Enterprise bargaining set to boldly go way of the dodo

Duncan Hart successfully appealed against a workplace deal that his union struck with Coles. Picture: Glenn Hunt

Is it the end of the road for enterprise bargaining? You may be surprised that I am even posing this question. Most people probably assume that enterprise bargaining is a central feature of our industrial relations system and this isn’t going to change.

Actually, enterprise bargaining has never really developed into the comprehensive method of pay setting the original proponents expected. There are a variety of reasons for this outcome, not least the excessive degree of regulation of the enterprise bargaining process and certification.

And while enterprise bargaining is incredibly strong in the public sector, with nine out 10 public sector workers covered by enterprise agreements, its popularity in the private sector is waning. This latter trend is about to accelerate as more firms seek to have their enterprise agreements terminated and revert to the award.

Let me start with a definition and some key facts. Enterprise bargaining is the process of collective negotiation between the employer, employees and their bargaining representatives with the goal of making an enterprise agreement.

This process is regulated by legislation and includes the granting of protected industrial action to workers when an agreement is being negotiated. Agreements are certified by the Fair Work Commission only if they meet the better-off-overall test, which requires that “each award-covered employee and each prospective award-covered employee must be better off under the agreement than they were if the relevant award applied”.

There is no requirement on trade unions to sign enterprise agreements, although this occurs in a large number of cases. Most workers covered by enterprise agreements are under agreements signed by unions.

We can take a broader look at the number of employees covered by different methods of pay setting. The Australian Bureau of Statistics has collected these figures for many years.

What these figures show is that about 40 per cent of employees are covered by enterprise agreements, another 40 per cent are on individual arrangements and the remaining employees are paid the award.

One of the problems with the way in which pay-setting methods are classified by the ABS is that no consideration is given to the extent to which individual arrangements are actually related to the award — over-award payments are a case in point. The effect is to understate the importance of awards which, on the raw figures, have been declining in coverage. In 2014, the Fair Work Commission ordered a dedicated survey of employers in part to deal with this issue. While there are serious concerns about the low response rate of that survey, the findings do cast a new light on how pay is really established in Australia.

If we take enterprises, rather than employees, we find that only 14 per cent of private sector firms are covered by enterprise agreements. Individual arrangements are the dominant pay-setting method, with 64 per cent of enterprises using this method.

But here’s an important statistic: nearly two-thirds of individual arrangements used by enterprises are award-based; one-third of enterprises pay only the award.

If we convert this statistic to the pay-setting method of employees, as opposed to enterprises, we find that 36.5 per cent of employees are covered by enterprise agreements, 28 per cent have individual arrangements and the remainder have award-based arrangements.

The FWC survey also rein­forces a point we know from other sources of information — that enterprise agreements are much more common in large enterprises than in small ones. For enterprises with 200 employees or more, 50 per cent use enterprise agreements as their main method of setting pay. For small enterprises with five to 19 employees, only 7 per cent use enterprise agreements. The figure for medium-sized enterprises (20 to 199 employees) is 21 per cent.

To sum up: enterprise agreements are an important, but not the dominant, means of establishing pay. They are common among large enterprises and dominate the public sector. While the incidence of award-only pay for employees is relatively low (15 per cent to 20 per cent), many individual pay arrangements are actually based on the underlying award.

Given that one of the objects of the Fair Work Act is to “achieve productivity and fairness through an emphasis on enterprise-level bargaining underpinned by simple good-faith bargaining obligations and clear rules governing industrial action”, we should conclude the legislation has failed — certainly on the productivity front, but also in terms of the emphasis on enterprise-level bargaining.

So what makes me think that enterprise bargaining is coming to the end of the road, at least in the private sector? There are two major developments that are bearing on this outcome: first, the decision by the FWC to quash the Coles supermarket enterprise agreement and, second, the successful application by several firms to have their enterprise agreements terminated so they can revert to the award.

Consider the first of these developments.

The much lower penalty rates for Saturday and Sunday work in the agreement compared with the award meant that, even with the much higher base rates of pay, many Coles workers were made worse off by the agreement. It is estimated that close to half of Coles’ supermarket workers were worse off because of the hours they typically worked.

Having had this agreement cancelled by the FWC, notwithstanding the objection of the company and the Shop, Distributive and Allied Employees Association (go figure), the company has reverted to a Work Choices-era agreement that also contains the lower penalty rates.

However, the base rates, and increases thereto, from the cancelled agreement have been retained by the company.

An application by an aggrieved worker to have this agreement also terminated has been launched and it’s London to a brick that it, too, will be quashed by the FWC.

The only alternative for the company will be to revert to the award and pay some over-award payments, perhaps on an individual basis. The SDA can probably kiss goodbye to its preferential deal contained in the two agreements, including encouragement to join the union and deducting union dues from workers’ pay packets.

The key here is the potential flood that is about to be unleashed as other agreements signed by the SDA with large companies — Woolworths and the fast food outlets, in particular — are carefully scrutinised and applications are made for their cancellation. What has been a beautiful partnership between these large companies (lower penalty rates are very important to them) and the SDA is about to come to an end.

The broader implication of the quashing of the Coles agreement and the likely cancellation of other similar ones is that enterprise agreements, under this strict interpretation of the better-off-overall test offer no real advantages to employers. If every worker has to be better off compared with the award, then the employer may as well simply run with the award and use over-award payments on a targeted basis to achieve the best outcome possible.

One of the key reasons for shifting away from a one-size-fits-all award to an enterprise-specific package of wages and conditions as set out in agreement has now been eliminated.

If enterprise agreements can only pay over the award, in toto, to every worker, then the attractions for employers to embark on the laborious and costly procedure of negotiating an agreement with the union and/or workers are greatly diminished. In the end, it will probably be only in cases where the benefits of the legal prohibition of industrial action (unprotected action) during the course of an agreement are sufficiently large and genuine — in many cases, workers will never go out on strike and employers know it — that formal agreement-making will survive.

To be sure, employers can be pressured by unions. And enterprise bargaining will endure in the public sector because witless politicians will continue to support it. But for private sector enterprises facing stiff competition, enterprise agreements gradually will fade away in all but the largest firms.

The second factor that is bearing on the roadblock that enterprise bargaining is facing is the determination of some employers to seek to have their enterprise agreements formally terminated by the Fair Work Commission.

For those firms that negotiated terms and conditions during the mining boom that now no longer make commercial sense, there is a pressing need to be released from enterprise agreements that legally roll on beyond their expiry dates.

Under section 226 of the FWA, the FWC must terminate an enterprise agreement after its nominal expiry state if “it is not contrary to the public interest to do so” and it is “appropriate to do so having regard to the views of those covered by it (employer, workers and union, where applicable) and the likely effect that termination would have on them.”

Mind you, it has not been plain sailing for employers seeking to have agreements terminated, who must battle an institution that is known to stand up for union/worker rights irrespective of the consequences.

Take the case of Boom Logistics, a company servicing the coal industry located in NSW’s Hunter Valley. While the senior member of the FWC — deputy president Jeff Lawrence, former ACTU secretary — handling the case accepted that the enterprise agreement was undermining the competitiveness of the firm, he decided that termination of the agreement would not lead to an increase in productivity and efficiency — in his opinion.

By some tortured logic, he concluded “the substantial reduction in take-home pay and conditions of employment resulting from the termination of the agreement is not offset by the efficiency benefit to the employer”, having stated that there would be no efficiency benefit. Another case of go figure.

Reading between the lines, the FWC deputy president would rather see the firm go broke — employment had already been reduced by 40 per cent when the case was heard — than agree to terminate the agreement.

Luckily, other members of the FWC have allowed common sense to prevail, with recent cases involving Griffin Coal and Aurizon resulting in the termination of enterprise agreements, even though both cases were appealed by the unions. It’s a case of game on and other employers are likely to pursue the route of agreement termination, particularly if they have a good relationship with their workers.

What will happen in the place of the agreement is award plus arrangements. Base rate of pay are likely to be higher than the award and some conditions may be retained. Individual over-award payments will become more commonplace, particularly for the best and most valuable current workers. But new workers may be recruited on pay and conditions that closely mirror the award, a two-tier arrangement that is forbidden if an enterprise agreement is in place.

Is there any prospect that enterprise bargaining will diminish in importance in the public sector? There is no doubt that state governments are under pressure to control employee expenses, given their runaway growth in recent years. Several states have used pay caps as a means of controlling wage costs. This was done by the incoming O’Farrell government in NSW, for example.

In this year’s state budget, the South Australian government announced a 1.5 per cent a year cap for all new agreements covering public sector workers, although a higher cap of 2.5 per cent was agreed to for cases where negotiations had already begun. In all likelihood, this arrangement will end in tears and be unenforceable.

Note also these pay caps have a way of being offset by larger numbers of public servants, thereby offsetting any savings governments may budget for. And down the track, generous one-off pay deals often more than make up for the losses associated with the caps.

The real problem with public sector enterprise bargaining is that there is no notion of a market and even the identity of the true employer is unclear.

The representatives of the “employer” in these negotiations tend not to have their heart in the process because they are indifferent to the outcomes save pleasing their political masters.

What then happens is that the pay and conditions are just added to through the years as every concession made during one round of negotiation is baked in and there is never any consideration given to trading off some conditions to improve pay or other conditions.

The end result is public servants who are paid considerably more than their private sector counterparts and whose conditions of employment — think job security, superannuation, paid leave and the like — far surpass those that pertain in the private sector. Enterprise bargaining was designed to usher in a new era of labour market flexibility where pay and conditions could be aligned to the requirements and circumstances of individual enterprises. Across time, the one-size-fits-all prescriptive awards would fade away and virtually all workers would be covered by agreements.

There were some significant one-off gains when enterprise bargaining first took off; substantial productivity trade-offs in exchange for pay rises and enhanced conditions were commonplace. Across time and in part because of faulty legislative changes — the better-off-overall test replaced the more flexible “no disadvantage” rule, for example — the system has developed more downsides than upsides.

However, enterprise bargaining has been a boon to the unions and the officials who could spend their time using the tactic of threatening industrial action to pick off particular employers and squeeze above-market deals for the workers. For some time, there has been no need to offer any productivity trade-offs; it has become something of a badge of honour among unions to refuse. The certified enterprise agreements now have an alarming degree of sameness between them, notwithstanding the prohibition of pattern bargaining in the act.

Many agreements contain clauses that are favourable to unions such as the sole nomination of the union-connected superannuation fund, union-related income protection insurance, encouragement of union membership and restrictions on the use of casuals and contractors.

Enterprise bargaining has played into the hands of the Construction Forestry Mining and Energy Union, in particular.

None of this analysis should be taken as endorsement of the 122 modern awards that were meant to be written in plain English but are still hard to follow. They are highly prescriptive and inconsistent; they are the antithesis of light-handed regulation of pay and conditions suited to modern workplaces and a diverse workforce. But the point here is that awards are the lesser of two evils for many employers.

Enterprise bargaining has simply failed to live up to the dreams of its proponents. The only way enterprise bargaining can contribute to improving productivity — something that is urgent for raising living standards — is to lighten the deadweight impact of its over-regulation. It’s a challenge the government is unlikely to meet.