Labor Relations Process and Cost of Labor Contracts

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Labor relations is an important element of fair organization of work and establishing proper terms of interaction between management and employees. It is a process that involves management and labor unions, which represent employees, and implies the collective bargaining on pivotal workplace issues that predetermine the law-abiding, fairly paid, and safely organized employer-employee relationships.

In collective negotiations, the representatives of management and the union discuss and agree on specific written terms of employment, which both parties further follow in their cooperation. Within the framework of such a process, the economic perspective and the control of implementing the written agreement into practice play a significant role in labor relations. Therefore, the cost of labor contracts and the labor relations process requires detailed discussion to clarify their role in the workplace setting. This paper is designed to explore the importance of the cost of labor contracts and labor relations process from the position of their essential contribution to the organization of fair labor conditions.

Cost of Labor Contracts

When bargaining the employment issues within the labor relations process, the parties aim at achieving agreement and making a decision on an array of points. The most important of them are “issues such as wages, benefits, working conditions, hours of work, safety, job security, and grievance procedures” (Carrell & Heavrin, 2013, pp. 3-4).

In establishing labor relations between an employer and employee, labor contracts play a pivotal role since they regulate the type of relationship and the conditions under which the two parties interact. Therefore, collective bargaining between management representatives and labor unions is mainly focused on discussing labor contract costing with precise attention to details that guide the estimation of the cost of labor. In particular, the identification of proper wages, overtime payment, sick leaves, maternity leaves, pension, paid time off, and the cost of other issues are of the most concern to both employer and employees. Indeed, despite the wide range of issues relevant to both employee and employer when agreeing on labor issues, the economic aspect prevails for both parties. Therefore, the cost of labor contracts is essential to labor relations discussion.

Direct and Indirect Costs of Labor Contracts

From an economic perspective, the process of costing labor contracts involves calculating the expanses on the part of the employer and benefits on the part of the employer or the union representing a group of employees. According to Recchia (2016), there are direct and indirect costs involved in calculating labor contracts. In essence, direct costs include the payments that management is obligated to make in exchange for work completed under the agreed terms of employment. In particular, as stated by Recchia (2016), “compensation components and employer paid benefits are the two largest types of direct costs” (para. 3).

As for the indirect costs, they are thought to be the elements of payments that might be avoided or depend on circumstances (Recchia, 2016). For example, sick leave payments are indirect costs of labor contracts since they will be paid only in case of workers’ impaired health condition, which might not occur, and an employer will not bear monetary losses. However, compensation, employee benefits, and security provided by labor contracts are essential to labor units discussing the cost of agreements.

Cost of Wage and Salary

Wage and salary are the driving forces that motivate workers to perform in the workplace. According to Lazear (2018), compensation is considered one of the most effective incentives in labor relations since it drives the economic functioning of individuals in society. Overall, when calculating the cost of salary and wages, the issue of the cost of living should be considered to ensure that the employees obtain payment that suffices their daily needs (Carrell & Heavrin, 2013). As for the approach to calculating incentive compensations, there are several methods that have different effects on labor relations.

In particular, wages might be calculated on the basis of input or output. The type of payment that is based on input cannot be influenced by workers in most cases because the cost is fixed-on-time units, such as hourly, daily, or monthly wage. In this case, employees cannot affect the cost of their income; they can only rely on “time-based pay that allows worker choice of labor units supplied” or “promotion tournaments based on subjective, relative effort evaluation” (Lazear, 2018, p. 197). As for the output-based compensation, it is calculated on the basis of the completed amount of work or produced items, which are the units that a worker might influence by increasing productivity that might ultimately increase payment (Lazear, 2018). The employers’ task is to identify the cost of labor that suffices the needs of the labor union but reflects the market conditions and the ability to pay. Thus, wage and salary costs are the primary concern of labor contracts, while employee benefits also have a high level of significance.

Employee Benefits

While salary is essential and obligatory in any labor relations, employee benefits might be questioned due to their relative influence on employee productivity. However, some of the employee benefits are necessary due to their role in the provisions of human rights. For example, in terms of social security, unemployment insurance is one of the required benefits that is provided by employers’ tax payments (Carrell & Heavrin, 2013). As for the types of employee benefits that might be negotiated, they include income maintenance plans, employee health care, pay for time not worked, premium pay, and employee services (Carrell & Heavrin, 2013).

Within these negotiated benefits, such issues as retirement income, disability payment, maternity leaves, and others are considered. For example, parental benefits and flexible mother’s employment after giving birth have positive effects on women’s employment, which plays a significant role in labor relations (Kluve & Schmitz, 2018). Thus, when calculating the cost of labor contracts, the parties commonly negotiate and make decisions on employee benefits as well as job security and seniority issues.

Job Security and Seniority Issues in Labor Contracts

In accord with the previously discussed elements on the contracts of employment, job security is considered an essential issue since it provides workers with guarantees on their ability to obtain income in challenging times. In particular, job security provides “the rights to remain employed during times of layoffs, rights to promotion opportunities, and to a fair hearing in cases involving discipline” (Carrell & Heavrin, 2013, p. 323). In addition, job security terms predetermine the need of employers to provide job opportunities for employees instead of prioritizing automatic work through equipment (Carrell & Heavrin, 2013).

As for the seniority issues, they are discussed in relation to the human capital theory, according to which people gain more experience and expertise over the years of work. Therefore, employers should provide benefits for senior employees and make an effort to retain them. Thus, the cost of labor contracts comprises a number of essential decisions and agreements, the provision of which is monitored throughout the labor relations process.

Labor Relations Process

The labor relations process includes the practices, policies, and actions undertaken by employees or employers in order to implement the provisions of labor contracts. In essence, within the process of labor relations, the parties ensure that their rights are respected, duties are performed, and obligations are followed in due manner. Essential elements in the labor relations process are the addressing of unfair labor practices, disciplinary issues, and grievance procedures, as well as arbitration practices.

Addressing Unfair Labor Practices

Labor contracts and labor laws contain explicit identification of proper job conditions and agreed-on responsibilities and obligations of each party. Indeed, since employees are interested in protecting their rights to fair labor, they must have an influence on employers to eliminate the potential to violate standard provisions of labor relations regulations. Therefore, employees have the right to organize unions to promote their rights on organizational and broader levels. While employees’ right to organize is pivotal, “in many cases, the exercise of that right directly opposes the employer’s right to maintain a work environment” (Carrell & Heavrin, 2013).

That is why the National Labor Relations Act (NLRA) was introduced to identify precisely the issues considered unfair in order to regulate fair relationships between employees and employers (McDowell & Huhn, 2017). However, in the case when these provisions are breached, unfair labor practices should be addressed using proper means.

Disciplinary Issues, Grievance, and Arbitration

When any of the provisions of the signed labor contract is breached or violated, consecutive actions are implemented to address the violation. This issue is called grievance, which is “any formal complaint filed by an employee or union concerning any aspect of the employment relationship” (Carrell & Heavrin, 2013, p. 407). Grievance issues should be addressed by following steps with an effort from both the employer and employee parties to regulate the issue (Lewin, 2020). It is conducted through conferences between all involved and responsible parties within an organization, as well as arbitration procedures if the case cannot be settled by intra-organizational means (Carrell & Heavrin, 2013). In such a manner, through collective bargaining, employees within unions have the right to influence the relationships with employers and regulate the economic processes (Amsler et al., 2020). Other elements in the labor relations process are arbitration and disciplinary practices.

In the case when a grievance issue fails to be settled between parties, arbitration is initiated. Since employers and employees might breach the labor agreements, employee misconducts are discussed in labor relations. In particular, minor offenses and serious offenses in employee misconduct are differentiated. Commonly such issues include damaging property, dishonesty, discourtesy, technology issues, gambling, sleeping, and others (Carrell & Heavrin, 2013).

These issues might be a subject for discharge or arbitration. Labor arbitration is a process in which “the parties involved agree to submit an unresolved dispute to a neutral third party, whose decision is final and binding” (Carrell & Heavrin, 2013, p. 431). Depending on the issue at hand, arbitration might be of two types, interest and rights arbitration. The rulings are guided by the Federal Arbitration Act and aim to provide fair labor relations between the parties.


In conclusion, labor relations is a complex process of interaction between employees and employers aimed at both parties’ achieving their goals of a qualitative and fair job. Essential elements in labor relations are the cost of labor contracts and labor relations process issues, which predetermine employees’ motivation to work and employers’ obligations and rights within the labor organization. Furthermore, fairness is a central concept within these elements since employees strive for rights provision while employers want to pursue economic advantages. Therefore, through collective bargaining, organizing into unions, and having the right to arbitration, the involved parties can resolve job-related issues to regulate their cooperation.


Amsler, L. B., Martinez, J., & Smith, S. E. (2020). Dispute system design. Stanford University Press.

Carrell, M. R., & Heavrin, C. (2013). Labor relations and collective bargaining: Private and public sectors (10th ed.). Pearson.

Kluve, J., & Schmitz, S. (2018). Back to work: Parental benefits and mothers’ labor market outcomes in the medium run. ILR Review, 71(1), 143-173.

Lazear, E. P. (2018). Compensation and incentives in the workplace. Journal of Economic Perspectives, 32(3), 195-214.

Lewin, D. (2020). Individual voice: Grievance and other procedures. In Handbook of research on employee voice (pp. 281-297). Edward Elgar Publishing.

McDowell, D. S., & Huhn, K. C. (2017). NLRB remedies for unfair labor practices. University of Pennsylvania Press.

Recchia, K. (2016). Can you cost it? Calculating the cost of labor contracts. California Society of Municipal Finance Officers Magazine. Web.

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BusinessEssay. "Labor Relations Process and Cost of Labor Contracts." December 16, 2022.