At smart companies, labor and management don't fight anymore -- but the law says that workers and managers are intractable enemies and that fairness is possible only if the two 'sides' wage a cockfight. More than likely, the law says you're a criminal

Did you hear what a lawbreaker Polaroid is?

According to a complaint issued by the National Labor Relations Board (NLRB), the big instant-photography company has been "interfering with, restraining, and coercing employees," and has thereby violated their rights under the National Labor Relations (Wagner) Act.

Sounds heinous, I know. But Polaroid's crime turns out to be something less than capital. And the board's action is simply the cold, dead hand of the past reaching across the decades to throttle a critical element of today's new economy. Company owners, beware: you could be next.

The story begins way back in the 1920s, when hundreds of American companies set up what were known as work councils or company unions -- bodies designed to encourage shop-floor cooperation and to represent employee interests, but without any ties to organized labor. Some of those councils, such as Goodyear's so-called Industrial Assembly, had real power and did much to foster teamwork. Others were little more than employer-sponsored shams. Set up a docile house union, the theory ran, and you can persuade workers they don't need an independent one.

Organized labor, not surprisingly, hated them all. When the New Deal-era Congress was debating labor law in 1935, Senator Robert F. Wagner made sure his bill banned company unions.

The Wagner Act thus institutionalized the idea that labor and management are intractable enemies. In effect, the new law said that cooperation was always a snare and a delusion. What the two adversaries needed was a level playing field where they could duke it out. That idea has defined labor relations ever since.

The Wagner Act's adversarial system worked fine for a while, mostly because big U.S. companies dominated their markets. When companies and unions went to the mat, as they did regularly, the unions could win generous wage hikes and the companies could then raise prices. But starting in the mid-1970s, American businesses began learning harsh lessons about the new global economy they were competing in. They could no longer raise prices with impunity. They had to boost quality and service levels. Consumers now had more choices: if they didn't like Detroit's offerings, they could buy a Toyota.

In this new environment the adversarial approach to labor relations was an albatross around business's neck. Union contracts fixed labor costs regardless of competitive conditions. Union work rules restricted management's ability to introduce new technology or reorganize production methods. Worst of all, the adversarial system engendered fear and loathing on the shop floor. Hard-nosed managers assumed employees were slugs. Wary workers figured managers were out to screw them. Quality? Hah. That's the company's problem.

That basic incompatibility -- between new market conditions and the old adversarial system of labor relations -- has spawned two unexpected developments in today's business world.

One is the near death of the labor movement. Union membership is shrinking. Contract negotiations are bitter and fruitless. Newly aggressive companies fight back rather than give in; unions cling desperately to old and ineffective strategies. Last year's sorry dispute between Caterpillar and the United Auto Workers is the perfect example of a lose-lose battle. The union slunk back to work, defeated. The company earned the undying hostility of the very people it must depend on to ensure world-class quality.

The other big development: a startling proliferation of experiments in cooperative, nonadversarial labor-management relations.

Some companies have set up quality teams, self-directed work groups, or employee task forces. Others have established employee stock ownership plans or elaborate profit-sharing arrangements. The purpose of all those experiments: to get employees and managers working together, rather than at cross-purposes. Small companies such as Springfield Remanufacturing Corp. and Web Industries -- you've read about them and others in this magazine -- have been in the forefront of the movement. The results in many cases have been little short of spectacular.

But the law in its majesty hasn't begun to catch up, which means that the old system may yet squash the new. Last December the NLRB ruled that Electromation, a small Indiana manufacturer, had acted illegally in setting up "action committees" of employees to address workplace issues. In June the board ordered Du Pont to disband its safety committees. Other companies are now considering whether their own teams and task forces are illegal, too. One human-resources exec recently confided that he had planned to set up a worker committee on compensation issues. Hearing of the NLRB's recent moves, he quietly tabled the idea.

And then there's Polaroid. Ironically, the big photography company was planning no radical move; it was merely setting up a 30-member board of employees to act as a kind of focus group, responding to managerial initiatives on problems such as health-care costs. Because employees own 20% of the stock, says Polaroid labor counsel Ann Leibowitz, management figures their long-term interests are pretty much the same as the company's. But because people in different jobs have different perspectives, consultation is only common sense.

Sorry, Polaroid. Employees and the company are enemies, remember? Not only may such a body be ruled illegal as a company union (an administrative hearing was scheduled for November 1); but the very act of talking about it constitutes a violation of employee rights, according to the NLRB.

It could have a chilling effect on any would-be union organizers. Never mind that no national union has mounted a campaign at Polaroid in nearly 30 years.

Hey, folks -- we've got a problem here, and it's called the Wagner Act. Theoretically, the new commission on labor-law reform set up by Labor Secretary Robert Reich and Commerce Secretary Ron Brown will address this subject. But like everything else in Washington, the commission is moving at a glacial pace. And it must walk a fine line between political realities -- placating the unions -- and the realities of the marketplace. The NLRB's new chairman, William Gould, recently nominated by President Clinton, faces the same constraints, not to mention the letter of an outdated law. Meanwhile, all it takes is one disgruntled worker (or one aggressive union organizer) to alert the board to possible violations.

Conclusion: a lot of promising experiments in the business world are likely to die on the vine -- all because Congress decided, more than half a century ago, that labor and management must fight. Unless we change that assumption, their fight may strangle our economy.

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John Case, an Inc. senior writer, is the author of From the Ground Up: The Resurgence of American Entrepreneurship and writes a syndicated weekly newspaper column called "The Inc. Report."