Norfolk Southern will deemphasize the use of furloughs as a way to cut costs during market down cycles.
The plan comes as two activist investors are pressing NS (NYSE: NSC) and Union Pacific (NYSE: UNP) via shareholder proposals to address paid sick leave.
The Class I railroads have used furloughing as a means to reduce costs during cycles when freight demand might be down. It has also been used on a seasonal basis to align workforce needs with operational needs.
Furloughing is when a railroad lets go of employees with the expectation that the workers will return when called back by the railroad.
But stakeholders have contended that the furloughs that occurred during the start of the COVID-19 pandemic cut the workforce too thin, especially since that workforce didn’t return to the railroads at predicted levels.
Furthermore, some observers contend that the workforce reductions due to pandemic-related furloughing may have exacerbated service issues that arose due in part to headcount cuts brought on by precision scheduled railroading, a method that the Class I railroads deployed to streamline operations.
“We were all unprepared in the last two years with the sudden drawdown in demand and then sudden resurgence in freight. At the same time, labor force participation rates continued to decline, and when time came to rebuild our ranks and recall furloughed employees, we couldn’t get enough people. And frankly, two years later right now, we still have about 25% of our crew locations that are understaffed,” NS President and CEO Alan Shaw told investors during his company’s investor day Tuesday.
“Now we’ve made a lot of progress, and we’ve made a lot of progress in our service product, but we’re not yet where we need to be. So for America’s freight railroads, resilience has a deeper importance than just the ability to handle future disruptions like the pandemic,” Shaw continued.
While a market downturn might result in higher operating costs associated with a slower network, the option of furloughing employees can cost the railroad much more in the long term, Shaw said. That is because when freight rail demand bounces back, the railroad can’t meet that demand and therefore loses that service to trucking. Service disruptions could also arise because there are not enough crews to run the trains.
“We know that no business is going to deliver sustainable growth if it gives a lousy product quality” following every down cycle, Shaw said.
The costs to find and train new employees are also significant, Shaw said.
“I’m confident that changing our workforce strategy during economic downturns is going to be a positive step in our efforts … to improve our relationship with our employees and improve their quality of life,” Shaw said.
Activist investors want paid sick leave addressed at NS and UP
NS’ changing views on furloughs come amid other actions to address work-life balance issues within the freight rail industry. Two activist investors want NS and Union Pacific to offer paid sick leave as a standard, perennial benefit.
Impact Shares, a socially conscious exchange-traded fund, has filed a proposal on the issue with NS, while Trillium Asset Management, a socially responsible investment firm, has filed a proposal with UP (NYSE: UNP).
Both companies belong to the Interfaith Center on Corporate Responsibility, a coalition of shareholder advocates calling for social change. The companies say addressing work-life balance issues improves employee retention as well as reduces potential operational disruptions due to strikes or work stoppages.
They also point to how the railroads are facing worker retention issues and have slashed headcount levels in recent years.
“We believe paid sick leave to be essential to protecting and maintaining one of a company’s — and the economy’s — most important assets: workers,” said Martin Owens, chief engagement officer for Impact Shares, in a Monday release. “Paid sick leave should not be seen by companies as an expense, but as a prudent investment — an insurance policy that will promote a strong workforce and, by extension, a healthy economy.”
While the railroads do provide leave, paid sick leave may not kick in immediately, This arrangement — a sticking point for some unions during this most recent round of contract talks — was bargained by the unions and the railroads in past negotiations in exchange for benefits elsewhere.
“Railway workers face an impossible choice when they are sick: to stay home and risk their jobs, or go to work and risk their health and the public’s health. Meanwhile, railway companies have reportedly paid out $196B in stock buybacks and dividends to shareholders since 2010,” said Kate Monahan, director of shareholder advocacy at Trillium.
“Focusing on the short term at the expense of workers poses potential risks to the company and the economy. As shareholders, we are asking management to reprioritize and take the longer-term view that safeguarding the health and safety of their workers will better position them for the future,” Monahan continued.
NS declined to comment on the proposal.
UP said: “Union Pacific knows quality of life concerns are real and we are working with employees to make changes. Employee feedback has driven recent strides in our attendance policy, and we are currently piloting a work/rest pilot that we hope to learn from and implement more broadly. However, anecdotes that rail employees do not get time off work are untrue. Union Pacific employees receive several paid days off to use as personal days, holidays, and sick days. No Union Pacific employee has been fired because of missing a single day of work, and we actively assist employees who encounter hardships that require time off.”
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