commission of Aging Center, or putting an addition on a school. The workers onsite must stay in their siloed function. Construction projects already require an intricate weaving of many functions. What if a drywall hanger calls in sick? Well, today, maybe a person who normally does roofing or framing might pitch in. With Prevailing Wage laws, those are different functions with protected classes of work that are compensated at different rates. Employees can’t just help when and wherever they are needed. As you might imagine, larger contractors, who are more likely to be unionized, have larger volumes and more employees. Specialization of functions and the extensive record-keeping associated with Prevailing Wage laws is much more doable for them. 

This law also adds inefficiencies even when the whole team is present because certain employees must wait for their part to begin. You’ve probably noticed this on road construction projects. Those have been required to comply with federal Prevailing Wage laws all along because they expend federal dollars.  

People often joke about how road construction crews feature one person working and five others watching him or her work. This is not because of laziness. It is Prevailing Wage in action. Each of those workers has a different siloed function. The people watching the work have a different function and are compensated at a different rate. They are not allowed to just pitch in, and in most cases would be forbidden to do so. They are waiting for the function they fill to be needed. Even if work rules allowed cross functions, the employee who changes functions from their specialty would have to document the amount of time doing a different function and their rate of pay would be adjusted to a different prevailing wage for those minutes. 

You can see why this method is more expensive, less efficient and overly complicated for most small businesses. Prevailing Wage is a “small businesses need not apply for government construction contracts” policy. 

Recognizing that this will add additional costs, the legislature did grandfather in projects that are already in process or where communities have already approved millages based on construction estimates without the added costs and inefficiencies of Prevailing Wage laws.  

Prevailing Wage reinstatement directly impacts construction businesses who bid on government contracts in a very profound way. For the rest of us, it will raise the cost of government construction projects and therefore the cost of government. 

Both the reinstatement of Prevailing Wage and the repeal of Right to Work laws passed this week included small appropriations. This is a technical issue with a big implication. It removes the right of citizens to overturn the actions taken by the legislature through referendum.