Media Center

September 19, 2022
Publications

By Adam L. Santucci and Langdon T. Ramsburg

Employers are facing an economic paradox.  On one hand, employers are fighting incessant labor shortages. This has triggered a war for talent, which employers have waged against each other by offering ever-increasing and creative incentives to prospective employees. On the other hand, the chorus of warnings about a coming recession are growing louder and more frequent.[i]  These contradictory pressures beg the question: could the same economic incentives employers are offering to attract available workers ultimately prevent employers from being able to keep those same workers through the duration of a recession?

This really raises two additional questions for employers to consider:

1. Should they be evaluating the affordability of the hiring incentives based on today’s demand or future demand?
2. Should employers continue to engage in the war for talent at all?

Many employers that have evaluated those questions have answered the same way.  The gist of their response goes something like this: “One problem at a time. Today’s problem is high demand and low labor supply.  A recession (yet to be realized) is tomorrow’s problem.  I will deal with today’s problem today and tomorrow’s problem tomorrow.”

Indeed, many employers argue that if there really is a recession coming, they should do everything they can to satisfy as much demand now.  Doing so will allow them to be as financially liquid as possible and have as little inventory as possible (assuming anyone still has inventory anymore) before the foretold recession hits.

This requires labor, which right now means enhanced compensation incentives and a strong employer brand.

That all makes perfectly rational economic sense – with one caveat.  If employees are savvy enough to leverage the labor shortage to secure ever-increasing incentives (which they are), the employees are also savvy enough to have those incentives memorialized in a contract (which they should).  Meaning, the risk this presents is not a problem a future reduction-in-force can resolve.

All the financial liquidity accumulated through this additional labor could be exhausted after demand slows.  So, the real concern is that financial liquidity secured now minus economic incentives paid throughout a contract term is ultimately significantly net negative (for what it is worth – law firms will likely be some of the biggest offenders/victims of this).

What all this means is that it is not tomorrow’s problem.  It is today’s.  As employers enter into these incentive agreements, the labor shortage and recession risks are simultaneous problems, just realized at different times.  With this in mind, some employers will nevertheless stay the course and continue to offer increasing incentives for various reasons that are specific to them (e.g., cashflow needs in the short term).

However, many employers will start considering incentives that are not based on today’s demand but instead based on historical, normalized demand and revenue.  Some particularly risk-averse employers may only consider incentives based on historical recession demand and revenue.  Each employer must undergo this cost-benefit analysis for themselves.

The employers taking a more cautious approach may find themselves leaving the battlefield altogether (either by strategic choice or because their new incentive calculation will not yield new hires).  These employers will continue to offer the same level of salary and benefits, but will not continue to offer increasing incentives.  This will leave these employers waiting it out to fight another day from a better vantage point.

But just because it may be strategically wise for their particular circumstance, does not mean it will be painless.  These employers may be left behind as other employers swoop in and scoop up their candidates or worse, their current workforce.

The remaining employees will have to work longer hours, and that may make them more likely to look elsewhere for a more flexible work schedule. So not only will vacancies remain unfilled, but more vacancies may be created.  In the meantime, customer/client demand will unfilled and revenue unrealized.

Finally, there is another category of employer for whom the entire debate is a luxury.  No matter what they do and no matter the incentives offered, they cannot find applicants (let alone employees).  This is true for employers looking for physical laborers, CDL drivers, and skilled trades, just to name a few.

For these employers, it is not through strategic choice but through no choice at all that they simply wait.  Depending on the severity and length, a recession and corresponding increase in labor supply may feel like a return to quasi-normalcy for these employers.  An opportunity to reset, so to speak.

Employers who are finding themselves on the sideline of the war for talent are starting to plan for that future opportunity to secure talent, whenever it may present itself.  Planning for the future means using new, advanced tools to best position themselves going forward.

For example, as employers are looking to ensure that the applicant review process is fast and efficient, and there are more tools than ever to help streamline applicant intake, screening, and onboarding.  A number of these tools employ Artificial Intelligence, AI, in the applicant screening process.

The use of AI in the human resources space seems appealing.  If we can remove the biases, unconscious and otherwise from our recruitment and retention practices by using AI, we will all be better off, right?  A computer reviewing a resume will have no knowledge of the candidates’ gender, race, national origin, disability status, or other protected traits.  That is certainly one of the primary benefits of using AI in this setting.

However, employers must be certain that any AI tool is not simply perpetuating the same biases that have long been problematic for regular human intelligence.  Candidate screening tools that have a disparate impact, that is, an unintended discriminatory impact on certain protected groups, will very likely be unlawful under Title VII of the Civil Rights Act and similar state anti-discrimination laws.

These tools need to be tested and validated to ensure that there are no disparate impact concerns, and human resource professionals considering the use of these tools must be certain to ask the right questions when selecting a vendor.

Additional concerns that were recently highlighted by the federal Equal Employment Opportunity Commission.  On May 12, 2022, the EEOC issued guidance regarding the Americans with Disabilities Act and the use of software, algorithms and artificial intelligence to assess job applicants and employees.

The EEOC’s Guidance, groundbreaking in many ways, outlines three areas where AI could potentially violate the Americans With Disabilities Act (ADA):

1. The employer does not provide a reasonable accommodation to allow an applicant to be rated fairly by AI;
2. The employer relies on AI that screens out qualified applicants with a disability, intentionally or unintentionally; or
3. The employer utilizes an AI tool that makes an unlawful disability-related medical inquiry.

Note that it is the employer who will be on the hook here, not the AI vendor.  Thus, employers deploying AI in the hiring process need to be aware of these risks and must be sure to discuss how they will be addressed with the vendors offering these products and services.

The EEOC Guidance is required reading for anyone considering the use of AI at any stage of employee life cycle. There is no doubt that we will continue to see a proliferation of AI tools.  AI is being used to solve more and more problems for organizations of every size.  AI will certainly be helpful in addressing many human resources related challenges, including the applicant tracking, screening and onboarding processes.

Understanding the legal issues and working to ensure compliance from the beginning is the best approach for employers.  This area of the law will continue to develop, with additional guidance from state and federal agencies, the courts, and quite possibly state regulation of the use of AI in human resources functions.

From all this, one thing is clear – employers must not be unintentionally and unknowingly nearsighted as they strategize about employee recruitment and retention.  Instead, employers should be thinking (at least) three moves ahead.

1. Is it appropriate to base hiring and employment incentives based on today’s unrecognizable demand? For some the answer will be yes.  For many, the answer will be no.
2. If not, does a complete exit from the war for talent make sense? Either by strategic choice or by default, employers that choose to temper their incentives based on historical demand will likely find themselves outside looking in.  That is ok.  It may be painful in the short term but the best choice in the long term.
3. If an exit from the battle space is the right choice, is the future use of technology (AI) the appropriate tool to use? The fact that the EEOC has issued guidance suggests that it recognizes AI is here to stay and will grow in application.  Employers planning to use this tool should just understand the risks that come with it and carefully vet the AI they use.

At some point, sooner or later, the world will be recognizable again, and we will find ourselves on familiar terrain (right?).  Until then, it is the employers with the best ability to see around corners that will be the strongest when we get there.

[i] Let The Wild Rumpus Begin (gmo.com); Jamie Dimon: Brace yourselves for an economic ‘hurricane’ – CNN

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