Opposition should bank on flexibility

With the devastation of the 2007 election defeat having receded and the appetite for a real contest later this year intensifying, it seems the coalition has come to accept that while industrial relations will not be the principal front on which the election will be fought, it is neither possible nor credible to avoid the subject.  On the contrary, its prospects demand a posture that exhibits confidence without arrogance and balance without timidity.

One area where the coalition can press forward in a way which highlights one of the emerging failures of the new industrial relations system the government has introduced is, surprisingly enough, flexibility in agreement-making between employers and employees.

Throughout much of the last government's term, the then opposition was very effective at seizing on Australian workplace agreements (AWAs), in particular, to depict the Howard government's workplace relations system as a pernicious, Dickensian throw-back.

So it's hard at first to think that individual agreement making might afford the opposition an opportunity to demonstrate real initiative without courting a fierce counterattack from the government that it is attempting to restore the previous system.

There is a way the opposition can craft a policy on more flexible agreement-making that addresses a major problem of rigidity facing businesses, large and small alike, while protecting itself from attacks.

The first point to note is that the Rudd government bas a system of individual statutory contracts, however much it might characterise these agreements otherwise.  They can be made under either modern awards or enterprise agreements.

Take modem awards.  Every modem award must contain a flexibility term allowing the employer and an employee, if they both wish, to agree to terms varying the effect of the modem award if it is done to meet their genuine needs.

The Fair Work Act makes it clear that these individual contracts are taken to be terms of the modem award likewise, all enterprise agreements must contain flexibility terms.  If they don't, they are taken to include a model flexibility clause.

As with flexibility agreements made under modem awards, a flexibility arrangement made under an enterprise agreement is taken to be a term of the enterprise agreement.  Here's the main technical and political point:  individual flexibility agreements under the government's system require no third party review or approval.

All flexibility agreements, whether made under a modern award or enterprise agreement, must provide that the employee will be better off overall, but that's of little or no relevance unless either parry initiates a dispute about whether the flexibility agreement satisfies this condition or the Office of the Fair Work Ombudsman inspects the agreement of its own volition.

For business, in particular, the scope of individual flexibility arrangements under the government's system depends on what the relevant modem award or enterprise agreement permits.  In practice, this means that the range of matters over which employees and their employers can agree upon will be limited to the matters that Fair Work Australia has prescribed in the modern award, or which the employer and unions involved in bargaining have agreed to prescribe in an enterprise agreement

So while the Fair Work Act provides that individual flexibility agreements under modem awards and enterprise agreements cannot be expressed to require, in effect, union approval, this provision is quite disingenuous.  The flexibility clauses in modern awards and enterprise agreements have already been severely curtailed before they are available to be utilised directly by employees and their employers.

The evidence for this?  The standard modern award flexibility clause limits the range of matters over which employees and their employers can directly agree upon to just live matters.  Under enterprise agreements, the range is usually limited to the same matters unless the parties have agreed to expand or contract those matters.

For the opposition, this means that in formulating a more flexible system of agreement-making it can look at a policy option which primarily does two things.

First, it unhinges the ability of individual employees and their employers to enter into flexibility arrangements from the very limited range of matters that modern awards and enterprise agreements prescribe while retaining the better off overall test.

Secondly, and in order to ensure that protections are properly in place, the coalition should consider third parry review before individual flexibility agreements can operate, unlike now.  Ultimately, the coalition can give business the greater flexibility it needs while giving employees protections they deserve.

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Hypocrisy at work in pay claims

Australian Workplace Agreements:  how ironic that the individual workplace instruments unions spent a decade vehemently attacking should now become the benchmark for wage parity in workplace negotiations over terms and conditions.

It is clear that higher rates of pay in individual agreements will increasingly set the standard for general wage increases as part of collective negotiations.

How did this happen?  Well, it goes like this.  When the Rudd government started to introduce its industrial relations regime, it began by stopping employers and employees from entering into any further AWAs.  Existing AWAs could continue and transitional arrangements allowed some individual agreements to be made in limited circumstances.

Then, early this year, the government introduced the transitional framework by which existing workplace arrangements would gradually move into the new system now regulated under the Fair Work Act.

Part of this transitional framework allows employers and employees to terminate existing AWAs under certain conditions.  The termination of AWAs is an outcome the government very much wants and the new framework imposes few hurdles to their demise.  In another irony, however, its policy, while hostile to the concept of AWAs, was amenable to the need for individual statutory contracts known as individual flexibility arrangements.

Specifically, if an AWA has not passed its nominal expiry date, the parties can agree to terminate it.  If the AWA has passed that date, either party can unilaterally apply to Fair Work Australia to terminate the AWA, although this takes about four months.  So here's how it all comes together.

Many employers negotiating upcoming workplace agreements with unions under the new regime are trying to transition AWA employees across to existing collective agreements in anticipation of having all employees covered in the new deals that will eventuate.

In order to elicit the early agreement of their employees to come off their AWAs and on to the collective agreement, employers are often agreeing to maintain relativities between the rates of pay AWA employees received as part of the flexibility they accepted when entering into their AWAs and the present rates otherwise payable under the existing collective agreement.

So, for example, an employee who entered into an AWA might have accepted greater flexibility in hours and duties in exchange for a rate of pay fixed at 5 per cent higher than the corresponding rate in the collective agreement.  In order then to persuade that employee to come across to the collective agreement without the employer having to wait for the nominal expiry date and then apply over a four-month period to Fair Work Australia, the employer will offer to maintain the differential over time.  AWA employees are, as you would imagine, quite happy to maintain their wage relativities.

Enter the unions.

What we are seeing under the new system is unions exploiting this process by campaigning for wage parity between those on collective agreements and AWA employees coming from AWAs on to collective agreements.

The refrain is:  why should two people "doing the same job" receive different rates of pay?  The solution?  Everyone should receive the AWA rate in addition to the normal percentage increases over the life of agreements.

Forget that this completely ignores the fact that two people can occupy the same role but perform it differently or within different parameters.  That's precisely what higher AWA rates were intended to buy in the first place.

There is no explanation from unions on the grounds of productivity, whether by way of greater flexibility or some other quid pro quo.

For an instrument so maligned, AWAs seem to be playing an important part in the unions' case for higher wages, which are not at all controversial if justified and neutral on jobs.

Perhaps you can now see why under the new industrial relations system the more prudent union negotiators will not hamper the use of individual flexibility arrangements by employers wanting to use them to pay higher rates.

This is why the Australian Manufacturing Workers Union's opposition to the use of these arrangements at Campbell's Soup earlier this year made little sense and did not serve the interests of its members in the longer term.

Let's finish remembering what this is not about.

Committed and passionate union advocacy to advance the interests of their members is perfectly legitimate.

What we should deprecate is the hypocrisy associated with criticisms of the very flexibility that is now being relied on to campaign for higher wages.

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Fat pay packets for state public employees unsustainable

State and territory governments will surely welcome recent news of a national economic recovery.  A stronger economy will mean additional revenue inflows into treasury coffers, meaning that states might be saved from the fiscal consequences of their spending profligacy.

The risk is that such a revenue-driven reduction in net state budget deficits, standing at $2.9 billion this financial year on the latest projections, may gloss over growing costs that states have found difficult to control.

The largest element of state government operating budgets is their expenditures on public servant wages, superannuation and other entitlements.  In 2008-09, states allocated more than $78bn towards gross employee expenses, representing about 46 per cent of total general government sector spending.

By comparison, $43bn was spent for the same purposes in 2000-01.  This implies an increase in spending on state public sector workers of 78 per cent over the period, or an average of 8 per cent a year.

This increase in state spending on labour inputs is driven by two main factors:  changes in the numbers of people employed by state government agencies and other bodies; and changes in salaries and other benefits paid out to these public servants.

After a period of reduction in the number of state government employees during the 1990s, state public services increased substantially during the recent economic boom.  In 2000, there were about 972,000 people on the state government payroll.  By 2008, this had risen to about 1.2 million.

Victoria led the way in expanding the bureaucracy in percentage terms, with an increase in the total number of public servants of 37 per cent.  NSW, South Australia, Tasmania and the Northern Territory each recorded growth of about 25 per cent or more.

The largest increase in state government staffing was in the area of administration, which grew by at least 57 per cent between 2000 and 2007.  There is additional evidence to suggest an increase in the numbers of administrators engaged in service delivery areas such as education, health and policing.

There have been even more dramatic increases in state public sector salaries and entitlements in recent years.

Adjusting for higher education sector staff earnings, it is possible to calculate an implied amount of gross earnings for each state government employee.  From 2000 to 2006, gross earnings per employee grew by 4 per cent a year on average.  This is above the Reserve Bank of Australia's inflation target band of 2 per cent to 3 per cent.  Rising salaries for state public servants, even after accounting for the overall growth in government employment, suggest the increases in overall employee expenses were mainly attributable to public service pay increases during the peak of the previous business cycle.

The seemingly inexorable rise in state government employee expenses proved unsustainable in the light of the combined budget deficit position of the states and territories.  A return to fiscal sustainability by the states will require a discipline in controlling spending on labour costs not witnessed in previous years.

Governments have recently announced restraint measures such as caps on public service numbers, voluntary redundancies, a freeze on non-frontline staff recruitment and wage growth targets.

These measures constitute an implicit acknowledgment by the states that action needs to be taken to control bureaucratic costs.  The big question is whether existing initiatives will be sufficient for the task.

It is possible to derive estimates of the additional revenue needed by the states to fund their public service costs, over and above that implied by their publicly stated wages policies.  During the next four years, it is estimated that taxpayers will need to pay an additional $15.6bn to cover state government employee expenses above wage policy benchmarks.  To put this figure into perspective, the aggregate amount of payroll tax revenue collected by state governments last financial year was about $16.5bn.  In effect, the states will be approaching taxpayers seeking another payroll tax to subsidise extra public servants and their salary costs.

With signs of life evident in the Australian economy, state governments may be tempted to pull back on the need to pare back their labour costs.  Public sector unions are more likely to pursue inflationary wage claims if they perceive state revenue growth to be on the increase.

The obvious problem with this "business as usual" scenario is that it would not address the underlying causes of expenditure growth that contributed to the state fiscal crisis in the first place.

Additional measures could be pursued by governments to reduce the likelihood that public sector employment costs would erode state budgets in the future.

State governments should consider a mechanism enshrined in certified agreements whereby public servant salary growth is paused when budgets are in deficit.  Wages policies could also be legislated.  Governments that intend to relax the policy should be obliged to publicly report on productivity improvements attained by their workers.

Public sector caps are an appropriate mechanism to help restrain the overall costs of government employment, provided they are backed by appropriate enforcement mechanisms.  Ministers and senior officials that oversee breaches in a cap should be liable to some form of sanction.

A return to the reforming spirit of the 90s at the state level, through the devolution of key service delivery functions to private or non-profit organisations, would save taxpayers the burden of supporting a large public sector.

It is important that a recovering economy not lull states into a false sense of fiscal security.  The price of a lack of reform putting government employment on a sustainable footing is an eventual re-run of the difficulties that jurisdictions are facing at present.

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IR reform activity must go on

In the next parliamentary term we need to see a consolidation of the changes Work Choices has brought about, despite the differences between the government and opposition in this campaign.

There is a loose consensus around two key reform items that will yield substantial efficiency dividends and possibly reduce unemployment below 4 percent during the 42nd parliament if the next government is able to maintain the momentum generated in, this most recent term.

The first is award simplification.  Many would have been pleased to see during the debate last week between Workplace Relations Minister Joe Hockey and opposition spokeswoman Julia Gillard.  General bipartisan support for award simplification.  The government and opposition have in mind processes of simplification that could produce different outcomes, but there is at least a common view that our system of awards is too complex.

The second issue will prove to be of great consequence.  Over the next three years, the government and parliament will need to decide to what extent the federal system, the key to a unitary system, is to prevail over state systems.  About 85 per cent of employees fall within the federal jurisdiction.  But since Work Choices was introduced, state governments have been enacting legislation on workplace matters that are not precluded by the federal act.  The Workplace Relations Act establishes the supremacy of the federal system but preserves the states' ability to enact legislation on specific employment matters.

These matters include the method and frequency of payment of wages or salaries, deductions from wages or salaries and long service leave.  None of this is to argue that state governments have no role in the regulation of aspects of employment.  But to achieve greater clarity for employers and employees, a decision will need to be made about whether state legislation in all these areas sits comfortably within an increasingly unitary system.

An example of this complexity was seen in Victoria when the state government introduced the Victorian Workers' Wages Protection Bill 2007, which provided, among other things, that employers would be required to pay wages in the form of cash unless authorised by the employee to pay it in other forms, such as by electronic funds transfer.  The Liberal opposition resisted the bin and the government decided not to proceed with the cash payment requirement.

The purpose of this reference is not to make a judgement about the merits of the aborted cash payment requirement.  Rather, it's about the desirability of a state government enacting legislation on matters that most would think the federal act, and the Workplace Ombudsman, would be responsible for addressing.

The interaction between the levels of government is a source of great complexity.  We need an active period of continued reform.

Fair's still fair under IR changes

Robert Menzies writing in 1956, said of the history of our common law that "our intellectual tradition is inductive trial, error, trial, success, precedent".  And, although he was drawing a comparison with the deductive tradition of continental Europe his remark spoke of something that, for all its imperfections, has redeemed the common law down the ages.  For while the common law has been susceptible as much to atrophy as to activism, we have seen utility in its incrementalism and virtue in its flexibility.

The federal government's workplace reforms will aim to restore to a considerable extent the role of the common law in day-to-day employment relationships, Greater recognition of employment contracts and independent contractor relationships will enhance freedom of contract.

This is welcomed, but employers should not assume that the common law means only greater freedom.  Sensible employers will appreciate that their obligations to employees will lie increasingly in contract and not in statute.  They will not misunderstand this as encouragement to ignore obligations freely entered into.  This is important for many reasons, especially in the area of dismissal.

First, the common law, far from being an inert legal landscape, has become the preferred battleground for employees, who have seen that statutory remedies rarely deliver more than a nominal remedy.  In, say, unfair dismissal and breach-of-certified agreement cases, compensation is more limited than applicants assume, while reinstatement and fines seldom yield long-term advantages.  Disgruntled former employees who successfully resort to common law remedies do so without legislative thresholds and ceilings, facing only the burden of proving the loss and damage they allege.

The common law surrounding employment has long recognised implied duties of good faith and fidelity.  It is also recognising, with greater application, the duty of mutual trust and confidence, which is, very simply described, the duty to act fairly.  Two 2004 House of Lords decisions in Eastwood and McCabe considered how this duty operates.  While finding in each "case" that the duty of mutual trust and confidence imposes a duty to act fairly during one's employment, it does not extend to termination.

These decisions are, of course, not binding on Australian courts, but they form part of a trend suggesting that, while the duty at present does not extend to termination itself, it may be only a-matter of time before courts, including those in Australia, recognise what in effect will be a common law remedy for unfair dismissal.

The lesson?  Employers should be careful when dismissing employees even after unfair-dismissal laws have been wound back.

Second, the implications for employers are not limited to common law developments that might expose them to new causes of action.  In this new era of reform, an employer disregarding the manner of termination maybe powerless to enforce the employment contract after dismissal.

This is important in the area of restraints of trade.  Employers often try to protect their goodwill by securing restrictive covenants from employees.  Such covenants are pervasive but difficult to enforce.  The Federal Court's decision in the so-called ICAP case in February, as well as the NSW Supreme Court's decision in the Aussie Home Loans case in April, illustrate these difficulties.  In both cases, applications for injunctions restraining the employment activities of former employees were dismissed.

Courts presume that a restraint of trade is void unless the employer can prove it is reasonable to protect its assets.  The presumption is justified by the public interest in competition and the imperative of preserving an employee's ability to earn a living.

Many employers do not realise that dismissing employees in breach of contract may release them from restrictive covenants they signed.  An employee, say, who is wrongfully dismissed will say the employer's breach of contract amounts to a repudiation of that contract, discharging the employee from his obligations, including those owed under any restraint.  If so, gameover.

Prudent employers won't interpret imminent legislative changes by the Howard governments an invitation to dismiss employees capriciously or without sound reasons.  This depends at once on an apprehension of exposure under common law principles in a state of continuous evolution, as well as an understanding that you cannot enforce a contract you have not been prepared to honour.