Explainer: where to from here on penalty rates?

A Canberra barista makes coffee. Many low-paid workers will be affected by the Fair Work Commission’s decision on penalty rates. AAP/Lukas Coch

In its long-awaited decision, the Fair Work Commission on February 23 reduced Sunday and public holiday penalty rates for over 700,000 workers covered in four awards for hospitality, fast food, retail and pharmacies, as part of the Modern Awards Review. The decision has inspired heated debate, both for and against. And the matter is far from resolved.

The Labor Party and the ACTU are firmly opposed. The Coalition government is so far moving cautiously, knowing that the issue may well play a significant role in the next federal election. The prime minister yesterday refused to say clearly if the government supported the decision or not, while Liberal Senator Eric Abetz has argued for a grandfathering of current employees’ wages so that only new employees would be affected.

Background to the decision

Employers had argued that Sunday penalty rates should be reduced to the level of Saturday rates because:

  • we now live in a 24/7 society where Sundays are no longer special days, and
  • a reduction would enable employers to open for longer hours on Sundays and employ more workers.

The Productivity Commission broadly supported employer arguments. Nevertheless, the evidence for these arguments is weak.

The employment generation case is based predominantly on economic theory rather than empirical data. The Productivity Commission implicitly recognised this when it recommended that the onus of proof be reversed, so that unions should be required to demonstrate that wage reductions would not generate employment growth.

There is also substantial evidence that weekend workers have difficulty in making up for lost time at weekends with family and friends during the week.

The decision

The Fair Work Commission, which the Rudd government established in 2009, only partially accepted employer arguments. It acknowledged the difficulty of quantifying employment impacts, but was particularly swayed by the evidence of small-business witnesses that a cut in penalties would allow them to offer employees more work.

However, it reached slightly different conclusions for different sectors (see below). It also argued that while the “disutility” for Sunday work had declined, it remained greater than for Saturdays.

So the commission’s decision was nuanced and complex. The new rates vary between sectors and according to employment status.

Acknowledging the hardship that predominantly low-income workers on Sunday penalty rates would face, the commission envisages that, while public holiday rates will be effective from July 1 2017, reductions to Sunday rates will be phased in over two to five years. It has called for submissions from the parties in this regard. Casual workers have also not suffered as severely as others.

For restaurants and clubs, the commission did not reduce rates because it considers that employers presented insufficient evidence supporting their arguments – it requires further evidence. It also stated that the changes decided “provide no warrant for the variation of penalty rates in other modern awards”.

Who is affected?

The following summarises how the main groups of workers are affected:

  • hospitality – full-time and part-time workers had rates reduced from 175% to 150%, but casuals were not reduced
  • fast food – rates reduced from 150% to 125% for level 1 employees (commonly aged 14-20), but for casuals it was 175% to 150%
  • retail – rates reduced from 200% to 150%, but for casuals only from 200% to 175%
  • pharmacy sector – rates cut from 200% to 150%, and 200% to 175% for casuals
  • restaurants and clubs – no cuts but there may be in the future.

Why does Labor oppose it?

The sheer inequity of the decision has aroused extensive opposition. Estimates of the loss in income for workers on penalty rates range from $3,500 to $6,000 (by ACTU president Ged Kearney) every year. This is very substantial for workers who are largely at the lowest-paid end of the labour market spectrum. Many rely on penalty rates, especially on Sundays, to meet household expenses.

The Productivity Commission also acknowledged that these workers are unlikely to receive sufficient additional hours to make up for the loss of pay.

In addition, this is a highly gendered issue, since the sectors affected are dominated by female employees. The economic gender gap may widen as a result.

It is unusual historically for the Fair Work Commission or its predecessors to reduce wages across the board for whole classes of workers or sectors. The most notable previous instance was in 1931, in the exceptional circumstances of the Great Depression.

But the current decision has occurred in a relatively buoyant economy at a time when a shift is already occurring from wages to profits. The day before the commission’s decision, the Australian Bureau of Statistics (ABS) released figures showing that private sector wages growth was 1.8%, the lowest since it began collecting data in 1997. At the same time, company profits soared by 26.2% for 2016.

In the retail sector, gross operating profits for unincorporated businesses – mainly the small businesses the decision was designed to benefit - grew by 11.5% for the December quarter alone. Most of the businesses affected will also enjoy a tax reduction if the government has its way.

What are the options for contesting the decision?

The ACTU intends to apply in the commission for “take-home pay orders”, which might protect existing workers from reductions or mitigate them. However, the commission has already indicated that it did not favour any general “red circling” or grandfathering that would preserve current Sunday penalty rates for all existing employees.

Unions will also exert pressure on employers to pay over award rates. Some large employers, such as Coles and Woolworths, already do this through enterprise agreements, although these provide lower penalty rates for some part-time workers.

In addition, a small number of employers have indicated that they will not apply the cuts to their employees, notably cosmetics retailer Lush and some small cafes. However, many workers in retail and hospitality are entirely award-reliant, which means they will be paid according to the commission’s ruling.

Enforcement is a further issue that has not arisen in the debates so far. Quite illegally, many employers, particularly in hospitality and retail, do not actually pay prescribed penalty rates, and the Fair Work Ombudsman catches only some of these. The 7-Eleven case was a stark reminder of this.

What happens from here?

Penalty rates could hurt the government in the next election. So far it has treaded warily on the issue. Prime Minister Malcolm Turnbull has said the government respects the ruling of the commission, but stressed that it had the power to implement the changes gradually to soften the blow for workers.

We can expect a strong ACTU campaign focusing on key marginal seats leading up to the next federal election. The Labor Party has indicated that it will reverse the decision if it is returned to government at the election. Labor has successfully wedged the government on the issue, after the government prevented tabling of a private member’s bill to protect penalty rates.

The government claims that all parties should abide by the umpire’s decision and that parliament should not intervene. However, it has previously supported penalty rate reductions. It has also intervened against umpire’s decisions it did not support: special legislation covering Victorian firefighters and abolition of the Road Safety Remuneration Tribunal are two examples.

In the longer term, we can also expect employers to come back for further reductions now that they have their foot in the door. Penalty rate reduction, and even abolition, has been an ongoing employer claim for over 20 years.