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Industrial relations and the award-reliant small business

Workers in small firms are no different to those in larger ones

As we head inexorably towards the federal election this September one of the issues that should get more attention is industrial relations. For the opposition leader Tony Abbott this has been a sensitive subject, haunted as he has been by the ghost of “WorkChoices” and the problems that created for the government of former Prime Minister John Howard.

The replacement of “WorkChoices” with the Fair Work Act of 2009 has not been without its critics, primarily from major employer groups. However, the impact of these industrial relations provisions on the small business sector is an area that has not been given adequate attention.

This is an issue that has already been raised by the Council of Small Business of Australia (COSBOA), who are seeking to have awards simplified for small firms.

The complexity of Australia’s industrial relations system is a challenge to a lot of small businesses, but many owner-managers find it useful to have a well-defined industrial award when setting wages and conditions for their employees.

The award-reliant small business

For those seeking to get some understanding of the behaviour of small businesses and their engagement with industrial awards, a good starting point is a research report entitled “Award-reliant small businesses”, published by Fair Work Australia in January 2012. The report was authored by Samantha Farmakis-Gamboni, David Rozenbes and Kelvin Yuen from the Minimum Wages and Research Branch of Fair Work Australia.

It is a long report (173 pages). Yet it is well researched and provides both an excellent review of the extant literature, and a critical analysis of the available data sources on small firms and industrial relations. The aim of the research behind the report was to address two research questions:

1) What are the characteristics and performance of small businesses that employ award-reliant workers and their employees; and

2) What are the differences between small firms that employ award-reliant workers and small firms that do not employ award-reliant workers, particularly with respect to indicators of performance?

The term “award-reliant businesses” refers to firms that have employees who are paid wage rates that are set according to the industrial award for that type of employment. It does not include firms that pay above award rates. The report makes a number of observations and draws a range of findings that are worth summarising.

There is a lack of available research

One of the first findings highlighted by the report is the lack of research dealing with Australian small firms' engagement with the industrial relations system. Although the report contains a well-considered and detailed review of the literature, it could identify only one published study since the introduction of the Workplace Relations Act 1996 that dealt specifically with the subject.

The literature that was available suggests that small businesses rely more heavily on awards when setting wage rates than do their larger business counterparts. It also suggests that many small business employers have difficulty in understanding the industrial awards system. Despite this they noted that the awards system does not appear to inhibit flexibility within the workplace.

In short, the Australian industrial relations system is unique in its use of awards and there has been insufficient research into the interrelationship between industrial awards and small business. It is an area that deserves more attention if we are to enhance the workplace environment of the small business sector in this country.

There is a lack of reliable data to measure small business industrial relations

Another major finding from the study was that there is a lack of reliable data for the analysis of how small businesses deal with their employees. The researchers examined a number of the most relevant databases. These included the Business Longitudinal Database (BLD) from the Australian Bureau of Statistics (ABS), the ABS Survey of Employee, Earnings and Hours (EEH) and the Household, Income and Labour Dynamics in Australia (HILDA) database. HILDA is a federal government initiated and funded survey managed by the Melbourne Institute of Applied Economic and Social Research.

BLD and EEH survey employers while HILDA surveys employees. According to the study these key sources of data suffer from a range of issues. The ABS data sets lack detail due to the amount of data that has been removed in order to preserve confidentiality. Also some of the questions used in the survey do not collect actual financial and employment data but only qualitative data (typically ordinal measures serving as proxies). The HILDA database is limited by its accuracy due to being self-reported employee data rather than employer payroll records.

There are problems in definition

Another problem identified by the study is the lack of adequate definitions of what a small business is. This lack of clear definition has been commented upon previously by this author in “The Conversation” . The ABS defines small firms as those having fewer than 20 employees, with micro-firms having less than 5 employees. However, the Small business Fair Dismissal Code defines a small business as one that has less than 15 employees.

These definitions use employment rather than turnover to define small firms, which is different to the practice in many other countries. Further, there is a significant difference in the management of a business owned and operated by a sole trader with no employees, one that has 4 or 5 employees, and one that has 20 employees.

Small firms suffer lower productivity, profitability and survival rates

The study found that around 90% of all employing business in Australia are small (e.g. with fewer than 20 employees), but account for only one third of employees and one third of operating profits before tax.

Small award-reliant firms accounted for 12.9% of small employing businesses (based on 2005-2006 data). Compared to firms that either did not use awards or used a combination of awards and non-award arrangements, award-reliant small firms were found to be less likely to enjoy higher levels of productivity and profitability. They were also less likely to survive. Most firms that commenced using only awards tended to move towards non-awards or a combination of awards and non-award arrangements.

The authors of the report caution that the problems associated with the databases outlined above make it difficult to accurately determine the causality of these trends. This means that it is not clear whether award-reliant firms are adversely affected as a result of the awards system or for other reasons. As such it is difficult to draw reliable conclusions from these findings.

Award-reliant workers in small firms are no different to those in large ones

The study also found that employees working within small award-reliant businesses were not significantly different to those employed within larger firms. However, award-reliant workers were found to receive lower hourly wage rates, and those working in small firms generally received lower hourly wage rates than their counterparts in large firms.

Award-reliant workers in small firms were also more likely to experience higher rates of turnover and casualization than their counterparts in larger companies. These award-reliant workers were also more likely to be female and part-time or casual employees.

According to the study’s authors increases in award wages are unlikely to affect award-reliant workers in small firms significantly differently to their counterparts in large firms. However, they did caution that the limitations imposed by the data sources make such findings less easy to confirm.

What are the implications of this research?

According to COSBOA’s Executive Director Peter Strong, speaking at the National Press Club in August 2012, the problem is the industrial relations system is designed for large businesses not small ones. He claimed that the system is not working for small business and is too complex and difficult for owner-managers to deal with.

Without doubt there is a difference between managing a company with hundreds or thousands of employees and managing one that has less than 20 or even less than 5 people. It is also fair to say that Australia’s industrial relations system is complex and that there are probably too many separate awards.

However, there needs to be more investigation into the nature of small business industrial relations and how such firms deal with the complexities of Australia’s industrial awards system.

The findings that emerge from this study suggest that care should be taken in seeking to make substantial changes to the industrial awards system as it relates to small businesses. Small business owners may lack the time to fully understand the intricacies of industrial relations law. However, they operate within their respective industries and must seek to compete for workers in the same employment market as larger firms.

As the findings from this study suggest, many larger firms will pay higher hourly rates to employees and offer more secure jobs. Any initiatives designed to create simplified awards for small businesses, particularly if they offer less attractive wages and conditions to workers engaged in the same jobs as those employed by larger firms, are unlikely to offer long term solutions.

Note: Tim Mazzarol is President of the Small Enterprise Association of Australia and New Zealand (SEAANZ).

SEAANZ is a not-for-profit organisation founded in 1987. It is dedicated to the aim of bringing together small business professionals in practice, education and training, and to promote small business development, communication and dissemination of research, ideas and information.