Penalty rates in awards: do we really need them?

Are penalty rates becoming old fashioned? Retail image sourced from

There have been renewed calls from employers - mainly in the retail sector - for reductions in the wage premiums (or penalty rates) that industries are required to pay staff for work undertaken at non-standard times (such as evenings, weekends and public holidays) and overtime hours.

The submissions made by the retail industry employers’ associations to Fair Work Australia, as part of the Modern Award Review process, are actually quite modest. They suggest halving the penalty rate for working on Sundays and limiting the conditions under which part-time employees become eligible for overtime premiums.

Nevertheless, there are solid grounds for questioning the entire basis for the inclusion of penalty rates in awards.

The economic rationale in favour of penalty rates is straightforward. If employers don’t offer higher wages for work at “undesirable” times, they may not be able to find enough staff to work at those times. Similarly, without the enticement of a significantly higher hourly wage, employees may not be willing to accept offers of overtime.

But we do not need awards to sort this out.

Awards set minimum statutory conditions that must be observed by all employers covered by that particular award. This is exactly what we do not need in the case of penalty rates. There is no strong reason why the appropriate penalty rate for weekend work, for example, should be the same in a green grocer as in a bakery, or the same for a business in Saint Kilda as one in Wangaratta.

Ultimately, wage determination is best left to employers and workers (and their unions) to determine on a case-by-case basis through bargaining. Premiums for work at non-standard hours would then vary across firms and times of the week to reflect variations in demand and supply conditions.

But what about the social case? Work in the evenings, on weekends and on public holidays has generally been thought of as socially undesirable, and thus deserving of additional compensation. This was often addressed with respect to work on Sundays, the traditional day of rest in Christian societies, but became a principle that was also extended to work on Saturdays and in the evenings. The argument usually claims that work at such times has adverse effects for family and social life.

However, the world today is very different to the one in which these arguments were conceived. Instead, we now live in a society where, as consumers, we expect services to be accessible at all hours, and where, as workers, the premium attached to working between 9 and 5, Mondays through Fridays, is far weaker. Indeed, for many groups, most notably students and second earners from families with children, the preferred times of work are anything but 9 to 5 on a week day.

Only with respect to public holidays can a strong “social” argument be made for the retention of penalty rates. Public holidays are built around the idea of promoting common leisure time, and thus employers are discouraged from operating on such days. Nevertheless, even here the case has been weakened by the wavering community support for some public holidays (for instance, the Queen’s Birthday and, dare I say it, Labour Day).

A very different argument, and one recently pedalled by Ged Kearney, President of the ACTU, is that of need; that “millions of Australians rely on penalty rates to meet their cost of living expenses”. But why are persons working nights and weekends any more deserving than those struggling on an income earned by working 9 to 5 on weekdays?

Finally, it can be argued that employers need to be required to pay additional compensation where work has potentially adverse consequences for health. This argument is the most compelling, but would then see the statutory prescription of penalty rates restricted to those hours regimes demonstrated to be harmful for health – mainly regular shift work late at night and for “excessive” overtime hours.

Ultimately, the retention of most penalty rates in awards reflects a world that is long gone, and in a truly modern award system many would have been abandoned. Penalty rates might still be prescribed for work on certain public holidays, shift work in the evenings, and for overtime regimes requiring working hours that are excessive from the perspective of individual worker well-being (though even this will be difficult to define on an award basis given it will vary with the nature of work undertaken).

And of course, even if awards were silent on penalty rates, it does not follow that they would disappear. Many employers will still need to pay workers more to attract sufficient labour to work at undesirable times.