insight

Labour on a mission with Fair Pay Agreements

11 May 2021

After being stymied from delivering on its fair pay agreement policy last term, Labour is now promising a law change which has the potential to significantly increase collective bargaining and union influence in the workplace.

We run through the detail of the proposed legislation, as set out in the Cabinet Paper.

Economic and political context

The Cabinet Paper accepts that Fair Pay Agreements (FPAs) will raise unit labour costs and that this may be passed on to consumers in higher prices, or may incentivise employers to cut hours, compress wage ladders above FPA-set minimums, rely more on contractors, invest in labour saving technology which would reduce jobs over time, or shut up shop altogether.

But Workplace Relations and Safety Minister Michael Wood said these risks were “outweighed by the intended benefits of FPAs, including better standards of living for workers, improved productivity and a fairer distribution of the benefits of productivity, and better engagement between employers and workers”.

He also rejected advice from Treasury that, to soften the impact on the economy, there should be a limit on the number of FPAs that could be progressed at any one time and that they be prioritised for workforces that are “widely considered to be deserving of better terms and conditions”.

From the Government’s perspective, change is necessary to deal with “entrenched weaknesses” in the New Zealand labour market including: a prevalence of low quality jobs; low real wages; low labour productivity; wages lagging productivity increases; persistently poor outcomes for Māori, Pacific peoples, the young, the disabled and recent migrants; low collective agreement coverage (around 17%) by OECD standards, and a reliance in some industries on split shifts or casual working hours, which transfer costs and risks to employees. 

This is despite Treasury’s comments, dating back to 2018, that there is minimal empirical evidence for either the proposition that imbalances of power are causing wage or productivity concerns, or that an FPA system is an effective policy response to such concerns.

The Government’s aim is to have legislation in the House this year for passage in 2022.

Initiation and coverage

Two categories of FPA are envisaged – Occupational FPAs and Industry FPAs. A union may initiate an FPA if that union has at least one member within the proposed FPA’s coverage.

The union must describe the boundaries of the FPA and must be able to satisfy one of two tests:

  • a representation test, requiring the support of 10% or 1,000 employees in the designated industry or occupation (whichever is lower), or
  • a public interest test, requiring evidence of harmful labour practices within the relevant industry or occupation, e.g., issues of low pay or limited bargaining power.

FPA applications will be assessed by the Ministry of Business, Innovation and Employment (MBIE), which will have the power to call for evidence and information from the initiating union. Where the public interest test is being invoked, MBIE can invite submissions from interested parties within a specified timeframe.

To grant an application under the public interest test, MBIE will need to be satisfied that at least one of four conditions are present:

  • low pay
  • low bargaining power
  • lack of pay progression, and/or
  • long or unsocial hours, or contractual uncertainty that is not adequately compensated.

Once an FPA is initiated, all employers and employees within the proposed coverage will be included by default – and they will also be bound by its terms, whether they participated in the bargaining or not.

The Minister acknowledged that initiation threshold has been set deliberately low, which could mean that significantly more initiations occur than have been assumed or budgeted for.

FPA content

The legislation will specify topics which are either mandatory to agree or mandatory to discuss.

Mandatory to agree will be: base wage rates, how they will be adjusted within the term of the FPA, whether employer superannuation contributions are included in the base rate; ordinary hours, penalty rates (for overtime and shift work), coverage, duration, and governance arrangements (any, ongoing responsibilities the bargaining parties will have).

Mandatory to discuss will be: redundancy, leave requirements, objectives of the FPA, skills and training, health and safety, flexible working arrangements.

FPAs may also include, where agreed in negotiations:

  • exemptions from coverage for up to 12 months for employers in significant financial hardship
  • terms specific to a region, provided they meet minimum entitlement provisions
  • differential terms - e.g., based on qualifications or skills, which might include a lower rate for young people and those in training, and
  • a preferential payment for union members (which could be either one off or recurring over the life of the FPA but cannot exceed the union member’s membership fees).

Treatment of contractors

FPAs will be available only to employees at the outset but it is the Government’s intention to bring in contractors “as soon as possible”. In the interim, employers who misclassify employees as contractors to avoid the terms of an FPA will be liable to a fine.

The affected employee would need to establish that they have been misclassified, after which the onus of proof that there has been no deliberate wrongdoing will shift to the employer. In support of this approach, the Minister said: “I consider diverting from the principles of natural justice to be justified and necessary as it would be very difficult, if not impossible, for the employee to prove what the employer’s intention was”.

Where there has been a successful case establishing misclassification relating to an individual, the Labour Inspectorate can issue an improvement notice in relation to similarly placed workers within that employer’s workplace.

Bargaining

Each bargaining side will have a duty to use best endeavours to represent all affected parties within the coverage area and to ensure that Māori are effectively represented and that their views and interests are both sought and considered.

BusinessNZ has agreed to assist industries or occupations to find a suitable bargaining representative and, where one cannot be found, to be the default representative.

There will be notification and communication requirements on unions and impacted employers when FPA bargaining is initiated and at critical stages through the process.

Employers will be required to pass on to the union the contact details of each employee within the proposed FPA inside a specified timeframe, unless the employee asks that this not be done. Unions can use non-members’ contact information only for FPA-related communication, not for recruitment.

Employers must allow workers two two-hour paid meetings for FPA purposes through the FPA negotiations, with two additional hours if the FPA is voted down at the first ratification ballot. These would be additional to the two union meetings per calendar year already provided for in the Employment Relations Act.

Unions will be entitled to access workplaces during bargaining, provided the primary purpose of the paid meeting is FPA-related, and when the FPA is in force whether the employees are union members or not.

Bargaining costs

Bargaining costs will generally lie where they fall. But the Government will provide a one-off contribution of $50,000 to each side with additional funding of up to $25,000 available where less than 20% of those in coverage are members of the relevant union or industry group.

The Government will also fund a neutral expert facilitator to each negotiation to assist both parties with the bargaining process and content requirements and will provide bargaining capability training through MBIE and grants of $250,000 a year to BusinessNZ and the Council of Trade Unions for the first three years the system is in force.

Dispute resolution and significant powers for ERA

There is no right to strike.

If the parties cannot come to agreement on a subset of terms, either party may apply to the Employment Relations Authority (ERA) for a non-binding recommendation on those terms.

If they still cannot resolve their dispute, either side may apply for a binding determination that fixes the terms of the FPA. The ERA may direct them to attempt, or return to, mediation.

The ERA must fix terms where an FPA has been put to ratification twice and failed both times.

Where the ERA has fixed the terms, appeal rights will be limited to whether the legal criteria for the determination have been met. There will be no ability to appeal the substantive decision.

Any determination must include all “mandatory to agree” topics and may include “mandatory to discuss” topics when these are part of the application and where the ERA considers inclusion appropriate.

Ratification

Ratification will be by simple majority of those employers and employees who participate in the vote.

Penalties

Penalties of up to $20,000 for an individual and $40,000 for a company or other corporation will be applied for failure to meet duties or obligations during the development of an FPS – e.g., not notifying affected employees.

Once an FPA is in force, the maximum fines will be half as large at $10,000 and $20,000 respectively.