Private Equity Fund Would Rather Shut Down a Plant Than Pay Its Workers a Fair Wage

Every morning at 6 a.m, starting in August 2008, a group of striking workers came to stand outside the Stella D'Oro cookie and biscuit factory in the Bronx, N.Y. They were fighting for what they saw as their right to a fair contract, and the middle-class way of life they spent decades building with their loyal work.


For many workers facing trouble paying their mortgages, sending their kids to college or even going out for a meal, remaining on strike was not easy.

Elizabeth Francisco told the Bronx Times Reporter during a recent rainy day on the picket line: "It's hard. When my daughter asks, 'Mommy, I want to eat dinner outside,' I have no money. Out here [on the picket line], I'm depressed."

It was especially rough when some of the 50 or so low-paid replacement workers, or "scabs," came out for their lunch break and literally waved their paychecks in the faces of these strikers who have been subsisting on little more than unemployment benefits and a $105-a-week union stipend.

Stella D'Oro workers returned to work Tuesday morning. The day before, Byrnwood Partners, the private equity firm that owns the plant, had decided to shut it down in October rather than maintain wage levels. As part of that proposal, the workers accepted an offer from the company to return to work at their original pay until the plant closes.

Meanwhile, despite the odds, union leaders vow to fight the plant closing; they are reaching out to the state's political leaders and seeking a buyer for the plant. On Tuesday, the Bronx Borough President Ruben Diaz Jr. denounced the closing and said his office would try to find another buyer.

"Stella D'Oro has been a Bronx institution for decades, providing thousands of jobs to Bronxites over the decades," he said. My office will do everything it can to prevent this hastily made decision and keep Stella D'Oro, and the much-needed jobs it provides, in Kingsbridge [in the Bronx]."

Last week, a National Labor Relations Board administrative judge ordered the workers reinstated and the company to bargain in good faith with the union; the judge found that the company sabotaged negotiations by refusing to provide verifiable financial information to support its demand for concessions.

"The private-equity predators at Byrnwood Partners thought they could refuse to bargain with us, deny us information, break the law, tear up our contract, force a strike and break the union," Joyce Alston, president of Local 50 of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, said last week. This week, Alston says of the closing, "They're doing it out of spite: if they can't get you one way, they'll try another."

Indeed, the union plans to file a complaint to the NLRB that Byrnwood’s plans to close the plant were retaliation against the union.

Before the plant shutdown, 30-year employee Eddie Marrero, a foreman who oversaw the oven operations, had explained to AlterNet, "We're now fighting for jobs, fighting for respect and we're trying to make a point: Capitalists can't come here and destroy decent-paying jobs."

But on Monday, Byrnwood Partners did just that by giving the legally required notice of at least 60 days or more to shut down the plant under the Worker Adjustment and Retraining Act (WARN Act). A company statement proclaimed Monday, "Since the strike began almost a year ago, the company has been actively evaluating strategic alternatives to its high cost of production in the Bronx facility."

Both the union and the NLRB judge challenged the company's failure to prove that it was losing money at the plant and condemned the firm for bargaining in bad faith.

Even so, given the peril facing the plant's workers, Joyce Alston says, "We're taking them seriously, and we're going to try everything we can to keep the plant open and find another buyer." She told AlterNet Monday, "It's our view that they're using the WARN Act to circumvent the judge's order."

For months, with chants of "No contract, no cookies," union workers have been protesting the unyielding offer by Byrnwood to slash wages by as much as $5 an hour over five years, end all sick days and most paid holidays and drastically cut benefits, including their pensions.

When the judge's decision against Byrnwood was announced last week, there was jubilation mixed with caution on the picket line. When lead mechanic and shop steward Mike Fillippou got the news on his cell phone from a New York Post reporter, at first he didn't quite believe it, and then he quietly went around the corner to print out the NLRB decision for himself at a local store.

As he returned to tell the news to his fellow strikers, they erupted with cheers, hugs and not a few tears. "It was a big victory not just for us, but for the whole labor movement," he says.

Tuesday, when he walked through the factory gates in the morning with his fellow strikers, they still kept alive some sense of triumph. "We accomplished our mission to go back," he says. But he and other union members were shocked by the dilapidated conditions they say they found inside the plant: a horrid smell instead of the sweet aroma of baked goods, broken lockers, dirty toilets.

"The place looks like it was vandalized," he says. Still, when he joined the others in signing his name on the factory rolls, "it was like a celebration," he says, and Fillippou started screaming exuberantly, "We're back! We're back!"

Byrnwood even offered Tuesday to renegotiate the union contract, a signal that makes Fillippou see the plant-closing announcement as just another negotiating tactic by executives designed to scare workers into submitting to low wages. Ultimately, Fillippou believes, "If they find the right buyer, they're going to sell it. They're there to make money, and the only reason they bought it is to resell it." (The company's statement hinted that it might also start another plant elsewhere to "assure a continuing supply of high-quality Stella D'oro products to its retail partners and distributors.")

Since 1964 this union local, fighting to save decent jobs, has represented workers at the company, which was founded as an Italian family business in the 1930s. Fillippou has worked there for 14 years, and a majority of the workers are women who have worked there for years, even decades. They made upscale cookies, including Swiss fudge, breadsticks, biscotti and a much-loved S-shaped breakfast treat, and, Fillippou says, "We're very proud of it, and we do it with heart. They came out excellent."

But after the scabs came in August, and the pre-strike inventory started to decline, the quality and range of products also began to slide, union activists say.

Indeed, one day last fall, a handful of workers took a break from picketing to take a look at the new Stella D'Oro products at a supermarket near the factory. They picked up boxes of the legendary S-shaped treat, and when they saw how misshapen, even burned, many of the cookies were, a few of the women began to cry. "Oh my God!" one 27-year veteran packer cried out as she handled the box and felt how thin the breakfast cookies were. "What have they done?"

Fillippou says, "We used to do quality control and reject those that didn't qualify. We know that quality control doesn't exist now." (A company spokesman declined to comment on the quality or range of products being made.)

George Kahssay, a 22-year foreman, observes, "They're making such shit, they're boycotting themselves." The union has called for a boycott of Stella D'Oro products, but Kahssay and others report that they encounter people who see them with their strike T-shirts on and tell them how bad the company's baked goods have become.

With private-equity firms in charge, labor advocates say, quality almost inevitably suffers -- whether it's in cookies or the wretched patient care offered by nursing homes owned by funds like the Carlyle Group.

"What happens to cookies happens to patients," observes Peter Rossman, a private-equity expert with the global International Union of Food, Farm and Hotel Workers (IUF). "You've got a recipe for human disasters."

Joyce Alston told AlterNet her view of Byrnwood's underlying anti-union strategy: "This has all been about maximizing profit," regardless of the harm it can cause workers -- or customers.

Yet the company, as is often the case, blamed the union for the decision to close. "By refusing to compromise and insisting on maintaining a high labor-cost structure, the union leadership has ensured that the jobs that they were trying to protect would eventually disappear from the Bronx forever," the company's statement said.

Alston says, "It's ridiculous to say that for us to go all the way through this fight, we would not care about our jobs and would not try to work something out." The sticking point in negotiations before the strike was the company's refusal to provide financial evidence to support its demand for drastic concessions. Indeed, the company's attorney insisted the union's accountant could just take hand notes from one audit report and couldn't make any copies of the document to study.

The strike has attracted the attention of local political leaders and the international labor movement, although it has drawn only sporadic news coverage.

Unfortunately, despite the judge's order requiring reinstatement of the striking workers, back pay and bargaining in good faith, the company can delay facing any enforcement for as long as 10 years because of the NLRB's elaborate, time-consuming appeals process.

That's just another illustration of what unions see as the broken labor-law system they hope to repair with the Employee Free Choice Act. Byrnwood is filing appeals to the full NLRB board (now with only two members), and then can appeal the decision to federal courts.

In Monday's announcement, the company seemed to say it would obey the order, since it is going to close the plant before a final NLRB ruling is issued. "There was little reason to risk a continuing back-pay award when the Bronx facility will be closed before any decision is expected from the full Board," the company said.

Closing the plant in the Bronx is the final step in an array of corporate strategies designed to squeeze as much money as possible from the bought-out company. Private-equity investors expect average returns as high as 25 percent after a company they purchase is resold, and some equity firms promise a 40 percent return.

Yet before Stella D'Oro's announced closing, a spokesman for Byrnwood had insisted to AlterNet that the fund's decisions were driven just by financial reality, not greed: "It's still a money-losing business because the [labor] cost structure simply isn't competitive for the business we're in."

Byrnwood bought Stella D'Oro at the "distressed" price of $17.5 million in 2006 from Kraft, which had bought it from the dismembered RJR-Nabisco company memorialized in the book and movie, Barbarians at the Gate.

To union critics, Byrnwood's executives are, essentially, the new barbarians. Their hard-nosed, illegal bargaining stance and harsh decision to shut the plant illustrates the powerful new role of private-equity companies in undermining workers' rights, job security and middle-class living standards. It also reflects, critics say, the weakness of a federal tax policy that actually encourages rapacious takeovers and current labor laws that don't protect employees from such abuses.

Peter Rossman, the IUF's communications director and one of the world's leading authorities on private equity's impact on labor, has said, "Stella D'Oro is a microcosm of what's been happening in corporate America for the past two decades -- and what urgently needs to be fixed."

Rossman says private-equity firms are growing increasingly powerful while displaying virtually no commitment to long-term investment in the companies they acquire; they're just interested in short-term resale profits.

In a new report, "A Worker's Guide to Private Equity," Rossman says, "To generate these short-term super profits, private-equity funds have aggressively undermined the foundations of collective bargaining built up over decades of union struggle."

A key to what Rossman argues is their destructive approach to investment is their use of leveraged-buyout strategies. They borrow heavily to take over companies and then load up that debt to be paid off by the companies they acquire, rather than by their own firms.

Between 2000 and 2007, he reports, 3,000 U.S. companies with a value of over $1 trillion were acquired by private-equity funds. They also indulged in the risky short-term investment instruments that have helped wreck the world economy as part of their "casino capitalism."

(A spokesman for Byrnwood wouldn't disclose Stella D'Oro's debt obligation and dismissed as "unsupported speculation" and "nonsense" the concerns that the cookie company had to drain its revenues to pay off debt.)

As always, these so-called smart guys are using other people's money, and, whether in private or public companies, generally paying themselves back handsomely in dividends, fees and share buybacks rather than investing in the companies they acquire. "You buy it, you strip it, then you flip it," Rossman says.

Even worse, federal tax policy actually promotes such destructive investing that can cost hundreds of thousands of jobs. Criticizing the "unlimited [tax] deductibility of interest" paid in leveraged buyouts, Rossman observes, "This massive regulatory subsidy, which encourages financial pillage while costing taxpayers billions of dollars in lost public revenue, is an open invitation to poison the books. As long as company balance sheets are forced to assume the burden of their own buyout, and saddled with colossal debts, workers like those at Stella D'Oro will be forced to pay the price."

The Obama administration is proposing taxing the salaries of equity fund executives at a higher rate, but it's not touching this devastating loophole that drives the buyout schemes, Rossman notes.

Clearly, then, the Stella D'Oro strike is more than just another strike at a plant, and far more is at stake.

"Corporate mismanagement, predatory private equity, the destruction of an iconic brand and now an attempt to destroy the livelihoods of modest working families -- the story at Stella D'Oro pretty well sums up all that's been happening over the past two decades," especially in manufacturing, Stewart Acuff, the organizing director of the AFL-CIO, says.

So the strike marks an important turning point in the fight against the lowball tactics of private-equity firms determined to destroy unions to boost their own profits. Mike Fillippou says proudly, "We showed other people [in the country] how to fight this."

In addition, union advocates say the battle over Stella D'Oro underscores another reason for passing the Employee Free Choice Act: the protection it offers workers during negotiations. If enacted, Rossman and others say, the proposed labor-law reform could limit the sort of bad-faith bargaining that Byrnwood was found guilty of by the NLRB judge last week; it would do so, in part, through sharply increased penalties and mandated arbitration for stalled first-contract negotiations.

A look inside the bargaining sessions between Stella D'Oro's owners and the union demonstrates just how far companies are willing to go to abuse negotiations in order to thwart unions.

At least a year before the union contract was scheduled to expire in June 2008, business seemed to be booming, Stella D'Oro workers say. The company added major new clients such as BJs and Costco, and, Eddie Marrero says, "We couldn't keep up with all the orders." But when negotiations began in May 2008, he notes, "As soon as management sat down with the union committee, they started crying poverty."

At that first meeting in a New Rochelle, N.Y., hotel conference room, Byrnwood's tough-minded chief negotiator, attorney Mark Jacoby, and the dapper managing partner Henk Hartong III claimed that Stella D'Oro was losing $1.6 million a year and major union concessions were needed. Hartong asserted, without offering any proof, that Stella D'Oro was a "troubled company" that "can't survive under the current labor contract."

NLRB legal documents show that the company never really budged over a series of six bargaining sessions. It kept claiming financial losses and continued offering slightly varied versions of the slash-and-burn concessions it first demanded from the union. The union members ultimately voted to strike in July 2008.

Joyce Alston and the other union members were shocked by the demands being made of them. The company's offer would cut some longtime workers' wages to as little as $13 an hour in the expensive New York City area and force a steep increase in out-of-pocket health costs.

Alston told the executives, "With the level of concessions you're asking, my members won't be able to maintain their standard of living. What you're asking is cutting so deep people won't be able to stay in their homes." One company official reportedly blithely replied, "They can always find another job."

Yet perhaps the most ludicrous corporate claim of all -- rejected by the NLRB administrative judge -- was found in the company officials' legal briefs disputing any unfair labor practices. They actually insisted that they never had asserted in negotiations an "inability to pay" that would require them to produce financial documents under federal labor law, just staked out a position on what they "wanted to pay." The judge just didn't buy such semantic mumbo-jumbo and concluded they were bargaining in bad faith.

This week, even the company's plans to close the plant haven't made Alston and many of the union workers regret the decision to strike. "At the end of the day, we've done the best we could," she says.

Alston believes their fight should serve in part as a wake-up call for other Americans. "Hopefully, the American people will put a stop to firms buying up companies and then destroying them," she says. "At some point, we will not have a middle class. Our workers have taken on this fight for themselves and for everyone else. In truth, it's the fight of their lives."

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