Bryan Caplan  

Dehiring: Win-Win-Lose

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Suppose your firm has a mediocre employee.  He's not ridiculous, but he's worth a lot less than you pay him.  What does your firm do?

Econ professors' knee-jerk answer is, "Fire him."  But people with real jobs often notice a rather different reaction: Instead of firing the mediocre employee, his boss tells him, "You need to find other opportunities."  The worker then has 1-3 months to search for another job, free of the stigma of current unemployment.  In HR jargon, the firm "dehires" him.  This how-to guide explains:
Managing a problematic employee is time consuming and negatively affects the cohesion of your fitness team. Unfortunately, hoping that a troublesome employee will just go away is not always realistic and may even make the situation worse. Instead of backing away from the problem, take action. By learning how to "de-hire," you may never have to fire anyone again.

[...]

Begin the conversation with statements such as "Sue, it appears that Club X is really not the place you want to be working. You have been calling in sick and arguing with members. Perhaps you're not happy teaching here any more?" "Sue, are you truly happy at Club X or do you feel you might need a change?" or "Sue, it doesn't appear that you want to be part of the team anymore. Why don't you think about what you want to do and let's meet again tomorrow."
Dehiring has two main advantages over firing.  First, it is legally safer.  Employees who leave of their own volition to take another position are far less likely to sue you than employees you kick to the curb.  Second, it is psychologically easier.  When a firm fires a worker, his boss and co-workers feel sorry for him.  When a firm dehires a worker, his boss and co-workers feel happy for themselves!  No wonder the subtitle of the how-to guide is: "Don't fire. Learn to de-hire to create a win-win situation for you and your employee."

On reflection, though, dehiring is only "win-win" for the firm and the worker.  What about the problem worker's next firm?  Dehiring is a nefarious plot between the worker and his current firm: "If you help me find another job, I'll become their problem instead of yours."  From the standpoint of the next employer, calling dehiring "win-win" is a sick joke.  The proper description is "win-win-lose" - the worker wins, the old firm wins, the new firm loses.

The prevalence of dehiring is another reason why educational signaling matters despite employer learning.  Suppose workers become transparent to their employers after a year on the job.  If firms summarily fire subpar performers, educational signals wouldn't matter long.  But if firms with subpar workers drag their feet, then dehire, educational signals can matter indefinitely.  The mediocre workers moves from firm to firm, gradually exhausting the pity of his employer and co-workers.  As long as he looks good on paper, everyone who knows the mediocre worker's true colors can escape by passing the buck to another unwitting employer.

Is there anything the government could do to ameliorate this problem?  Sure.  The government could mandate disclosure: If another employer inquires about your current or former employee, you must reveal everything negative that you know about him.  If you lie - or simply hold back - an employer who detrimentally relies on your reference can sue you for fraud.

As is often the case, though, actual government policy deliberately amplifies market inefficiency rather than mitigating it.  Existing law doesn't punish firms for concealing negative information; it punishes firms for revealing negative information.  The results are sadly predictable: Employers fear to hire - and when they do hire, verifiable credentials matter more than the dubious words of the people who already know the truth.



COMMENTS (20 to date)
Mike Lorenz writes:

Helping an employee who isn't a good fit find a new job elsewhere isn't a conspiracy against the new firm. Often the specifics of time and place that were present when the employee was hired change over time and the needs of the business and or the skills/motivation of the employee no longer match. That in no way means the employee is a "bad employee" - the match is just no longer optimal. I've had these types of conversations before with employees who I truly believed could be quite productive in another role. No kicking of the can, just honest recognition of change in fit.

Pat writes:

How the heck are you ever going to prove any of that? Juries and judges are going to determine whether you are lying about liking an employee who left your firm? Come on.

Finch writes:

This assumes all firms and jobs are equal. When you are de-hired from McKinsey and move to some executive position at a client, it's win-win-win. You couldn't cut it at McKinsey, but you'll do great in Cisco's acquisition group. Or you couldn't cut it at Oracle, but you'll do great at that app firm. There's a trickle-down market in employees. De-hiring comes with a significant message to the employee that they need to find a more appropriate match to their skills next time.


Nick writes:
The government could mandate disclosure: If another employer inquires about your current or former employee, you must reveal everything negative...

The common law is already moving somewhat in this direction. In case Jerner v. Allstate, Allstate fred an employee, Calden, for bringing a gun to work and otherwise acting dangerous, but gave him a good recommendation. When Calden shot several people at his next job, Allstate was sued for negligence in giving that recommendation.

All that stops employers from suing currently is the difficulty of proving damages from getting a sub-par employee. How do you prove to the court what money you would have made if there wasn't a loser on your team? Hard to sue for fraud when you can't show damages.

The other big reason companies don't want to release negative information is the possibility of a defamation lawsuit. They have to be sure that anything said about a former employee is 100% true. But subjective opinions about worker quality etc. rarely meet that standard.

If we're talking solely about incentives created by the common law, I think it currently strikes a pretty efficient balance between reporting dangerous employees and just not saying much about mediocre ones.

Put another way, if full disclosure of negative job performance was mandated, what sort of potentially inefficient compensatory behavior might employees engage in to avoid getting a bad rec on their next job? Seems to create a big opportunity for rent-seeking by HR departments.

DR writes:
On reflection, though, dehiring is only "win-win" for the firm and the worker. What about the problem worker's next firm? Dehiring is a nefarious plot between the worker and his current firm: "If you help me find another job, I'll become their problem instead of yours." From the standpoint of the next employer, calling dehiring "win-win" is a sick joke. The proper description is "win-win-lose" - the worker wins, the old firm wins, the new firm loses.

As a member of a department that has recently dehired 3 employees, I can say that there was an earnest belief that these employees might be a better fit for less dynamic work. Their skills were such that they were unable to be flexible enough to accomplish the analytical work of the department. But there is undoubtedly, in the minds of management, simpler analytical work for which they would be properly suited.

And the clearest indication of this is the fact that they were told to look for new positions within the company itself. If Bryan's claim is true, one would imagine that this wouldn't occur internally, as there would be a fear that a department head would burn bridges. Since this fear doesn't seem to exist, it would seem obvious that, while Bryan is right in some cases, the dehiring practice can just as easily be win-win-win as win-win-lose, even between firms.

Jeff writes:
This assumes all firms and jobs are equal. When you are de-hired from McKinsey and move to some executive position at a client, it's win-win-win. You couldn't cut it at McKinsey, but you'll do great in Cisco's acquisition group. Or you couldn't cut it at Oracle, but you'll do great at that app firm. There's a trickle-down market in employees. De-hiring comes with a significant message to the employee that they need to find a more appropriate match to their skills next time.

Right. Different jobs in the same industry require different skill sets, even at the lower end of the labor market. One guy may not be able to keep up with the work at an assembly line job that requires repeating the same task over and over at high speeds, but that same person might do fine working on an assembly line that moves slower and requires more finesse or fine motor skills.

Furthermore, I suspect that workers probably realize when they've been dehired that their performance was unsatisfactory. You'd have to be pretty oblivious not to. These workers then would, I'd suspect, either try to fix whatever made their performance unsatisfactory or, if they can't, gravitate towards positions where whatever their deficiencies are minimized.

For both reasons, I think it's simplistic to think of de-hiring as win-win-lose. It could go either way for the new firm who hires that worker.

tom writes:
The government could mandate disclosure: If another employer inquires about your current or former employee, you must reveal everything negative that you know about him. If you lie - or simply hold back - an employer who detrimentally relies on your reference can sue you for fraud.

This just turns the situation into lose/lose/win. The future employer gains lots of valuable information but to do so you shift a burden onto current employers. If they are potentially liable for not disclosing performance they have to meticulous in assessing every single employee since they have no foreknowledge of might or might not be leaving. Its the same reason preventative medicine probably doesn't save money in most cases since you are treating everyone, not just the 1% who end up with the condition. The new firm only has to look through one file while the old firm has to keep a file on every employee, one that is much more detailed.

jb writes:

To summarize the other commenters (whom I agree with):

win-win-not_my_problem


There's a huge gap between "horrible employee here" and "horrible employee everywhere" and Bryan's ivory tower underwear is showing. Not that there's anything wrong with that.


Rob Alvord writes:

Yes, is Brian supporting such legislation? Or is he simply speaking pragmatically? E.g. I often say that if the government is going to spend money on drug users, that they should spend it on rehab and not prisons. However, if I had my way I would not want ANY money spent by government.

Perhaps Brian isn't supporting this disclosure law per se, but instead suggesting a disclosure law would be better than a non-disclosure law.

RPLong writes:

I agree with Finch.

Looking at this situation from a model in which all employees are either good, mediocre, or bad regardless of where they're working is inappropriately simplistic.

The correct model accounts for the fact that people are high performers when they enjoy the work and low performers when they do not. Matching up an employee with a more suitable working situation is win-win-win.

Daniel Kuehn writes:

The other reason for de-hiring is experience rating in unemployment insurance.

Paul Crowley writes:

I'm pretty sure that if the Government were to propose a law that mandated such disclosure, you'd be quick to give a whole list of bad consequences the law would be likely to have that would outweigh the good, and I suspect you'd be right. So is there any change anyone - employee, firm or government - can make to improve the situation?

Thomas Boyle writes:

What Mike Lorenz and Finch said.

I've been de-hired myself - and they were quite right. I'm a much better fit in my present job, where I earn more than I did before and have positive reviews.

MingoV writes:

In my 20 years of directing clinical laboratories, dehiring was appropriate only twice. In both cases new employees couldn't maintain the rapid pace. They both got jobs in nearby labs.

Dehiring is inappropriate in many circumstances. An employee who frequently is tardy, takes long breaks, uses more sick leave than coworkers, etc. should be fired. An employee who is loud, argumentative, disrupts work flow, etc. should be fired. An employee who is rude to customers should be fired. An employee who is incompetent in a critical position (eg: hospital nurse) should be fired. An employee who steals should be fired. An employee who harasses coworkers should be fired. Etc.


The government could mandate disclosure: If another employer inquires about your current or former employee, you must reveal everything negative that you know about him.
New York state passed such a law in the late 1970s. The results were mixed. Every complaint, no matter how trivial or how valid, had to be reported to possible employers. Most HR departments generated lists of complaints without elaboration, and the affected employees could not rebut anything in the file. A spiteful coworker could file unwarranted complaints to reduce an employee's chances of getting a good job. On the plus side, the law eliminated the practice of getting a very bad apple to quit by promising not to report problems. (The law went into affect because an anesthesiologist repeatedly molested unconscious women at three hospitals despite being caught at the first and second hospitals.)

Glen Smith writes:

If you think dehiring is appropriate, you should probably consider straight-up firing yourself.


This sort of logic jibes well with Caplan's stance on immigration and borders: ignoring personal relationships and their impact on behavior and interests and instead zooming out and trying to act as an outside observer whose end goal is to maximize the amount of utils distributed around the world as well as ensure the distribution is sufficiently aesthetically pleasing.

In the end, people are going to take near concerns much more seriously than far concerns, as well they should. I'm sure Caplan cares much more about the welfare of his children than any other children in the world, as well he should. Those who actually act on abstract utilitarianism without regard for social proximity are not those who will inherit the Earth.

Adam writes:
From the standpoint of the next employer, calling dehiring "win-win" is a sick joke.

Not so if employment is a matching game. Workers vary in inclinations and attributes; positions, too. The issue is to match worker with right position.

Dehiring is a great solution to a mismatch. The worker's reputation remains intact as it should when there's no fault associated with the dehiring.

Dehiring is a poor economic choice only when it hides worker malfeasance such as theft, dishonesty or intentional sloth or shirking. The latter flaws s are easier to observe in more unidimensional jobs--such as big box warehousing.

Slow moving or unsafe warehouse employees are probably pretty easy to identify and fire the old fashioned way. Jobs with more complex demands may lead to dehires, since malfeasance may be more difficult to detect (raising the threat of lawsuits and other such costs).

Scott M writes:

In this job market the employee would likely drag his feet and make them fire him. At least then he would get unemployment.
Part of the problem of this is the idea that the employee should make a lateral, or even vertical, move, never accept a lower pay or responsibilities, etc.

Mike Lorenz writes:

The simplest argument against legislation to mandate disclosure is that it wouldn't work. How's that for ivory tower bashing. Approximately zero de-hires would show up on the radar. (More bluntly - employers would "lie" in an effort to give this real person who they probably actually care about from having a handicap in their job search.). I have no proof besides common sense, years of hiring/firing experience, and this anecdote: I was once tasked with analyzing turnover at a fortune 100 company - after any employee left, a code was entered by their manager in the HR system as to why they left. Shockingly, no one ever selected the code equivalent to "bad manager", even tough this was probably most often the real cause. The data would be crap and useless. Conversely, what could easily happen is employees could be more fearful of leaving a terrible work situation for fear of being blackballed by a terrible former manager. Even if this was rare, the fact that it would be the direct result of a govt mandate is terrible. Just another instance where the negative side effects would be more likely to occur than the actual "positive" outcomes desired.

Tom West writes:

An employee who frequently is ... uses more sick leave than coworkers ... should be fired.

Wow, the US really is a tough job market. Get sick - get fired.

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