Workplace Relations Framework

Repair not replace

A draft report by the Productivity Commission, Australia's Workplace Relations Framework, has found that despite sometimes significant problems and occasional peculiarities, Australia's workplace relations system is not systemically dysfunctional.

'Many features work well, especially given the need to find balance between the conflicting goals of the parties involved,' Peter Harris, Chairman of the Commission said.

'Changes to the workplace relations framework have to recognise that it's not just about the economics. There are ethical and community norms about the way in which a country treats its employees.'

Nevertheless, important reforms are needed, preferably soon. A key starting point is the system's principal regulator - the Fair Work Commission (FWC). Its decision-making on unfair dismissals, wage regulation, and enterprise bargaining are a key to the proper functioning of the system, and at least as important as legislation change. While the FWC is making sound efforts to modernise, its approach to wage regulation is overly legalistic and it tends to give too much attention to the counter-views of traditional partisan representatives.

The appointment process for Commission members is clearly flawed, and has resulted in inconsistencies between members' decisions. This has raised questions about the fairness of the umpire. Peter Harris said 'The Fair Work Commission has serious responsibilities for economic and social welfare. It should be revitalised as a modern regulator. Its appointments need to be beyond question, merit-based and involve all Australian governments. It needs an infusion of new skills and should develop its own evidence bases.'

The Productivity Commission also found that the Fair Work Act sometimes favours procedure over substance: an employee can behave badly in a workplace, be dismissed, but get compensation because of an employer's procedural lapses, even if no one disputes the misconduct. Enterprise bargaining can be afflicted by the same proceduralism.

A gap in the options for employment contracts has been identified. A whole new employment contract - the enterprise contract - may fill it, to help small businesses.

The Productivity Commission recommends retaining awards and the minimum wage , but each requires improvement to address specific social and economic priorities. Youth unemployment and apprenticeships also need attention.

The Commission found that penalty and overtime rates should be maintained overall, though regulated minimum Sunday rates should be aligned with Saturday rates for the group of industries that particularly provide weekend services - cafes, hospitality, entertainment, restaurants and retailing. This would be a floor to the penalty rate, and employers may decide to pay more if they find it hard to attract employees on Sundays. Ultimately, it is the Fair Work Commission that would decide regulated penalty rates.

State Governments should not be able to unilaterally trigger costs for employers by creating new public holidays. And employees should be able to vote to swap some existing public holidays to times that suit them better.

The inquiry also recommends stronger penalties for exploitation of migrant workers.

The Fair Work Ombudsman may need further resources, as an essential part of workplace safeguards.

• A workplace relations (WR) framework must recognise two features of labour markets.
  • Labour is not just an ordinary input. There are ethical and community norms about the way in which a country treats its employees.
  • Without regulation, employees are likely to have much less bargaining power than employers, with adverse outcomes for their wages and conditions.
• The challenge for a WR framework is to develop a system that provides balanced bargaining power between the parties, that encourages employment, and that enhances economic efficiency. It is easy to over or under regulate.
• Set against that framework, Australia's WR system is not dysfunctional - it needs repair not replacement.
• Toxic relationships between employers and employees can sometimes surface due to poor relationship management rather than flaws in the WR framework.
• Contrary to perceptions, Australia's labour market performance and flexibility is relatively good by global standards, and many of the concerns that pervaded historical arrangements have now abated. Strike activity is low, wages are responsive to economic downturns and there are multiple forms of employment arrangements that offer employees and employers flexible options for working.
• Nevertheless, several major deficiencies need addressing.
• While the Fair Work Commission (FWC) undertakes many of its functions well, the legalistic approach it adopts for award determination gives too much weight to history, precedent and judgments on the merits of cases put to it by partisan lobbyists. A preferred approach to award determination would give greatest weight to a clear analytical framework supported by evidence collected by the FWC itself.
• There is also concern that the appointment process for FWC members can lead to inconsistencies in some of its decisions, a problem that a new 'fit for purpose' governance model involving all Australian jurisdictions could resolve.
• The Fair Work Act 2009 (Cth) and sometimes the FWC can give too much weight to procedure and too little to substance, leading to compliance costs and, in some cases, poor outcomes.
  • Some minor procedural defects in enterprise bargaining can require an employer to recommence bargaining.
  • An employee may engage in serious misconduct but may receive considerable compensation under unfair dismissal provisions due to procedural lapses by an employer.
• These problems could be easily remedied without removing employee protections.
• Minimum wages are justified, and the view that existing levels are highly prejudicial to employment is not well founded. However, significant minimum wage increases pose a risk for employment, especially when set against a weakening labour market. Minimum wages are also often paid to higher-income households.
• Complementary policies that provide in-work benefits - such as wage subsidies or an earned income tax credit - might support higher incomes for lower paid employees, while not damaging employment. However, there are challenges in developing effective policies of this kind.
• Awards are an Australian idiosyncrasy with some undesirable inconsistencies and rigidities, but they are an important safety net and a useful benchmark for many employers. The FWC should address specified troublesome hotspots on a thematic basis, rather than completely replace them.
• Penalty rates have a legitimate role in compensating employees for working long hours or at unsociable times. They should be maintained. However, Sunday penalty rates for cafes, hospitality, entertainment, restaurants and retailing should be aligned with Saturday rates.
• Enterprise bargaining generally works well, although it is often ill-suited to smaller enterprises. However:
  • the 'better off overall test' used to assess whether an agreement leaves employees better off compared with the award can sometimes be applied mechanically, losing some benefits of flexibility for employees and employers. Switching to a no-disadvantage test with guidelines about the use of the test would encourage win-win options. The same test should be used for individual arrangements
  • bargaining arrangements for greenfields agreements pose risks for large capital-intensive projects with urgent timelines. A limited menu of bargaining options would address the worst deficiencies, while taking account of the different nature of greenfields projects.
• Individual flexibility arrangements have many possible advantages, but their take up is relatively low. In part, this reflects ignorance of their existence. But there are perceptions (sometimes not well based) of defects that also constrain their use. These could be resolved, including by providing information on their use, extending the termination period of the arrangements and by moving to the no-disadvantage test.
• There is scope for a new form of agreement - the 'enterprise contract' - to fill the gap between enterprise agreements and individual arrangements. This would offer many of the advantages of enterprise agreements, without the complexities, making them particularly suitable for smaller businesses. Any risks to employees would be assuaged through a comprehensive set of protections, including the right to revert to the award.
• Industrial action in Australia is at low levels. Only some minor tweaks are required:
  • processes for secret ballots can be overly complex
  • aborted strikes and brief stoppages are sometimes ingeniously used as bargaining leverage by unions, but a few simple remedies can address this without affecting the legitimate use of industrial action
  • there may be grounds to give employers more graduated options for retaliatory industrial action other than locking out its workforce.
• It seems to be too easy under the current test for an employer to escape prosecution for sham contracting. Recalibrating the test may be justified.
• Migrant workers are more vulnerable to exploitation than are other employees, and this is especially true for illegally working migrants. This may require more proportional penalties to deter exploitation and further resourcing of the Fair Work Ombudsman to detect it.

Chairman Peter Harris discusses our draft recommendations

The Productivity Commission has released a Draft Report requested by the Australian Government on our Workplace Relations System. Whether you're employed or not employed, in training or even considering retirement there's every prospect that right up until very late in your life you will be taking decisions that are ruled by this system. So this report is important to just about all Australians.

Our review has recognised two distinctive features of the Australian labour market - that if affects people's lives and their expectations for their future and that of their families and that most often employees alone are not as strong as employers in bargaining for reasonable workplace treatment.

Australia has a unique system for managing workplace relations. Our awards-based system started because of serious and at times violent disputation between employer and employee well over 100 years ago and disputes as a consequence became a good way of gaining coverage under an award. And another dispute gave birth to the concept of a minimum wage - a sum sufficient for a working man to support his family and settled by a court.

So our wages system had two major influences - judges were the decision makers and disputes were often the way that improvements were made which contributed consequently to our long history of strikes. Up until the 1990s we were tagged as a very strike-prone nation but since then strikes have fallen due to influences including enterprise bargaining - a system not rooted in dispute.

And the system has become much more national in its coverage. So most of us now are under the one national system. And there've been other successes in the last 20 years.

Most people who become unemployed are not out of work for that long and wage break-outs no longer occur as they did in the past. Generally the Australian economy as a whole has been better off over the last 20 years or so under the revised system which offers more flexibility to all parties. No less an authority than the Reserve Bank of Australia has noted just this.

This word 'flexibility' though is a bit of an issue. Everyone is in favour of flexibility but one person's flexibility is another person's loss of certainty and in search of flexibility some exploitation of workers under individual agreements occurred in the relatively recent past. We can and should have safeguards against that. Our report has examined the case for making improvements to this system and overall we find much is working well.

We need to repair it. We don't need to replace it.

The minimum wage share is high in Australia relative to many other countries. But all countries have unique mixes of social welfare and minimum wage arrangements that together attempt to help the lowest income earners find and keep employment.

No country is just right. The evidence in Australia is not great but overall the Productivity Commission has concluded that small increases in our minimum wage do not seem to have serious effects on employment.

Nevertheless there is a risk of that. Growing youth unemployment is a good example and no one currently represents the unemployed effectively in the processes that established the minimum wage. That certainly needs to change.

To do this and to genuinely improve its ability to set a price for work that affects hundreds of separate award wages across the country the Fair Work Commission needs to become a different kind of body - one with much greater use of economic and social analysis of its own and less dependent on what is submitted to it by employers and unions. And we recommend this not just for setting the minimum wage but for all those parts of the Fair Work Commission's actions that set wages and conditions a renewed institution is needed for the kind of labour market we will have in the future.

The Fair Work Commission is a powerful economic and social organisation. It needs to have and to rely more upon its own capabilities to judge the effects it is likely to have on the Australian economy just like the Reserve Bank does.

Some people have suggested that awards - the unique way we once used to set wages via dispute settlement in each industry should be abolished. Other nations such as the UK and New Zealand have done just that.

Yet we find awards are very important in some industries where enterprise bargaining has yet to take hold. Not just to unions, some employers are quite keen to retain them and more generally without them we may not have sound benchmarks for assessing whether new agreements are acceptable. So we propose to retain awards and to improve them as a key part of the workplace safety net.

We should also alter the process of award modernisation to focus on areas of significant improvement determined by analysis and not by the claims of one party or another. Now awards are already on a reform pathway in Australia.

They are fewer in number, they're easier to understand and most important they are becoming less of an impediment to new forms of work and innovation. This work must continue but be better focused on removing out of date judgments.

In company with awards legislation establishes standards for hours of work and forms of leave and similar matters. These standards - the National Employment Standards - are generally well regarded and they too should remain in place with some improvements. Together reformed awards and the National Employment Standards form core parts of the safety net in workplace relations.

But there are fallen logs blocking the reform pathway in both awards and the NES. The most prominent of these is penalty rates for weekend work. There is a good case for extra payments for those who work at times that most of us would prefer not to and there is no case for changing penalty rates for essential services where community attitudes established long ago have not shifted. But there is good information to show in some industries we have the payment structured wrongly.

For those who work abnormal hours including weekends the social and personal cost to them is greatest from evening and night shift. And Saturdays and Sundays not so much. But the penalty rates are set the other way around.

Set many years ago to deter weekend work these rates now just deter weekend services that as a society we increasingly want. This is particularly so for the café, hospitality, entertainment, restaurant and retailing industries and the retailing industry is shown up here.

The trends over the last 30 years are pretty clear. Saturday and Sunday are now just about the same in retailing. Our recommendation is that the Fair Work Commission determine that the Sunday rate be made equal to the Saturday rate for these industries.

Of course like every regulated rate in an award employers can and do pay more for better quality of work. So the new rate will be a floor and not a maximum.

We looked at public holidays too. Here the penalty rate is not the issue. They should stay. The issue is instead about simple loss of productivity from unilateral declaration of new holidays.

State governments should still be able to declare new holidays preferably after considering the costs and benefits. But employers should not be required to pay under the National Employment Standards beyond current numbers of such holidays and there are also ways to have some additional flexibility about when to take a public holiday, to swap one date for another if employees and employers agree.

Not all public holidays are the same. For some the original purpose has been lost. The Queen's Birthday holiday is not celebrated on the Queen's birthday and it varies by state.

We don't propose that the rates of pay for public holidays like these be varied. If you have to work on a new date for a public holiday you should be paid the penalty rate.

We do see value in allowing employees and employers to choose to swap to a better date for a public holiday from one that has little intrinsic meaning today. There are gains here for both employers trading on days when many people have a day off or meeting tight project deadlines and for employees such as having a day to add to their vacation.

Unfair dismissal laws in Australia have a bad name. There are lots of critical anecdotes and some of these are even true but the system serves an essential purpose.

Mostly the scope to exploit it lies with inconsistency in decision making and with people properly dismissed still receiving a payment due to simple process mistakes by an employer. It fails to pass any common sense test that a person dismissed for what is agreed to be unacceptable behaviour in the workplace is still compensated for a minor procedural issue.

We propose that the Fair Work Commission is not bound by this sort of rule and focuses instead on the substance of the issue and not the form. The single largest shift of approach we advocate in this report is in the nature of the institution that determines many of these decisions.

Now the Fair Work Commission has done good work in successfully reducing over 3000 awards to 122. But history and precedent play too large a part and independent research and analysis plays too small a part in decisions that affect such a large part of the economy.

We recommended as a restructure to have two separate groups to focus on its primary areas of work - a modern dispute resolution entity and an analytical body addressing significant social and economic questions. Restructuring will strengthen the Fair Work Commission.

It will offer a foundation for many of our key recommendations on the minimum wage, on a new process for modernising awards, on the reform of weekend penalty rates. But this shows how important it is for the recommendations we make on restructuring to be implemented in full.

Small businesses dominate the Australian business structure by number and are significant employers. They are not however big participants in enterprise bargaining.

Enterprise bargains involve potentially lengthy exchanges with the regulator and unions both of which have more experience in setting and navigating the process than a small business. We have designed a concept that may assist those small businesses which would like to remake an award to suit their business but don't want to breach the law. It's put up for consideration.

Migrant workers are more vulnerable to exploitation than other members of the Australian workforce. Better penalties are required to deter this exploitation and the Fair Work Ombudsman should receive additional resourcing to help with this.

The Ombudsman is a key part of the safeguards in the system. Finally this report also includes a number of recommendations that address flaws in the bargaining process and how businesses and unions behave towards each other. Most of these will not affect the majority of firms or unions.

They deal with behaviour that is not that common but when it does occur can be very harmful. Some of them will also help the Fair Work Commission apply better judgment.

The law can be too inflexible for modern circumstances. The celebrated example where a wage negotiation has to be started all over again simply because two documents were stapled together is an extreme example but one that is simply unnecessary and undesirable in a modern system.

The Productivity Commission has put balance in bargaining between employer and employee first in framing this report. It's a draft report and some positions we take may well change in the light of new information. We have made some formal information requests in this draft and we hope we can get information from you.

You can find the report at pc.gov.au