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ERIE - LACKAWANNA MERGER STUDY

Labor Contracts

Study XVI

A. Payments under the Washington Agreement or Interstate Commerce Act to employees deprived of employment or otherwise adversely affected by consolidation.

The effect of coordination or consolidation of railroad operations upon personnel has long been a subject of negotiation between management and labor organizations, and the question became particularly acute in the early 1930's when the depression was forcing such actions in order to effect necessary savingso A general agreement as to treatment of employees thus deprived of employment or otherwise adversely affected was reached in May, 1936, in Washington, D. C., between the labor organizations and the carriers, which has to a large extent set the pattern since that date and which has become known as the "Washington Agreement".

The question was further considered at length in connection on with revisions of the Interstate Commerce Act in 1940 and Section 5 (2) which permits consolidation of carriers subject to approval of the Interstate Commerce Commission, also provides that the Commission shall require a fair and equitable arrangement to protect the interests of the railroad employees affected. Certain allowances to affected employees were specified in the Act and these differ from the provisions of the Washington Agreement. Under some conditions the Interstate Commerce Act is more favorable to affected employees than the Washington Agreement, but under other conditions the Washington Agreement is more favorable.

The Commission applied the terms of the Interstate Commerce Act in its order dated May 17, 1944 in Oklahoma Ry. Co. Trustees Abandonment, 257 ICC 177, and for some years assumed that the allowance under tHe Interstate Commerce Act should be taken as the maximum allowance permissibl6. This position was assailed. by the labor organizations and following the decision of the Supreme Court of the United States in Railway Labor Executives' Association v. the United States, 339 U.S. 142 dated March 27, 1950, it has been accepted that the Interstate Commerce Act represents minimum rather than maximum protection and that agreements between employers and employees can provide for greater protection.

In one of the most important recent cases, that of the consolidation of the Louisville and Nashville and the Nashville, Chattanooga and St. Louis, F.D. No. 18845, decided March 1, 1957, the Commission proposed conditions giving the protection afforded by the Washington Agreement, reduced as to dismissed employees to the extent that they receive compensation in any other employment or under employment insurance laws, with minimum protection being that afforded by the so-called "Oklahoma conditions" based on the Interstate Commerce Act.

In the present instance, the merger of the two companies under study would result not only in reductions in working forces, but also in dislocations and rearrangements affecting many of the remaining employees, and the first purpose of Study XVI was to estimate the payments that would be required by the Interstate Commerce Commission for the protection of employees deprived of employment or otherwise adversely affected by the merger.

The Washington Agreement provides for four types of payments to employees affected by consolidation which are summarized in the following paragraphs:

(a) "Displacement Allowance'' (Section 6) Employees who., while not losing their jobs, are placed in a worse position with regard to compensation and rules governing working conditions at any,time during a period not exceeding five years from the effective date of a consolidation, are entitled to receive a "displacement allowance". This allowance is a monthly payment,equal to the difference between the average monthly compensation for the year preceding displacement and the compensation received after displacement.

(b) "Coordination (Consolidation) Allowance'' (Section 73 - Any employee who within three years from the effective date of the consolidation, is deprived of employment as a result of consolidation or coordination, shall for certain specified periods received a monthly allowance equal to 60% of his average monthly compensation for the year preceding his release, except that a lump sum payment is made for employees .with less than one yearts service. The allowances are made in accordance with the table below:


          Length of Service of Employee

                                              Lump Sum Payment

Less than one-year.......................Equivalent to 60 days pay

                                          Payents equal to 60% of
                                          average monthly compen-
                                          sation for period of -

One year and less than two years.....................      6months
Two years and less than three years..................    12 months
Three years  and less than five years................    18 months
Five years and less than ten years...................    36 months
Ten years and less than fifteen years................    48 months
Fifteen years and over...............................    60 months

This allowance shall be reduced to the extent of an
  employees earnings in other railroad employment.

       (c) "Separation Allowance" (Section 9) -    Any employee
            eligible to receive a "coordination (consoli-
            dation) allowance" may, in lieu thereof, take
            a lump sum payment called a "separation allowance"
            as set forth below:

                                             Separation Allowance

Loss than one year ......................    5  days pay for each
                                                month worked.
One year and less than two year .........    3  months pay.
Two years and less than three year.......    6  months pay.
Three years and less than five years....     9  months pay.
Five years and over.....................    12 months pay.

(d) "Moving Allowance"(Sections 10 and 11) - The agreement also provides that any employee who accepts a change in the location of his employment as a result of consolidation shall be reimbursed for his moving and traveling expenses, and, for loss of wages not to exceed two days, provided the expenses are incurred within three years of the date of the consolidation (Section 10). It further provides that employees who move shall also be reimbursed for any loss in their equity in a home, or for cost of cancellation of a lease (Section

Section 5 (2) of the Interstate Commerce Act as amended in 1940 includes the following:

(f) As a condition of its approval, under this paragraph (2) of any transaction involving a carrier or carriers by railroad subject to the provisions of this part., the (Interstate Commerce) Commission shall require a fair and equitable arrangement to protect the interests of the railroad employees affected. In its order of approval the Commission shall include terms and conditions providing that during the period of four years from the effective date of such order such transaction will not result in employees of the carrier or carriers by railroad affected by,such order being in a worse .position with respect to their employment, except that the protection afforded to any employee pursuant to this sentence shall not be required to continue for a longer period, following the effective date of such order., than the period during which such employee was in the employ of such carrier or carriers prior to the effective date of such order. Notwithstanding any other provisions of this Act, an agreement pertaining to the protection of the interests of said employees may hereafter be entered into by any carrier or carriers by railroad and the duly authorized representative or representatives of its or their employees.

For the purpose of this study the Interstate Commerce Act provisions were applied except where the Washington conditions as modified in the Louisville and Nashville case afforded more protection. The total cost is estimated at $3,108,187, and the calculations underlying this figure, together with the methods used and the assumptions requisite to develop these costs, are shown in Schedule A.

Payments to employees would be chargeable to operating expenses to and thus become a deduction in computing Federal income taxes. At the current rate of 52%, the reduction in income taxes would be $1,616,257, and the remaining cost of $1,491,930, would be borne by the merged company. Interest at 5% on this amount, or $74,597, is included in the study as an annual charge against the merger.

Merger plans have, of course, not yet progressed.to the point where the effect upon specific personnel can be clarified to indicate which of those employees deprived of employment at their present location, and who are offered transfer to a different location, would be willing to make the transfer with proper compensation for moving costs, and what proportion would prefer to remain where they are and take the consolidation or separation allowance. On the basis of present limited knowledge, the range between a reasonable minimum and a reasonable maximum estimate of possible payments is wide. Our estimates have knowingly been made on premises which would tend to produce maximum estimated. costs rather than minimum, and it is quite possible that the ultimate cost will be materially less than that herein estimated.

B. Other effects of merger upon labor contracts and estimated costs of equalizing rules and rates of pay.

The payments estimated above would be handled under basic rules which have been tested and clarified over a long period of years, although still subject to modification. A second and even more difficult area of labor problems involves the consolidation of operations into a unified whole, the merging of seniority rosters into single lists of employees who would perform the consolidated operations at various points, the reconciliation of variations in rates of pay and working rules, the concentration of through traffic on the shortest or most economical joint routes resulting in transferring freight from one through line to another, etc. Agreement on these problems will be difficult on any basis, particularly so if the problems at each local point are to be settled individually. There will be interminable delays in affecting merger unless general principles on a system-wide basis can be negotiated for use in settling specific problems. As pointed out in the report proper, we believe that as soon as plans have been sufficiently crystalized, steps should-be taken to advise the labor organizations of the progress made and to seek a preliminary understanding as to the basic principles to be adopted where labor is concerned.

The only factors above to which it appears possible to assign definite dollar value are the matters of rates of pay and working rules. These have been analyzed craft by craft, and it has been assumed that where system-wide differences exist the basis most favorable to the employees would become the standard of the merged company, but that existing local or point variations would be unchanged.

The estimated annual cost of equalizing the differences in rules and rates of pay is $510,000, and when payroll taxes are added to the portion represented by wages the total estimated annual increase in costs is $571,454.

Explanation of Methods Used and Assumptions Made in Schedule A

Note No.

The number of jobs which would be abolished in the various studies was determined by actual,count where possible. Where the number of employees was not shown, an estimate was made by dividing estimated wages saved by the average compensation for the type of employees involved. Jobs abolished, thus determined, were separated by I.C.C. wage reporting division groups by studies, and in the case of Groups I, II, and IV, Studies VIII, IX and XIV were further separated between principal locations. Jobs which would be created at various locations as a result of changes in the operations of the merged company were also shown. Officials and off-line and on-line agencies of the Traffic Department were analyzed separately.

An analysis of the employment records of both companies was made for the years 1954, 1955 and 956 to determine the number of employees who left the service because of deaths, retirements, dismissals and resignations by I.C.C. reporting division groups. This number was related to total employees in each group to determine the per cent of attrition. Not all jobs created by attrition, however, were considered to be available to absorb employees whose jobs were abolished, since most resignations are on junior jobs and there are frequently several resignations on the same job in the same year. The following table shows the per cent of jobs created by attrition considered available.

       I.C.C.                                                     Per
     Group  No.              D E S C R I P T I 0 N                Cent

  I    Executives, officials and staff assistants                  100
 II    Professimal, clerical and general                            80
III    Maintenance of way and structures                            50
 IV    Maintenance of equipment and stores                          40
  V    Transportation (other than train, engine and yard)           60
 VI-a  Transportation (yardmasters, switch tenders and hostlers)    50
 VI-b   Transportation (train and engine service)                   50

Displaced employees at locations where the railroads have substantial forces were considered re-employed locally in jobs made available by attrition at those locations. It was assumed displaced employees at other locatims would be offered transfers to locations where jobs created by attrition were available.

Jobs requiring transfer were determined by actual analysis in each Group and it was assumed that only 6% of the employees would accept such jobs, with the remainder refusing transfer and accepting the allowances provided by law. Transfers were assumed to be made only within I.C.C. employee groups and in the case of Groups I II. and IV were limited by the total of new jobs created at specific locations.

Men deprived of employment are those employees who refuse transfer.

Jobs made available by attrition in any given year that were not used to provide jobs for employees whose jobs were abolished in that year were used to offer re-employment to employees whose jobs had been abolished in prior years. Within each I.C.C. Group, it was assumed that 20% of the excess jobs created by attrition in each year-after the first would be at a location where they could be offered to former employees receiving allowances. Whether such employees accepted or not, they would then cease to receive allowances. Twenty per cent of the balance of jobs available by attrition were used to reduce the number of employees who would receive a displacement allowance, as described in Note (10).

It was assumed that 75% of the employees deprived of employment in the Cleveland and New York-New Jersey areas and 25% of the employees in other areas would accept separation allowances, and that the remainder would become entitled to consolidation allowances. The number of employees taking separation allowances was determined by applying weighted average per cents reflecting the above assumption within each I.C.C. Group. It was assumed the lump sum payment for employees would be based an an average of three years service, which would produce nine months' pay or $3,819, based on average compensation for 1956.

Under the Washington Agreement the allowance was taken at 6% of the average compensation of $5,113 for all employees for the year 1956, or $3,068, reduced in the first year only by $1,000 representing unemployment c - pensation received. It was assumed that employees losing their jobs would earn 80% of their railroad earnings from other employment in the Cleveland and New York-New Jersey areas and only 20% elsewhere, a weighted average of 64.0%. Accordingly, a deduction of $3,272 was made for outside earnings. Only employees deprived of employment in the first three years were protected and the period of payment was limited to 18 months reflecting the assumed average length of service of three years.

Under the Interstate Commerce Act, the allowance was based on average compensation for all employees for 1956 of $5,113, reduced in the first year only by $1,000 representing unemployment compensation received. As described above, a deduction of $3,272 was made for outside earnings. Since employees were assumed to have had an average length of service of three years, only employees deprived of employment during the first three years were given protection and all payments were teminated at the end of the third year.

Moving costs for each employee transferred were estimated at $375 to which was added $50 representing two days' pay, making a total of $425.

It was estimated that 259 homes would have to be sold at an average loss of $2,500.

The losses described above are protected for a maximum of three years under the Washington Agreement and a maximm of four years under the Interstate Commerce Act. It was assumed, however, that the merged company would give this protection for the full period during which transfers would take place.

It was assumed that 25% of the estimated number of employees placed locally, based an the location studies described in Note (1), would be offered jobs paying less than they previously earned, and that the average lose would be $1.00 a day or $250 a year. The allowance was not continued beyond the fifth year, as it was assumed that employees would have regained their original rates by that time. It was also assumed that in each year after the first the number of persons entitled to a displacement allowance would be reduced by 20% of the balance of jobs made available by attrition but not otherwise used.

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