Yesterday, Hostess announced that it would be forced to liquidate if it could not get striking employees to return to full production as of today. Among many pro-labor types, this was dismissed as yet another negotiating ploy by management. It wasn't. Hostess is laying off 18,500 workers and liquidating its assets. Here's how Hostess explained the situation:
On Nov. 12, Hostess Brands permanently closed three plants as a result of the work stoppage. On Nov. 14, the Company announced it would be forced to liquidate if sufficient employees did not return to work to restore normal operations by 5 p.m., EST p.m., Nov. 15. The Company determined on the night of Nov. 15 that an insufficient number of employees had returned to work to enable the restoration of normal operations.
The BCTGM [Bakery, Confectionary, Tobacco Workers and Grain Millers International Union] in September rejected a last, best and final offer from Hostess Brands designed to lower costs so that the Company could attract new financing and emerge from Chapter 11. Hostess Brands then received Court authority on Oct. 3 to unilaterally impose changes to the BCTGM’s collective bargaining agreements.
Hostess Brands is unprofitable under its current cost structure, much of which is determined by union wages and pension costs. The offer to the BCTGM included wage, benefit and work rule concessions but also gave Hostess Brands’ 12 unions a 25 percent ownership stake in the company, representation on its Board of Directors and $100 million in reorganized Hostess Brands’ debt.
Anyone who is surprised by this decision to liquidate and lay off employees wasn't really paying attention. Hostess emerged from Chapter 11 in January amidst a bad economy and the trend toward healthy eating already had the company in a precarious position. Without scaling back Hostess's overly generous union contracts, the company was almost guaranteed to go under. Kyle Smith had an article in Forbes earlier this year that outlined how grim things were: "Hostess is saddled with 372 collective bargaining agreements, 80 different health and pension benefit plans and workers’ compensation costs that last year hit $52 million–which works out to over $2700 for each of its 19,000 employees."
Despite this unsustainable situation, Smith notes that union was so intransigent it refused to even give up paid holidays on workers birthdays, an odd benefit that almost no companies provide. Also, the union work rules at Hostess were near farcical:
Ridiculous union work rules that are consciously engineered to increase inefficiency and create superfluous jobs are making Hostess uncompetitive with other industry players. If cakes and bread arrive together and are headed to the same place, they must nevertheless be split onto separate trucks; drivers are forbidden to load products onto their trucks.
Making matters worse, the Hostess liquidation will likely drag down other companies. Hostess was a party to 40 multiemployer pension plans. Multiemployer pension plans are unique to unions, and here's how they work:
In these plans, several unionized businesses join together to provide a single, collective retirement plan for all their employees. ... The catch is that multi-employer plans are governed by what’s known as “last man standing” accounting rules. Here’s how they work: If there are five companies in a multi-employer plan and four of them go bankrupt, the fifth has to assume the pension obligations for all of the employees from the four bankrupt companies, known as “orphans.”
In other words, other companies who never had any relationship with Hostess and its employees may now find themselves on the hook to pay for the expensive pensions the failed bakery.
It should be said that the closing of Hostess is a tragedy for its workers, and it's a classic example of workers not being served well by their union leaders. Leading up to Hostess's decision, many workers were crossing picket lines, aware that the situation threatened the survival of the company. And the Teamsters Union was willing to compromise with management in a way that was agreeable. It was the Bakers union -- a.k.a. the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union -- that ultimately refused to strike a deal.
The Hostess brand is iconic and beloved, and the sales are still brisk -- even if they aren't enough to justify the costs demanded by Hostess's union bosses. Someone will probably pick up the pieces and begin producing Twinkies and Wonderbread again, though Hostess's production will almost certainly be moved to facilities located in right-to-work states. Until then, ding dong the Ding Dong is dead.