The New UAW Contract: A Somewhat “Clear Path”

With General Motors, Ford, and Fiat Chrysler again profitable, the recently concluded contracts between the United Auto Workers (UAW) and these Detroit automakers resulted in the first gains by the union in a decade. The UAW achieved its primary goal of establishing a “clear path” for tier-two workers, those hired since 2007, to gain wage parity with their tier-one coworkers earning almost twice as much. The new contracts increase starting hourly wages for tier-two workers, now being referred to as “in progression” workers, to $17 an hour from $15.78 and establish annual increases leading to tier-one wages after eight years. The largest immediate gains are for those workers with between seven and eight years of seniority, who see their hourly wage jump from $19.28 to $28 immediately. The contracts also extend full healthcare coverage to tier-two workers.

Tier-one, or “traditional” workers also made gains. The contracts include the first hourly pay increases for traditional workers in a decade. Two 3% increases in the first and third years of the four year contracts will bring these wages to about $29.70 an hour by the end of the contracts. Tier-one workers also receive 4% lump sum bonuses (about $2400-2500) in the second and fourth years of the contracts.

In addition to advances in hourly wages, the contracts include bonuses to workers reflecting the relative profitability of the individual automakers. At Ford, all workers received an $8500 immediate signing bonus, while workers at GM got $8000. Tier-one workers at Fiat Chrysler received $4000 signing bonuses, with $3000 bonuses paid to tier-two workers. Workers at all the automakers will continue to receive annual profit sharing bonuses, based on formulas unique to each contract. And the automakers made promises to invest in a variety of their U.S. facilities.

To be clear, the new agreement does not do away with the two-tier employment structure. Instead, it establishes a path by which workers hired at the introductory hourly rate achieve the full hourly wage rate after eight years of employment. But even then, tier-two workers do not match the real compensation of tier-one workers, who qualify for a generous defined-benefit pension after thirty years of employment. Tier-two workers, all those hired after October 29, 2007, are enrolled in defined-contribution 401(k) plans. The automakers agreed to raise their contribution from 4% to 6.4%.

Background to the negotiations

The two tier wage structure was a concession by the UAW negotiated in 2007, during a period when the automakers were in dire straits. Originally, tier-two workers were only supposed to comprise a maximum 20 percent of hourly workers, which the automakers quickly achieved by offering buy-outs to high seniority workers and replacing them with cheaper tier-two workers. That cap was lifted as the Obama administration’s Auto Industry Taskforce ushered GM and Chrysler through bankruptcy. After decades of downsizing, the Detroit automakers employ about 140,000 hourly workers in the U.S., with Fiat Chrysler accounting for 36,000 and GM and Ford roughly splitting the rest. Twenty percent of GM’s hourly employees are tier-two, compared to twenty-nine percent at Ford, and forty-five percent at Fiat-Chrysler, owing in large part to the automakers’ different rates of hiring over the last few years.

The growing percentage of tier-two workers created pressure within the UAW to close the wage gap, as tier-two workers gained a voice in the union concomitant with their expanding numbers and tier-one workers also came to see a dual wage structure as a threat. Furthermore, the far greater share of tier-two workers at Fiat Chrysler threatened the premise of pattern bargaining altogether – that wages be taken out of competition by harmonizing labor costs among the companies. The growth of the nonunion sector in the United States has undermined that principle, and led to the two-tier structure as a way of cutting the gap between union and non-union wages. Were Fiat Chrysler to maintain lower labor costs than GM and Ford by employing far more tier-two workers over the long-haul, the integrity of pattern bargaining among the Detroit automakers would be compromised. So the UAW needed to address the wage gap both to meet the demands of its membership and reassert the primacy of pattern bargaining among the Detroit automakers.

A rocky start to negotiations

Pattern bargaining among the UAW and the Detroit automakers begins with the union selecting one of the automakers with which to initially bargain, the so-called strike target. The UAW may decide to negotiate with the automaker they perceive as having the most to give, or which could least afford a strike, or which would be most likely to concede issues of import. Once a contract has been negotiated with the strike target, the UAW then seeks to impose the terms of that settlement with the other two automakers, thereby maintaining the pattern.

The UAW began negotiations with Fiat Chrysler, most likely because that automaker has the highest percentage of tier-two workers and was perceived as most vulnerable to a strike. It was also probably seen as a promising signal that the Chairman of Fiat Chrysler, Sergio Marchionne, had previously indicated a desire to end the two tier wage structure and was even quoted in the press as calling it “unsustainable.”

Concerns of a strike escalated when the union membership at Fiat Chrysler voted against ratifying the initial contract, sending the parties back to the bargaining table. Workers rejected the deal primarily because it did not provide a clear path to wage parity for tier-two workers. By the end of that four year deal, tier-two wages would have climbed as high as $25.35 for workers with more than three years current seniority, but no higher. In fact, workers with more than six years seniority would not have received any increases in the final three years of the contract. Only after being sent back to bargaining table did negotiators reach a settlement that offers annual wage increases to all tier-two workers and establishes an eight year path to wage parity with tier one workers.

Looking ahead

The biggest issue looming over future negotiations involves autoworkers’ healthcare benefits. The new contracts fold in-progression workers into the traditional healthcare benefit under which the automakers pay the full cost of insurance premiums for workers and their families, with employees responsible for only minimal copays. This benefit is likely to fall within the definition of a “Cadillac plan” under the Affordable Care Act and be subject to an excise tax beginning in 2018. Under the new contract, workers in such taxed plans may be responsible for annual deductibles of up to $400 for individual and $800 for family coverage.

The tax implications of the current healthcare benefit aside, escalating healthcare costs and how, or whether, they should be shared may become contentious issues down the road. The initial agreement the UAW negotiated with Fiat Chrysler included the creation of a healthcare cooperative that the union pitched in its summary to workers as a “trailblazing” idea on par with the 2007 creation of the Voluntary Employee Beneficiary Association (VEBA) that assumed responsibility for retiree healthcare. Union members saw the co-op as a threat to current benefits. Amid the uproar, the provision was left out of the renegotiated contract.

Notwithstanding the retreat from creating a healthcare cooperative, the UAW appears to be preparing its membership for future concessions to healthcare benefits, or at least the creative reworking of current plans. The UAW is already warning members that over the course of the new contracts, members’ healthcare costs will increase from $8 to $13 an hour. Having previously shifted retiree healthcare to the VEBA, and employees hired since the creation of the two tier compensation structure to 401(K) style retirement benefits, healthcare benefits for current workers is the remaining “legacy cost” that the Detroit automakers have identified as placing them at a competitive disadvantage vis-à-vis the non-union automakers operating in the United States. The UAW clearly expects these benefits to be a focus of future negotiations.