Bryan Caplan  

What If Firms Could Opt Out of Sexual Harassment Law?

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Suppose firms could publicly opt out of sexual harassment law.  Would they choose to do so?  The simplistic answer is, "Since sexual harassment laws were forced on firms, they'll all opt out as soon as they get the chance."  But status quo bias is a powerful force - and even if it weren't, social norms have deeply changed since the dawn of sexual harassment law.  Would firms really value immunity to lawsuits over bad publicity and harm to worker morale?

My best guess: Small, for-profit firms would soon opt out, given the chance.  They have little reason to worry about bad publicity, and the laws are quite inefficient: workers rarely value the right to sue their employer for harassment more than their employers value immunity to such lawsuits.  To maintain worker morale, most such firms would loudly declare an internal policy against sexual harassment: "Here at the Widget Corporation, we strongly oppose sexual harassment.  But from now on we're going to handle the problem internally." 

Larger firms that fret about their public image, in contrast, would wait and see what happens.  Over the course of 5-10 years, though, they'd probably opt out too - and cry that their callous competitors forced their hand.

The main hold-out, I suspect, would be non-profits - especially universities.  Their main customers, after all, are parents - and few parents want to send their kids to a school that leaps at the chance to evade sexual harassment laws.  Internally, moreover, universities are full of people who are ideologically committed to things as they are.  Pragmatic administrators would be loathe to cross them.

Of course, I could be wrong.  So tell me: What would happen if firms could opt out of sexual harassment law?


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CATEGORIES: Regulation
Twitter: Bryan Caplan @bryan_caplan



COMMENTS (16 to date)
LemmusLemmus writes:

Not a lot would happen. That's because when the anti-harassment laws are the norm, by opting out a firm signals: "This is a company where harassment is considered a-ok." Even if they proclaim otherwise.

Such a firm would probably end up with a lot of employees who'd like to do a bit of harassin', but no women to harass.

dangerman writes:

Increased wages to employees.

Employees would capture some non-zero amount of the arbitrage between "workers [who] rarely value the right to sue their employer for harassment [vs.] their employers value immunity to such lawsuits".

RohanV writes:

I think someone would create an alternate mechanism for handling sexual harassment claims. Something like arbitration. This mechanism would balance more towards the companies (higher standards of proof/smaller awards), but still punish wayward companies. However the branding would be very strong, perhaps partnering with various women's groups.

Then many companies would switch to this mechanism. They'd say that preventing sexual harassment is important but the current law is unworkable and unpredictable. This system gives them cover, while still not binding them to full power of the law, since participation is voluntary.

An example of similar voluntary scheme might be movie or game ratings. Voluntary schemes, but pretty much everyone in the industry abides by them, and government ratings/censorship is not really an issue.

Or perhaps the way sports leagues (NHL, in particular) handle fines/penalties for various offences. In a sense, one could say that the sports leagues have substituted their own legal system for what would traditionally be assault. The government stays out of it except for the most egregious cases.

john hare writes:

Given the number of bogus accusations I have heard of, I would expect most firms would opt out ASAP. There is likely some selection bias in the problems discussed in local business, but there seems to be considerably more damage done by the law than the problem it is meant to address.

The fear of accusation used as a lever to control bosses and coworkers being the larger problem IMO.

david writes:

If it's publicly opt-out, firms that opt out may face vandalism or otherwise political action that the state can discourage, or punish, but not really prevent. This may deter firms from opting out, especially larger firms.

robert writes:

Why pick on sexual harassment laws? Seems that if companies had the ability to opt out of laws, the list of laws that they would abide by is much shorter than the list of ones that they would choose to ignore, if allowed.

Pollution? Civil rights? Workplace safety? Customer safety? Health? Heck, why stop there? Violent crime, of course. Why not just knock off your competitors? In the long-term, the market might correct for disobeying those laws, but companies do a terrible job of managing for the long term, and in the short term the managers and owners make a killing.

External rules that companies would live by would only benefit the companies and would be enforced by others. For example, the collusion among Apple, Adobe, Google and others to not poach engineers was enforced by Steve Jobs threatening to hire away the engineers of any company that strayed.

Matt H writes:

I think universities would opt out and create their own systems as well. These new systems would be tougher than the current law. But over time they would become easier on the administration, and harder on individuals. Universities would use this opportunity to buy more of the moral positional good that signals their superiority. The students get the joy of occasional lynchings and university control allows liberal professors to actually have the power to punish people they disagree with.

Handle writes:

Plenty of employers would still discipline employees for sexually harassing other employees, they just wouldn't be criminally liable, or risk huge awards in civil suits.

They would neutralize respondeat superior or employer indemnification and thus simply pin it all on the accused. Since most folks are easily replaceable, and it's a huge financial win to fire someone for suspicion or cause if it cancels out some long-term benefits, then they'll just dump the guys.

So, on the one hand, it would diminish the financial incentive to make a sexual harassment suit for a woman. She doesn't get anything out of it except justice (if true) or revenge (if false). She might get a bad reputation and thus worry about keeping her job or getting promoted.

On the other hand, since replaceable male workers would be quickly fired without any help from their employers, they could be under more risk from both true and false accusations.

Employers mostly care about financial liabilities and happy, cohesive employees. They would dump sexual harassment suits for the former reason, but not necessarily the policies themselves for the latter reason.

NZ writes:

Opters-out wouldn't just be small businesses, but those small businesses whose leaders most want to signal that they are fed up with overregulation and feminist authoritarianism.

Mike Linksvayer writes:

A symmetric question is what would happen if firms could opt in to such regulation? I recall a c. 2005 idea (on discrimination, not harassment) http://islandia.law.yale.edu/ayers/AyresBrown_Mark_et_ing%20Nondiscrimination.pdf that I presume hasn't had any takers, simply due to not hearing more about it.

I suspect the cost of even considering opting out (if it were possible) or in to non-default regulation is very high, but maybe should be lowered so as to encourage more experimentation.

foobarista writes:

Given that many of these laws (and most importantly for expense, the reporting requirements associated with the laws, which are more expensive in aggregate than actual lawsuits) don't kick in until you have 50 W2 employees, many growing small companies try to "opt out" as long as they can by outsourcing and 1099-contracting as much as they can until they can no longer operate without more internal hires. I see this a lot in Silicon Valley among smaller, slower-growing startups.

It's also quite easy to avoid hiring in-house bureaucracy for a long time nowadays, since HR and accounting can be so easily outsourced, lots of what used to be called IT can be done in the cloud, etc. Many tech companies have only tech and sales/marketing staff and (a small number) of C-level executives, and have a CFO and/or COO who manages HR and accounting through outsourcers. The only other person they may have is an office manager, who does all other "bureaucratic" jobs.

Julien Couvreur writes:

@robert

You ask why not let firms opt-out of other laws, such as pollution regulations, workplace safety, customer safety or crime.

I would split those in two categories:
1) harassment, workplace safety, customer safety
2) pollution, crime, violating contracts (fraud)

The first group is quite compatible with the opt-out idea. That's because the potential victims are people who choose to interact with that firm.
So they can refuse to interact with firms that do not offer sufficient guarantees, recourse, arbitration, quality, auditing, etc.

The second group is more difficult. We have not developed institutions and norms for dealing with those violations of property in a decentralized and competitive way. This is the result of a government monopoly on law and arbitration.
Private arbitration and enforcement for aggression (real crimes) are difficult to bootstrap in presence of government.

J writes:

I am tempted to side with dangerman for an increase in wages.

Consider that employers now often by insurance to cover such suits (or certainly could). The employer could just negotiate a contract with employee, one that allows suit for sexual harassment (but has the insurance premium for that employee deducted) and one that does not allow for suit at a higher rate. I'd think most men would choose the higher rate and probably most women too.

Also, consider the signalling by the employee, not just the employer. Everyone considers the employer opting to have no liability for sexual harassment as a signal that it is an employer who harasses. But the employee that wants legal recourse also signals that they are litigious and more likely to sue their employer (as they value being able to sue more than other employees). This could potentially cause adverse selection, with only the most litigious prospective employees seeking to be employed at companies which have not opted out.

Robert writes:

in reply to Julien Couvreur:

In the theoretical world, yes, people have the choice to interact or not with a company that chooses not to, for example, provide a safe work environment. In the real world, however, a low-regulation environment tends towards monopoly and oligopoly, reducing choices or, at the very least, raising the costs of choices. In a company town, those choosing to not work for that company would bear a high cost. Yes, monopolies do not live forever, but for practical purposes, they live long enough.

As for your second group, government has been the tool that society has chosen to deal with those issues.

Mark V Anderson writes:
In the real world, however, a low-regulation environment tends towards monopoly and oligopoly, reducing choices or, at the very least, raising the costs of choices.

I suppose I'm just preaching to the choir on this blog, but this is totally wrong, and in fact likely to be the exact opposite of what Robert says. I think it is clear that highly regulated industries tend to have fewer businesses and have less competition, because small companies cannot make a profit while also following all the regulations.

sanchk writes:

Couple of intuitive guesses, assuming somehow opting out of sexual harassment laws could be done in a socially acceptable fashion:

  • Women would trade-off for a higher wage to work in jobs and locations where they would feel protected from harassment (public, outdoors, low male presence vs. private, indoor, lonesome, high male presence). Men can also get sexually harassed too, but I don't see men in general making that trade-off.
  • Sexual harassment outside of the workplace could decrease; why commit a crime in public and suffer legal stain to your reputation when the same crime committed in the workplace merits a private internal investigation that won't necessarily be revealed publicly if that is in the firm's best interests?
  • Or, sexual harassment outside of the workplace could rise; by not keeping a lid on a destructive and potentially addictive activity in the workplace, it could empower harassers to seek the same pleasures outside of the workplace.
  • Some compensation/insurance scheme between the firm and its workers for sexual harassment cases would become a benefit provided by the firm to all its employees. Whatever the scheme, it's design would look to shift the burden of compensation and blame away from shareholders and towards harassers. I'd expect this to be a full fledged business, with existing and new insurance companies offering products suited for small/self employed businesses to help pool risks.
  • Younger, less educated people may see the workplace as a step towards sexual empowerment, and may forgo their education for an early start to their careers as an opportunity to seek sexual advancement. Some businesses may consider a strategy to offer sexual liberties to young hires to offset paying a lesser wage.


Is there no handbook of the economic impacts of legalizing a crime/discrimination in the workplace? Someone should consider writing it, there might be some money in that venture.

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