Outsourcing HR to ChatGPT
Maybe not yet. Or at least not fully. While it may seem tempting to save time and money by letting AI write your employee policies, some businesses have already paid a price for that.
Good Morning!
Here are today’s highlights:
Cheating on workplace drug tests continues to rise.
“I believe we’re marching toward an uninsurable future,” says a former insurance commissioner.
An effort to rein in the excesses of private equity loses a legal battle in Texas.
From across the Atlantic, America’s startup boom looks impressive.
ARTIFICIAL INTELLIGENCE
Using ChatGPT to generate HR policies can expose businesses to big legal and financial risks: “Earlier this year, Carly Holm, CEO of HR consultancy Humani, received a call from a New York-based client. One employee had filed a workplace harassment claim against another, and the situation was escalating quickly. But when Holm asked the client for a copy of their employee handbook, part of a routine compliance check, they stumbled. ‘They kind of sheepishly said, Okay, well here it is, ChatGPT wrote it,’ Holm told Forbes. For Holm, who has reviewed AI-written policies for dozens of her clients, the revelation was no surprise. But in this case there was a major problem: the AI-generated handbook didn’t have an anti-harassment policy at all.”
“Companies are increasingly turning to AI to generate important, often legally binding, employment documents — from company handbooks and workplace policies to contracts like offer letters and separation agreements, according to interviews with four HR and payroll service providers.”
“While some firms hire HR experts to review their AI-generated policies before publishing them, others seek professional help after issues come up. For instance, one California-based firm with 200 employees used AI to generate their company handbook, Daniel Grace, a director at global HR service provider Iris Software Group, told Forbes.”
“But after distributing it company-wide, managers discovered it didn’t include an overtime policy, a legal requirement in the state. When employees worked several hours in overtime, the company was hit with a massive and unexpected wage bill.” READ MORE
HUMAN RESOURCES
Cheating on workplace drug tests has hit a high: “Workers are cheating on drug tests at the highest rate in more than 30 years, according to one of the U.S.’s largest drug-testing labs.The increase in tampered tests came from samples collected in 2023. About 31,000 drug screens out of 5.5 million showed signs of cheating, according to Quest Diagnostics. ‘Some American workers are going to great lengths to attempt to subvert the drug-testing process,’ said Dr. Suhash Harwani, senior director of science for workforce health solutions at Quest.”
“The percentage of urine samples that came back positive for drugs among the U.S. workforce remained steady at a two-decade high for the third year in a row. But the substantial rise of tampering, as well as the patchwork of new marijuana laws across the U.S., have intensified challenges for employers seeking to keep drugs out of the workplace.”
“Quest classifies substituted or invalid urine samples as a failed drug test. Some companies use medical review officers to check in with prospective employees or current workers to find out if there was a valid medical reason they failed the test. Sometimes they are retested, depending on the company’s drug-testing policy, Quest said.”
“More employers are moving away from drug screening as an effective tool to determine whether a candidate will be a good fit, said Bill Ravenscroft, chief revenue officer at Employbridge, a staffing firm. Companies that still test for drugs have workers who operate machinery or heavy equipment or require driving.” READ MORE
MARKETING
Businesses are already suing over the potential ban of TikTok: “Eight TikTok creators sued the U.S. government Tuesday over a new law that would force the sale or ban of the popular video app, arguing that the law violates their First Amendment rights by potentially shuttering a medium of communication that has become a critical ‘part of American life.’ The 33-page complaint echoes the arguments TikTok and its China-based parent company, ByteDance, made last week in a separate legal challenge by calling the law ‘unconstitutionally overbroad’ and contending that it would violate the free speech rights of 170 million users nationwide. President Biden signed the law last month.”
“The creators are being represented by Davis Wright Tremaine, a firm based in Seattle known for its cases involving First Amendment and media law. TikTok is covering the creators’ attorney fees.”
“Before the lawsuit was filed, creators said the law firm began contacting them and asking about their interest in participating in a class-action lawsuit — in some cases after they publicly posted about opposing a ban. The creators’ case, unlike previous court fights, will face an unconventional venue in the D.C. appeals court, where cases can often take more than a year to resolve.” READ MORE
PACKAGING
For more than 100 years, businesses have been trying to make a paper bottle: “Now they say they are the closest they have ever been. Diageo, Pernod Ricard, and Procter & Gamble are among a raft of companies testing paper-bottle designs they are betting can help their brands stand out on shelves, woo consumers concerned about plastic, and cut carbon emissions. But putting liquids in paper is inherently challenging. Paper bottles tested so far have needed an internal plastic barrier to stop them leaking. Companies have struggled with other problems too, including keeping flavors intact and stopping fizzy drinks from going flat. The paper-bottle push comes as paper is growing in popularity as a substitute for plastic packaging, with companies already using it to sell chocolate, ice cream, chewing gum, and chips.”
“Danish brewer Carlsberg says its research suggests paper bottles could attract more female drinkers, and find a home in upscale establishments. Pepsi says paper could better communicate the natural ingredients in its smoothies and juices. L’Oréal thinks the ability to emboss paper could help its hand creams stand out on shelves. Other companies see potential for paper bottles at sports events where glass is banned.”
“Environmentalists have questioned the merits of substituting paper packaging for plastic. Producing paper requires large amounts of chemicals, energy and water. Lining paper with plastic or other coatings can complicate recycling. And if paper ends up in a landfill it can release methane as it breaks down, not all of which is captured.” READ MORE
INSURANCE
The crisis is expanding beyond California and Florida: “At first glance, Dave Langston’s predicament seems similar to headaches facing homeowners in coastal states vulnerable to catastrophic hurricanes: As disasters have become more frequent and severe, his insurance company has been losing money. Then, it canceled his coverage and left the state. But Mr. Langston lives in Iowa. Relatively consistent weather once made Iowa a good bet for insurance companies. But now, as a warming planet makes events like hail and wind storms worse, insurers are fleeing. Mr. Langston spent months trying to find another company to insure the townhouses, on a quiet cul-de-sac at the edge of Cedar Rapids, that belong to members of his homeowners association. Without coverage, ‘if we were to have damage that hit all 17 units, we’re looking at bankruptcy for all of us,’ he said.”
“The insurance turmoil caused by climate change — which had been concentrated in Florida, California and Louisiana — is fast becoming a contagion, spreading to states like Iowa, Arkansas, Ohio, Utah, and Washington. Even in the Northeast, where homeowners insurance was still generally profitable last year, the trends are worsening.”
“The growing tumult is affecting people whose homes have never been damaged and who have dutifully paid their premiums, year after year. Cancellation notices have left them scrambling to find coverage to protect what is often their single biggest investment. As a last resort, many are ending up in high-risk insurance pools created by states that are backed by the public and offer less coverage than standard policies.”
“‘I believe we’re marching toward an uninsurable future’ in many places, said Dave Jones, the former insurance commissioner of California and now director of the Climate Risk Initiative at the University of California Berkeley law school.” READ MORE
THE ECONOMY
Some good news on inflation: “U.S. inflation eased in April, with a key measure of price pressures slowing to its lowest level since spring 2021. The consumer-price index, a gauge for goods and service costs across the U.S. economy, rose 3.4 percent in April from a year ago, the Labor Department said Wednesday. So-called core prices that exclude volatile food and energy items climbed 3.6 percent annually, the lowest increase since April 2021.”
“There are signs that the rocky start to the year may prove to be a blip in inflation’s longer-term downshift from 40-year highs. Americans’ prices at the gasoline pump, which jumped earlier this year, have retreated in recent weeks. Some economists believe additional relief is on the way from a long-awaited slowdown in rent increases.” READ MORE
LIQUIDATION
Looking for a pot to cook endless shrimp? “Equipment from more than 50 Red Lobster restaurants across the United States was up for auction on Tuesday, a liquidator said, as the embattled seafood chain’s website listed dozens of locations as being temporarily closed. The auction site includes grainy pictures of freezers, ovens, blenders and other items. A photo of a tank with live lobsters appeared in the listing for the Red Lobster in Redding, Calif., along with photos of a bar with whiskey bottles and a refrigerator stocked with wine and beer. The auctions were scheduled to end on Thursday, and items must be picked up on Friday, according to the liquidator, TAGeX Brands. Whoever wins the bid for a particular restaurant will receive everything inside it (not including perishable goods and alcohol, the auction site noted).” READ MORE
PRIVATE EQUITY
PE has won a legal challenge: “A Texas federal judge threw out a healthcare-sector lawsuit that could have disrupted private equity’s bread-and-butter roll-up strategy. In a win for the PE industry against antitrust regulators on Tuesday, U.S. District Judge Kenneth Hoyt dismissed a lawsuit against Welsh, Carson, Anderson & Stowe after the Federal Trade Commission alleged the PE firm was suppressing competition in the Texas anesthesiology market as a result of its roll-up strategy.”
“After each acquisition, USAP raised the new company’s rates to match its own higher prices, the documents said. Soon the firm expanded its reach into Texas’ other major cities, buying up practices in Tyler, Austin, Amarillo, and San Antonio in an effort to consolidate the anesthesiology market in the state and suppress competition, the FTC alleged.”
“The dismissal marks an initial defeat for the Biden Administration in its effort to rein in the PE industry. In March, antitrust regulators at the FTC, the Justice Department and the Department of Health and Human Services initiated a public inquiry into the effects of PE and other corporations’ mounting control in health care.” READ MORE
STARTUPS
The Economist is impressed with America’s “extraordinary” startup boom: “Suddenly, what was old appears to be new. An array of data indicate that Americans are rediscovering their go-getting spirit. The most striking evidence comes from applications to form businesses, a proxy for startup activity. These soared in mid-2020, when America was still in the grip of covid-19. The initial surge was easy to dismiss: some of the new firms were scams, trying to profit from the government’s financial assistance for small businesses; others reflected the strangeness of the moment, with companies set up to import face masks or flog hand sanitizer.”
“But now, well after the pandemic has faded away, the surge continues. Last year applications to form businesses reached 5.5 million, a record. Although they have slowed a touch this year, the monthly average is still about 80 percent higher than during the decade prior to covid, compared with just a 20 percent rise in Europe.”
“Startups normally play an outsized role in creating employment in America, as elsewhere. By definition, every startup job counts as new, whereas mature companies have more churn. That difference has become even starker. In the four years before the pandemic, established firms added one net job for every four created by startups; in the four years since the pandemic, established firms have actually lost one job for every four created by startups.”
“Perhaps even more important than the numbers is the kind of ventures that are being created. In 2020 and 2021 many startups catered to the working-from-home revolution. These included online retailers, small trucking firms, and landscapers. Since mid-2022, however, the baton has been passed to technology firms, according to Ryan Decker of the Fed and John Haltiwanger of the University of Maryland.”
“The strength of the economy has also helped. When the job market is tight, it is easier for a potential startup founder to take risks, knowing that they can fall back on paid work if need be. The advent of new technologies, especially AI also feeds into it. Entrepreneurs are creating AI-powered tools to interact with customers, prepare taxes, sift through court records, and more.” READ MORE
THE 21 HATS PODCAST
Yeah, I Can Hold Myself Accountable: This week, in episode 195, Mel Gravely tells Jay Goltz and Liz Picarazzi about his recently executed succession plan, including what’s worked and what could have gone better. The main thing that could have gone better, Mel says, is his purchase of another small business where he says he misdiagnosed the challenges the business is confronting: “I thought they just had a bad model and they weren't managing it well. It was worse.” All of which leads to a discussion of the role that a board of advisors can play in helping an owner build a business. While Mel has said he wouldn’t run a lemonade stand without a board, Liz and Jay—like most business owners—have taken a different approach.”
Plus: with the talk of tariffs getting louder, Liz updates us on her search for an alternative to manufacturing her trash enclosures in China. “We really have to have a Plan B,” she says. “We'd be stupid not to have a Plan B.”
The tariff conversation has already proved prescient with President Biden just announcing a series of hikes on China, including raising the tariff on the aluminum Liz buys to 25 percent.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren