Supreme Court Questions Legality of Agency Shop Provisions

In Knox v. Service Employees International Union, Local 1000, the Supreme Court for the first time raised question about the continuing legality of “fair share” or agency fees. “Fair Share” is a bargaining system where employees are free to be non-members of a union, but must pay to the union their “fair share” of the costs of negotiating and administering a collective bargaining agreement. Though the Supreme Court has long upheld the constitutionality of such clauses, after Knox one must wonder if the political tides have turned on the issue.

Knox is a fascinating case that began in 2005 when California Governor Schwarzenegger called for a special election to consider Propositions 75 and 76. Prop 75 would have required unions to obtain employees’ affirmative consent before charging them fees to be used for political purposes. Prop 76 would have given the Governor unilateral authority to reduce appropriations, including appropriations for employee compensation, after a declaration of a fiscal emergency.

Not surprisingly, unions throughout California banded together to fight these measures. Service Employees International Union, Local 1000 (SEIU) was one of those unions. To fund its fight, SEIU imposed a special assessment on its bargaining unit members that it called an “Emergency Temporary Assessment to Build a Political Fight-Back Fund.” The assessment increased dues and fees to 1.25% of gross salary (from 1%) and eliminated the existing fees and dues cap of $45 per month.

A group of fair share members complained that the assessment was for political purposes and that they shouldn’t have to pay it. Notably, SEIU did not send out a so-called Hudson notice with its special assessment but instead relied in its regular Hudson notice sent only a month earlier. A Hudson notice, named after a Supreme Court case of the same name, provides notice to non-members of the union’s calculation of fair share assessments and the system available to challenging that allocation.

In Knox, the Union calculated that non-members were required to only pay 56.35% of the assessment based on the percentage of chargeable expenses the Union had calculated for its regular Hudson notice. The employees who did not object argued that they should have received a new Hudson notice providing them an opportunity to object. Those employees who had objected argued that even paying 56.35% was too much as the assessment was for non-chargeable political purposes.

A trial court agreed with the employees and ordered that a new Hudson notice be sent and that those who had previously objected receive a full refund. The Ninth Circuit reversed, finding that the procedure utilized by SEIU reasonably accommodated the interests of the Union, the employer, and the nonmembers.

The Supreme Court reversed the Ninth Circuit. The Court began by noting that an “agency shop” provision forces an employee to financially support an organization whose principles the employee may disagree with. The Court called such compulsory fees a “significant impingement on First Amendment rights.” On the main issue, the majority (Alito, Roberts, Scalia, Kennedy, and Thomas) had little trouble finding that SEIU should have sent a new Hudson notice for the special assessment. Justices Sotomayor and Ginsburg also concurred in that finding.

However, the majority opinion went further. It held that a union cannot use figures based on an audit of regular operations to support the calculation of chargeable versus non-chargeable expenses for a special assessment. The Court acknowledged that it is not easy for unions to determine what may be chargeable in advance. However, the Court held that unions must bear the risk of collecting too little – versus employees bearing the risk of paying too much – since the union’s constitutional rights are not at stake. Accordingly, the Court held that when a union imposes a special assessment or dues increase, there must be a new Hudson notice. More significantly, the majority decision delved into whether the First Amendment required an opt-in system versus an opt-out system. After discussing prior precedent, the majority held that nonmembers may only be required to pay expenses if they affirmatively consent (opt-in).

Comments:

1. Justice Sotomayor’s concurrence criticizes the majority opinion as being unclear on its most important holding, the opt-in requirement. I agree. For example, Justice Sotomayor asks whether the nonmember must opt-in for the union to collect any funds or just to collect non-chargeable funds. The majority decision just uses the term “expenses” so it’s unclear. I think the opt-in rule required by the majority decision probably applies just to non-chargeable expenses. In other words, the union can still collect the chargeable portion even if the nonmember hasn’t opted-in. But it’s not clear.

2. The most significant part of this decision in my mind involves the Court’s initial discussion of the First Amendment. As Justice Sotomayor notes, “the majority strongly hints that this line [referring to the Court’s prior precedent on agency shop provisions] may not long endure.”

3. Take, for example, the concept of an agency shop. Does this decision signal the impending death of “agency shop” provisions? The majority opinion acknowledges that agency shop agreements have been allowed in the interest of “labor peace” but calls it an “anomaly.” The majority further states that “our cases to date have tolerated this ‘impingement,’ and we do not revisit today whether the Court’s former cases have given adequate recognition to the critical First Amendment rights at stake.” Does that mean they will revisit it tomorrow? It certainly seems like that is what they are suggesting.

4. Regarding “opt-in” versus “opt-out” systems. The majority decision says it applies to special assessments and dues increases. But the majority opinion states that “requiring objecting nonmembers to opt out of paying the non-chargeable portion of union dues, as opposed to exempting them from making such payments unless they opt in, represents a remarkable boon for unions.” The majority opinion continues to state, “…acceptance of the opt-out approach appears to have come about more as a historical accident than through the careful application of First Amendment principles.” Further, the same rationale used to justify an opt-in system for special assessments and dues increases would seem to apply to regular and continuing assessments. So does that mean the majority will also revisit whether opt-out systems are permissible at all? Again, that’s what it seems like they are suggesting.

5. So what does this all mean? For public sector unions, this decision has to cause great concern not for what it requires today, but what it may signal tomorrow. It certainly seems like the majority has called into question the legality of agency shop provisions and also the use of opt-out systems. Practically, I expect that unions will begin to allow more employees to opt out of fees without a fight. The last thing the unions want is to get into another fight over fees and end up before this Supreme Court.

6. For employers, there is not a lot to do except sit back and watch.

Knox v. Service Employees International Union, Local 1000 (U.S. Supreme Court Case No. 10-1121) (Issued on 6/21/12).

Tim Yeung is a Partner with Renne Sloan Holtzman Sakai LLP in Sacramento, California where he represents numerous public entities in all areas of labor and employment law.