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PC News - October 2015

Australia's workplace relations framework: repair not replacement

There is considerable scope for improvement in Australia's workplace relations framework, but radical reform is not required.

In December 2014 the Australian Government asked the Productivity Commission to assess the performance of the Australian workplace relations (WR) framework and identify options for improvement.

A series of 5 issues papers were released in January 2015 and after extensive public consultation with stakeholders, a draft report was released in August. After further consultation the final report will be sent to Government in November 2015. The Commission is open to any new ideas or variations on its draft report recommendations.

In conducting the inquiry, the Commission recognised that a well-performing WR framework must balance the needs of businesses within the economy with the requirement to adequately compensate and protect the Australian workforce.

The architecture of the current system

Australia's WR framework comprises a complex array of labour laws, regulations and institutions. The national system directly affects millions of Australian workers.

In mid-2015, around 11.8 million people worked in more than 2 million workplaces around the country.

Of these people, 70 per cent were covered directly by federal workplace laws, and others are indirectly affected. The Fair Work Commission (FWC), the Fair Work Ombudsman (FWO) and Fair Work Building and Construction are the key national regulators, and the Federal Court is the principal judicial body.

The Fair Work Act covers most aspects of the way in which parties should deal with each other in their employment relations, and in setting a variety of minimum standards. An extensive body of common law sits beside the statutory framework.

Reflecting the regulatory underpinning of the system, wages and conditions for most national employees must be at, or above, the safety net of those set in 122 awards.

The Commission's draft report found: 'People are confused by the workplace relations system, and some parties that should have a bigger voice in it - consumers, the unemployed and underemployed - have marginal influence.

There are unquestionable inefficiencies, remnant unfairness, some mischief and absurd anachronisms. In this messy context, there is an understandable tendency to imagine that there must be a much neater and coherent system, and that it would be desirable to start with a clean slate.

The view from the bulk of stakeholders and from the Commission's analysis is that such a view would be misplaced.

The system needs renovation, not a 'knockdown and rebuild'.'

The architecture of the current system is highly elaborate and broad ranging

  • The architecture of the current system is highly elaborate and broad ranging

The system is not dysfunctional

The draft report suggests that Australia's labour market performance and flexibility is relatively good by global standards, and many of the concerns that have pervaded historical arrangements have now abated.

Strike activity is low, aggregate wages are responsive to economic conditions, wage contagion seems to be a thing of the past, and there are multiple forms of employment arrangements that offer employees and employers flexible options for working.

However, there are weaknesses in the system that can impede service quality to consumers, limit the prospects for the unemployed when the economic cycle slows, stymie innovation, and reduce the credibility of enterprise bargaining.

Several major deficiencies in the WR framework need addressing

Reform of institutional arrangements

The performance of Australia's workplace relations system relies strongly on the capabilities and functioning of its main institutions.

The Commission found that the Fair Work Ombudsman is performing well. However, while the Fair Work Commission undertakes many of its functions effectively, 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. As well, the appointment process for FWC members can lead to inconsistencies in some of its decisions, and should be reformed.

The safety net

The safety net comprises three main instruments that set floors for wages and conditions: the national minimum wage, the National Employment Standards and awards (including penalty rates).

Minimum wage setting in Australia

  • The national minimum wage is usually adjusted by the FWC each year following an annual review. The current national minimum wage rate is $17.29 per hour for adults.

    This sets a floor on the wage rates of most Australian workers, although there are lower rates for younger workers, apprentices and trainees, and some people with disabilities.

    The FWC also makes annual adjustments to the rates of pay specified in modern awards, which mostly start at equal to or just above the national minimum.

    The Commission estimates that around 7.2 per cent of employees are paid at up to the hourly minimum wage rate.

    Returns to labour of some important employment categories - independent contractors, working business operators and unpaid family members - are not influenced by the minimum wage and are entirely market determined.

Enhancing minimum wage determination

Minimum wages in Australia are set by an FWC Expert Panel, taking into account changes in economic conditions and representations, especially from the government, business and union stakeholders.

It generally awards modest rises in minimum wages, and its predecessors have occasionally suspended increases during economic downturns.

While the need for a national minimum wage is widely accepted in Australia, including by the Commission, employer groups, unions and governments regularly disagree about its appropriate level.

There are also ongoing disputes among economists about how minimum wages affect employment and poverty.

Economic theory and some international empirical studies suggest that increases in minimum wages can reduce jobs and/or hours worked, but they also indicate that employment gains are possible in some circumstances.

The Commission's draft assessment is that modest increases in Australia's minimum wage are unlikely to measurably affect employment, but that marked increases in the minimum wage bite (that is, the minimum wage as a proportion of median wages) would reduce employment.

How, and at what rate, such effects manifest will vary depending on economic conditions and other policy settings.

Analysis of the distribution of minimum wage earners by household income indicates that:

  • Minimum wage earners reside most frequently in middle income groups. This is because many higher income households have some family members (for example, dependent students) in low paid jobs.
  • Employees in the lowest income groups are significantly more likely to be on the minimum wage than those in higher income groups. While most people in the lowest quintile are not in work (and therefore do not receive any wages), almost half of those who are in work are paid at a minimum rate.

Australia's national minimum wage is high by international standards, but has declined over the past decade

  • Australia's national minimum wage is high by international standards, but has declined over
the past decade

Although many minimum wage workers do not reside in low-income households or work on the minimum wage for long, changes in minimum wages will affect the living standards of the lowest income households, though the extent of this depends largely on household structures.

Single person working households with a part-time employee on the minimum wage will be significantly affected, while working families in the lowest income groups receive considerable family benefits and other social security transfers, which partly shields them from the income effects of minimum wage movements.

The Productivity Commission considers that the FWC should give significant weight to employment impacts when determining the level of the minimum wage.

Many people receiving wages around the minimum wage are from middle income households

  • Many people receiving wages around the minimum wage are from middle income households

But an employee in a low income group is much more likely to be paid around the minimum wage rate

  • But an employee in a low income group is much more likely to be paid around the
minimum wage rate

The likelihood that minimum wages cause some disemployment means that, in considering adjustments to minimum wages, here is a need to weigh up the potential benefits to low paid workers who retain their jobs (and/or hours) against the potential losses to those 'would be' employees who fail to gain employment, or experience greater underemployment or job loss, as a result.

The greater the assessed risk and extent of such disemployment effects, the greater would be the case for constraining the growth of minimum wages or even reducing them.

The FWC should also take into account uncertainties in forecasts of unemployment related to unexpected variations in economic circumstances, and the consequences for employment and household income of forecasting errors.

The Commission also sees scope for the FWC to enhance its approach to annual wage reviews including through more extensive use of evidence and research, more explicit recognition and measurement of the tradeoffs between the different elements of the minimum wage and modern awards objectives, and taking better account of the effects of determinations on all affected parties.

The draft report notes that a range of measures could be used to complement minimum wages. For example, many countries use earned income tax credits (EITCs) for this purpose. However, there are uncertainties about the feasibility, benefits and costs of some of these options.

Changes to the National Employment Standards

The National Employment Standards (NES) specify minimum requirements for 10 conditions of employment - including hours of work, various forms of leave and redundancy pay. Awards, enterprise agreements and employment contracts cannot exclude any elements of the NES, or provide less favourable employment conditions.

The draft report notes that the NES as a whole have attracted little controversy, although there are concerns about the details of some elements.

The Commission's draft recommendations include allowing employees to swap public holidays for another date if agreed with the employer, and ensuring that employers are not required to pay for leave for newly designated public holidays.

Repairing awards

Awards are the regulations that describe various floors on wages and conditions for a wide variety of skill levels across multiple industries. Awards are a longstanding part of Australia's workplace relations framework, with the FWC determining awards for more than 100 years.

They are unique to Australia (and New Zealand until 1991).

The Commission found that awards have some undesirable inconsistencies and rigidities, but they are an important safety net and a useful benchmark for many employers. Nevertheless, there are strong grounds for improving the award system.

Awards should be easier to understand and no more complex than they need to be. Awards should be in plain English and be written to avoid the mistakes and misunderstandings that arise from the present ambiguities of awards.

The FWC should address specified troublesome hotspots on a thematic basis, rather than completely replace them. The four yearly award review process should cease.

Better aligning weekend penalty rates in some industries

The Commission does not recommend any changes to regulated penalty rates for shift, overtime and weekend work. However, in recent years, there has been intense debate about penalty rates for weekend work in the hospitality, entertainment, retailing, restaurants and cafes industries.

Social trends and community norms have shifted so that in particular egments of the services sector - cafes, hospitality, entertainment, restaurant and retail industries - Sunday working is now inherent in the job.

Australian society expects to be able to shop, go to a pharmacy, and eat at cafes and restaurants on weekends.

Consequently, the workplace relations system should embrace the concept of 7-day weeks in the relevant services industries. Not doing so, imposes costs on the community that were not present when those norms and preferences were not widespread among Australians.

The draft report notes that rates for Sundays (usually around 200 per cent of base pay) are at odds with rates for times that are also important for social activities (evenings), and to an even greater degree for times that pose clearly demonstrated health risks (night shifts and rotating shifts).

Evening/afternoon shift penalty rates can be as low as 10 per cent and night shift loadings as low as 15 per cent.

Survey evidence shows that the overall social costs of daytime work on Sundays are similar to Saturdays, and consistently lower than evening work.

The Productivity Commission's draft recommendation is that Sunday rates in the hospitality, entertainment, retailing, restaurants and cafes industries should be brought into line with Saturday rates, with a lag before any change occurs, allowing people to adjust their lives and working patterns.

Removing some flaws in enterprise bargaining

Following almost one century of centralised conciliation and arbitration, enterprise-level bargaining was introduced in Australia in 1993. Enterprise bargaining involves employees working together to reach an agreement with their employer over the terms and conditions of their employment.

The Commission found that while enterprise bargaining is generally working well, there are several flaws in the current arrangements, and it is often ill-suited to smaller enterprises.

  • The application of the better off overall test (BOOT) is creating uncertainty during the bargaining process and at the agreement approval stage. The BOOT should be replaced by a no-disadvantage test, and the same test should be used for individual agreements.
  • Allowing parties to negotiate agreements with longer durations, up to five years, would reduce the costs associated with bargaining.
  • Bargaining arrangements for greenfields agreements pose risks for large capital-intensive projects with urgent timelines. The rules around negotiation of greenfields agreements require modification to reduce inefficiencies and end stalemates in negotiations.

Wage relativities by day and time of the week

  • Wage relativities by day and time of the week

The social 'disabilities' of working on Sundays are always less than evening work and sometimes less than Saturdays

  • The social 'disabilities' of working on Sundays are always less than evening work and
sometimes less than Saturdays

Increasing the use of individual flexibility arrangements

Once an enterprise agreement is in place, individual flexibility arrangements (IFAs) can be made. IFAs allow individual employees and employers to vary an enterprise agreement to suit their circumstances. For example, IFAs can be made in relation to working hours and family-friendly work practices.

The Commission found that IFAs within enterprise agreements are underutilised. This is surprising because in principle they offer flexibility, provide protections for employees, and are not hard to make. In part, this reflects ignorance about the existence of IFAs.

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.

A new type of agreement - the enterprise contract

The Productivity Commission has floated the option of a new type of statutory 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 (and maintain generic protections, such as those relating to unfair dismissals).

The enterprise contract would effectively amount to a collective individual flexibility arrangement, but with some further flexibility.

Employers could offer it to all prospective employees as a condition of employment (resembling enterprise agreements, where new employees are covered by an existing agreement when they are hired).

No employee ballot would be required for the adoption of an enterprise contract, nor would any employee group be involved in its preparation and agreement unless the employer wished this to be the case.

As in enterprise agreements, employers and individual employees could still negotiate individual flexibility arrangements as carve outs from the enterprise contract if they mutually agreed.

The Productivity Commission has sought information on the costs (including compliance costs) and benefits of the proposed enterprise contract to employers, employees and to regulatory agencies. It also welcomes any variations that would achieve the goals of this new contract type.

Where a staple can undo an agreement

  • A number of participants in the Commission's inquiry argued that undue emphasis can be placed on the procedural equirements of enterprise bargaining.

    Peabody Moorvale Pty Ltd provided three pages - stapled together - to all of its employees to be covered by a proposed enterprise agreement.

    Some bargaining ensued, an agreement was struck, and the agreement was lodged with the FWC. However, by attaching the three documents together, the employer contravened requirements about the form of notice to be given to employees.

    The FWC had no real discretion in the matter, and was obliged by the Fair Work Act to reject the agreement. So the employer had to recommence the agreement process. The Commission found a convincing variety of similar examples.

    While there are often good reasons for imposing procedural requirements, substance rather than form should prevail. The FWC should have the discretion to overlook a procedural defect (that poses no risks to employees) without requiring an undertaking by the employer.

Other issues

The draft report contains analysis and draft recommendations on a range of other issues related to the WR framework.

These include: unfair dismissal, antibullying, public sector bargaining, industrial disputes and right of entry, lternative forms of employment (independent contracting, labour hire, casual workers and out workers) and protections for migrant workers.

Making an enterprise contract

  • Making an enterprise contract

Workplace Relations Framework: Summary of key draft recommendations*

  • Institutions

    The Fair Work Act should be amended to establish a Minimum Standards Division as part of the Fair Work Commission. This Division would have responsibility for minimum wages and modern awards. All other functions of the Fair Work Commission should remain in a Tribunal Division.

    The Fair Work Act should be amended to stipulate that new appointments of the President, Vice Presidents, Deputy Presidents and Commissioners of the Fair Work Commission be for periods of five years, with the possibility of reappointment at the end of this period, subject to a merit-based performance review.

    The Fair Work Act should be amended to change the appointment processes for Members of the Fair Work Commission. The amendments would stipulate that:

    • an independent expert appointment panel should be established by the Australian Government and state and territory governments
    • members of the appointment panel should not have had previous direct roles in industrial representation or advocacy
    • the panel should make a shortlist of suitable candidates for Members of the Fair Work Commission against new eligibility criteria
    • the Commonwealth Minister for Employment should select Members of the Fair Work Commission from the panel's shortlist, with appointments then made by the Governor General.
  • Minimum wages

    In making its annual national wage decision, the Fair Work Commission should broaden its analytical framework to systematically consider the risks of unexpected variations in economic circumstances on employment and the living standards of the low paid.

  • National Employment Standards

    The Fair Work Commission should, as a part of the current four yearly review of modern awards, incorporate terms that permit an employer and an employee to agree to substitute a public holiday for an alternative day into all modern awards.

    The National Employment Standards should be amended so that employers are not required to pay for leave or any additional penalty rates for any newly designated state and territory public holidays.

  • Penalty rates

    Sunday penalty rates that are not part of overtime or shift work should be set at Saturday rates for the hospitality, entertainment, retail, restaurants and café industries.

    The Fair Work Commission should, as part of the current award review process, introduce these new penalty rates in one step, but with one year's advance notice.

  • Enterprise bargaining

    The Fair Work Act should be amended to allow the Fair Work Commission wider discretion to approve an agreement without amendment or undertakings as long as it is satisfied that the employees were not likely to have been placed at a disadvantage because of the unmet requirement.

    The Fair Work Act should be amended to allow an enterprise agreement to specify a nominal expiry date that:

    • can be up to 5 years after the day on which the Fair Work Commission approves the agreement, or
    • matches the life of a greenfields project.

    The Fair Work Act should be amended to replace the better off overall test for approval of enterprise agreements with a new no-disadvantage test. The test should be applied across a like class of employees for an enterprise agreement. The Fair Work Commission should provide its members with guidelines on how the new test should be applied.

    The rules around greenfields agreements in the Fair Work Act should be amended so that bargaining representatives for greenfields agreements are subject to the good faith bargaining requirements.

    The Fair Work Act should be amended so that if an employer and union have not reached a negotiated outcome for a greenfields agreement after three months, the employer may request that the Fair Work Commission undertake 'last offer' arbitration of an outcome by choosing between the last offers made by the employer and the union.

  • Individual arrangements

    The Australian Government should amend the Fair Work Act to introduce a new 'no-disadvantage test' to replace the better off overall test for assessment of individual flexibility arrangements.

    The Fair Work Ombudsman should develop an information package on individual flexibility arrangements and distribute it to employers, particularly small businesses, with the objective of increasing employer and employee awareness of individual flexibility arrangements.

* A complete list of draft recommendations, and requests for further information, are available in the report overview.

Workplace Relations Framework

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