Although the Productivity Commission draft report endorses the workplace relations system, it recommends major reforms - Industry Updates & Analysis

On 4 August 2015, the Productivity Commission (PC) released its Workplace Relations Framework: Draft Report (PC Draft Report).

The PC inquiry into Australia's workplace relations framework was established by the Abbott Government late last year, and is due to provide a final report by November 2015.

Running to around 1000 pages, the PC Draft Report provides a comprehensive assessment of the operation and effectiveness of the Fair Work Act 2009 (Cth) (FW Act), as well as the institutions which oversee and implement the legislation.

Perhaps surprisingly, overall the PC Draft Report gives Australia's workplace relations system the 'thumbs up', stating that it is: 'not systemically dysfunctional. Many features work well – or at least well enough ... The key message of this inquiry is that repair, not replacement should be the policy imperative.'

The key areas in which the PC recommends significant changes are award penalty rates in the café/restaurant, hospitality and retail sectors; enterprise bargaining particularly for major projects; the role and processes of the Fair Work Commission (FWC); and unfair dismissal and general protections claims. Importantly, the PC Draft Report also proposes the creation of a new avenue for varying award conditions at enterprise level: the 'enterprise contract'.

ENTERPRISE CONTRACTS

The PC notes that individualised agreements under past legislation (AWAs) led to reductions of award entitlements for some employees. However, in order to give small-medium sized businesses the opportunity to implement award variations, the PC has floated the concept of enterprise contracts (ECs):

An EC would enable an employer to vary the applicable award for classes or groups of employees within an enterprise – without the need to negotiate individually with each employee, or to make a (collective) enterprise agreement.
An EC could be offered to potential employees as a condition of employment, while existing employees could choose whether to adopt an EC or keep their current terms and conditions.
ECs would be lodged with the FWC, but would not require the tribunal's approval. They would be subject to a no disadvantage test (NDT), although this would only become relevant in the event of a complaint by an employee about their EC.
EC templates would be provided to employers to encourage best practice.
Employees would be able to withdraw from an EC and return to the award after 12 months.

The PC Draft Report invites comment on the EC proposal (it does not form part of the recommendations at this stage). The EC idea may provide smaller employers with additional flexibility in the setting of wages and other employment conditions. However, it is difficult to see how ECs would have much of a role to play in the context of large, unionised workplaces.

ENTERPRISE BARGAINING & PROTECTED INDUSTRIAL ACTION

The PC considers that while most enterprise agreements are made without difficulty, there are a number of flaws in the current FW Act arrangements including:

The undue focus on non-compliance with procedural steps, which can lead to non-approval of a proposed agreement. The FWC should therefore be given discretion to overlook such procedural defects.
The 'better off overall test' (BOOT), which has often led to a 'line by line' approach by the FWC rather than a global comparison between a proposed agreement and the applicable award. This could be remedied by returning to a NDT, with clear guidance to the FWC on its application.

The other important aspect of enterprise bargaining for which many have called for reform is greenfields agreements for major projects. Greenfields agreements can be held up by union opposition. Instead, according to the PC, employers should be able to choose one of the following three options where negotiations for a greenfields deal have proved unsuccessful after three months: (1) continue negotiating; (2) request the FWC to undertake 'last offer arbitration' (i.e. choose between the employer and union's last offers); or (3) have the agreement approved by the FWC with a 12-month nominal expiry date. These proposals would give employers a wider range of options in the event of intractable greenfields negotiations than the measure proposed by the Abbott Government in the Fair Work Amendment Bill (currently before Parliament).¹

Other proposed changes to the bargaining framework include allowing agreements to be made for up to 5 years, or for the duration of a greenfields project (rather than the current 4-year maximum term for all agreements); and requiring individual bargaining representatives to show they represent at least 5% of employees to be covered by an agreement.

Noting that industrial disputes have waned in significance since the 1990s, the PC nevertheless proposes several changes that may assist employers in respect of protected industrial action:

Enabling employers to deal with strategies such as 'aborted strikes' and brief work stoppages, through (respectively) greater powers to stand workers down and increased options for deducting or not deducting pay.
Providing for a wider range of forms of employer protected action (currently restricted to retaliatory lockouts).

FAIR WORK COMMISSION

Perhaps the most far-reaching recommendations in the PC Draft Report are those relating to the FWC. The PC identifies three major flaws in the FWC's structure and operation: (1) history and precedent play too big a role in the tribunal's key economic and social functions, especially its award powers; (2) inconsistencies arise between individual members due to the weight placed on procedure over substance; and (3) the governance processes of the FWC unduly emphasise appointing persons with perspectives aligned to one or other side in industrial relations debates.

The PC therefore proposes restructuring the FWC into 2 separate divisions:

Minimum Standards Division: to conduct annual wage reviews and exercise award functions, based more on analysis and evidence obtained by the FWC itself (rather than through the submissions of opposing parties as is primarily the case in these matters currently).
Tribunal Division: to hear and determine cases relating to unfair dismissal, general protections, agreement approval, industrial disputes, union right of entry, etc.

Further, in proposals that will no doubt be seen as challenging the independence of the FWC, the PC recommends that new appointments to the tribunal (from President-level down) be for fixed 5-year terms with the option of reappointment (subject to a merit-based performance review). The PC also proposes that existing FWC members be subject to periodic performance review.

THE SAFETY NET: MINIMUM WAGE, AWARDS, PENALTY RATES & NATIONAL EMPLOYMENT STANDARDS

The PC considers that current minimum wage-setting processes, and minimum wage levels, are not having economically harmful impacts – although constant attention must be focused on youth unemployment, and the FWC should broaden its analytical approach to address unexpected variations in economic conditions.

Modern awards, according to the PC, are still unduly rigid and history bound – with consequent inflexibilities, ambiguities and costs for employers. The PC recommends retaining awards but reducing their systemic flaws, including by having the FWC only review awards 'as required' (rather than every 4 years) through careful empirical analysis.

Penalty rates were widely expected to be the most controversial aspect of the PC inquiry. Overall, the PC accepts the rationale for penalty rates (e.g. to address the health risks of night and shift work), their acceptance among the community and their importance for emergency workers in particular.

However, the PC Draft Report focuses particularly on penalty rates for weekend work in the hospitality, entertainment, retailing, restaurant and café sectors. It argues that these penalty rates are out of place, given the growing demand for weekend supply of services in recent years. Therefore, the PC recommends that Sunday penalty rates in these sectors (around 200% of base pay) be adjusted in line with Saturday rates (125-150%).

The PC found that the final component of the safety net, the National Employment Standards (NES), have attracted little controversy. That said, the PC is concerned about the expansion of public holidays by some State governments, and recommends amendment of the NES to ensure that employers are not required to pay for leave or additional penalty rates on these holidays.

UNFAIR DISMISSAL & GENERAL PROTECTIONS

The PC Draft Report includes several recommendations in these areas that will be welcomed by employers:

Ensuring that procedural errors in an employer's handling of a dismissal do not result in compensation or reinstatement, where the dismissal is otherwise valid (e.g. based on serious misconduct).
Giving the FWC more discretion to deal with unfair dismissal claims 'on the papers'.
Increasing lodgement fees for unfair dismissal claims (adjusted depending on an employee's income).
Clarifying, for purposes of the general protections provisions, whether an employee is exercising a 'workplace right' when a complaint or inquiry is only indirectly related to their employment.²
Introducing a cap on the compensation available in a general protections claim.
Reducing the scope of discovery processes in general protections cases.

ASSESSMENT

The PC Draft Report has already re-ignited the long-running political debate over the shape of Australia's IR system.

But the PC's recommendations are not as contentious as many observers were expecting. The confined impact of proposed penalty rate reductions, and the PC's overall endorsement of the minimum wage, will likely take some of the 'sting' out of the debate.

However, within the Draft Report are a number of significant reforms which would be very welcome to employers and assist in improving Australia's capacity to deliver major infrastructure projects.

Footnotes

¹ See here. We note also that the PC rejects the idea of requiring discussions over productivity as part of the bargaining process, and requiring that employee/union claims are not excessive, as proposed in the Fair Work Amendment (Bargaining Processes) Bill; see here.

² See here.

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