Australia’s industrial relations system ‘needs repair not replacement’

Scott Morrison’s call for employers, unions and government to try to reform the industrial relations system begs some questions.

Is the industrial relations system really a major problem? And does “industrial relations reform” offer any solution to the massive decline in jobs and work opportunities sparked by the COVID-19 crisis, or a path to greater productivity and economic recovery?

Yet to both those questions there is surprisingly little evidence to support an affirmative answer.

The Productivity Commission — the Federal Government’s independent economic advisory body — reviewed Australia’s industrial relations system less than five years ago, and the system hasn’t seen any fundamental changes since.

At the time it was headed by the man now appointed by the Morrison Government to lead Australia’s coronavirus recovery, the National COVID-19 Co-ordination Commission’s chief executive Peter Harris.

Although the review found “several major deficiencies”, it concluded that, “Australia’s WR [workplace relations] system is not dysfunctional — it needs repair, not replacement.”

It added that “Contrary to perceptions, Australia’s labour market performance and flexibility is relatively good by global standards.

In the past, it was a different story.

In the 1970s and 1980s, strikes were a regular occurrence and the economy was beset by a vicious cycle: big wage rises won by strong unions flowed throughout the economy through a centralised wage-fixing system, leading to higher costs for business and fuelling price inflation, which led in turn to more wage demands.

“Stagflation” — simultaneous high unemployment and high inflation — was a feature of the times.

But as the Productivity Commission noted, that’s ancient history.

In many ways, Australia now suffers the opposite problem.

For the past seven years, Australia has experienced the slowest period of wages growth since World War II, a phenomenon only likely to worsen during the recession triggered by coronavirus.

Reserve Bank officials have consistently highlighted stagnant wages as a major threat to the economy, because of the risk they pose to consumption and the ability for Australian households to service their record debts.

So if large wage demands aren’t an issue and strike action is rare, what are the key “repairs” the working groups may focus on?

A collapse in workplace agreements

A key feature of Australia’s industrial relations system is “enterprise bargaining”: employees, often but not always represented by unions, sitting down with the employer to negotiate pay and conditions at the workplace level.

When the nation moved away from centralised wage-fixing in the 1990s, it was envisaged by many that workplace level collective agreements would become the norm.

But in recent years, there’s been a precipitous fall in agreement-making.

According to analysis by the Centre for Future Work, only 12.8 per cent of private-sector employees are covered by current enterprise agreements. That’s up slightly from 11 per cent in 2018, but still barely half the level six years ago.

Official data analysed by the Centre for Future Work shows a big drop in employees covered by enterprise agreements.
Official data analysed by the Centre for Future Work shows a big drop in employees covered by enterprise agreements.(Supplied: The Australia Institute’s Centre for Future Work)

There are many possible reasons for the collapse in agreement-making.

One is the decline in the share of the workforce covered by unions. Another is “bargaining fatigue” among workers and employers.

When the system was introduced in the 1990s, there was much “low-hanging fruit” that could be harvested as part of the enterprise bargaining process.

Workers could agree to end restrictive work practices and, in return for the resulting productivity improvements, gain substantial pay rises.

But, decades on, the easy pickings are largely gone and, in many cases, employees face the invidious choice of trading away more fundamental conditions or benefits for modest pay gains, while, for both sides, the process can be time-consuming, frustrating and costly for limited gain.

There’s also an inherent problem with “firm” or workplace level agreement-making.

The system is poorly suited to large numbers of small to mid-sized workplaces with modest numbers of employees. Yet the mass industrial workplaces it was designed for were disappearing even as the shift to enterprise bargaining began.

The Australian Council of Trade Unions and many in the labour movement want a shift to industry-level bargaining, with collective agreements covering an entire sector.

That is resisted by business groups and policy makers who fear that it will foist pay rates and conditions upon individual enterprises that are unaffordable or unsuitable.

However, the small share of private-sector workers covered by collective agreements raises a fundamental concern.

International laws and conventions as well as Australian domestic law allow for and encourage collective agreement-making because the law acknowledges that there’s a power imbalance between an employer and an individual employee.

With such a small share of the private-sector workforce on collective agreements, most workers are left to fend for themselves in this unequal bargaining relationship or to rely on the old system of arbitrated “awards” setting pay and conditions, which was meant to be a safety net, not a catch-all.

Award complexity

These awards are themselves unpopular with small business owners.

“Small businesses do not have chief executives who are remote from the workplace and we don’t have experts such as pay clerks, occupational health and safety advisers, accountants and the like,” Council of Small Business Organisations Australia chief executive Peter Strong has argued.

It wants simplified awards for small businesses, especially in hospitality and tourism, that would also give employers of less than 100 staff increased “workforce flexibility”.

The Productivity Commission suggested another remedy: something akin to a simplified enterprise agreement, but for individuals, called an “enterprise contract”.

But, given that they would need to ensure the employee was not disadvantaged relative to the award, it might not make life any easier for small business operators if the awards themselves remained unchanged.

Wages rip-offs

The Four Corners expose on 7-11, the Domino’s Pizza debacle and a host of other examples have highlighted that underpayment of wages is rife.

Some estimates put the share of employers who are failing to pay lawful wages as high as 35 per cent, a figure supported by regular Fair Work Ombudsman audits, with much higher rates in particular industries, such as hospitality.

It may be true, as argued by COSBOA, that many small businesses make genuine mistakes in calculating their employees’ pay and entitlements because they struggle to understand the award, or awards, that apply to their staff — although Fair Work does offer online calculators and free advice to employers.

But it’s also clear that there is a serious level of genuine wage theft, not accidental underpayment — consider the franchisees paying legal wages to workers then making them return part of their pay to the boss.

And big businesses, with small armies of human resources staff leaving little excuse for error, have collectively underpaid tens of thousands of staff too.

Woolworths, Coles, Bunnings, Super Retail Group, the Commonwealth Bank, law firm Maurice Blackburn (which has a large specialist industrial law team acting on behalf of many unions) and, yes, even your ABC have been guilty of underpaying staff, often over many years.

A Senate committee that examined breaches of the Fair Work Act in 2017 was sceptical of entirely innocent breaches of the law.

“The committee is not persuaded by arguments suggesting that underpayment is usually the result of oversight, or that the law is too complex for employers to understand,” it concluded.

“While genuine errors do occur, these tend not to consistently favour the pecuniary interests of one side only — employees may be mistakenly underpaid or overpaid.

This has exposed how toothless the watchdogs are.

Despite auditing a few thousand businesses and recovering $40 million in underpayments for workers last financial year, the Fair Work Ombudsman cannot, with its current resources, possibly police most businesses to guard against wages theft.

It resorts to targeting high profile cases in the hope that the publicity will deter others and fighting a losing game of whack-a-mole against an overwhelming number of offenders.

When unions covered a large share of the workforce, their staff and officials used to regularly find and crack down on wages rip-offs by inspecting time and wages records. But diminished union membership and tough laws restricting unions’ rights to enter workplaces have put paid to that.

Win-win deals are possible, but difficult

It’s possible to imagine a quid pro quo deal to address wages theft that could meet the concerns of unions and the small-business lobby.

Simplified awards or regulations that were easier for small firms, in return for a massive beefing up of inspections by the workplace watchdogs and harsher penalties for employers — large or small — caught out deliberately or negligently underpaying workers.

This could involve fines, deregistration from serving as a company director, or even jail time.

Not an easy sell to business; indeed, it probably won’t be easy to find common ground and negotiate deals between the employer lobby groups and unions on many issues in industrial relations given that genuine compromise involves some pain for both parties.

And it’s debatable how much any changes that are agreed would contribute to the Prime Minister’s stated aim of helping to create more jobs.

Numerous international studies show you can have strong jobs growth and good incomes growth under a wide range of different systems for setting peoples’ pay and conditions.

The key driver for creating jobs and growing incomes is not the form of regulation, but the level of demand in the economy. The contribution of further industrial relations “reform” will likely be at the margin.

Michael Janda is a Media section vice-president of the Media, Entertainment and Arts Alliance, the union that represents journalists.