Commentary

Fair Pay Agreements (FPA’s)

May, 2021

By: Paul Jarvie

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The Government is delivering on its long-awaited manifesto pledge to introduce FPA’s although they will not arrive quickly or without much debate.

The planned timetable is to introduce the Bill to the house later this year where it would follow the parliamentary process which would probably take around 6 months before becoming law in mid-2022. Then the process of formalising a FPA could take up to 12 months meaning it is unlikely to come into force in the workplace until mid-2023.

The EMA has made it clear in our media statements and when talking to members that we believe FPA’s are ‘unfair’, inconsistent with international law and at odds with the ever-changing international workplace. They are step backwards to National Awards, which historically crippled NZ.

They strengthen the power of unions in a world where they are less relevant, as seen in their declining membership numbers. They also risk creating division amongst employers and employees with and “us and them” mentality, when there is a trend towards greater cohesion in the workplace. They do not meet the needs of our changing world.

What’s the case for FPA’s?

The case for FPAs rests on four alleged shortcomings in the operation of New Zealand’s labour markets. NZ Initiative research, however, reveals these concerns are either misconceived or will not be solved through FPAs and this a view supported by NZ Treasury.

  1. Current labour market settings have seen a decline in the share of New Zealand’s gross domestic product (or “share of the pie”) going to workers. This concern is a myth. The share of GDP going to workers did decline in the late 20th century, but this fall largely occurred in the 1970s and 1980s (at a time when New Zealand had a system of industrial awards similar to the FPA arrangements proposed by the FPAWG). Since the 1991 reforms, the decline in workers’ share of GDP has been arrested and is now trending upwards.
  2. An alleged rise in income inequality and a “hollowing out” of middle-income wages since the 1991 reforms. This concern is also misconceived. Though income inequality has been rising in many other countries since the early 1990s, income inequality before taxes and transfers has actually declined in New Zealand since the 1990s.
  3. That the current regime sees “good” employers being disadvantaged by “bad” employers by undercutting them in a “race-to-the-bottom”. This concern is also a myth. The data show that average wage rates have risen faster than inflation across all income deciles. Workers’ wages are simply not being bid down by employers on an ever-decreasing basis.
  4. New Zealand’s comparatively poor productivity growth rates. It is true that New Zealand has a productivity growth problem, however this problem spans the last 50 years. There is no evidence linking low productivity growth over the last few decades with our current labour market settings.

10% of an occupation, or industry can dictate conditions for the other 90%

Under normal democracy principles a majority is required to effect change, but for FPA’s 10% is considered a fair representation. That means in occupations with 200 people, 20 would decide the fate of the other 180 including terms and conditions of employment. It also means employers will have limited to no ability to be part of the bargaining process and it will be a ‘agreement’ reached between unions and the representative body of sectors or occupational groups.

How these sectors will be defined is also a major concern and has the potential to group many workers within a sector that are not considered part of the occupation in question.

The increased sick leave provisions, new public holidays, further minimum wage increases, supply chain issues, rate and rent increases, electricity charges and so on all compound FPAs and with the travel bubble to Australia now open, the grass may look greener to do business elsewhere.

What do FPA’s cover?

The intention of the FPA’s is to cover mandatory bargaining on base pay rates, how pay adjustments will be made during the term of the FPA, superannuation, ordinary hours pay, overtime, penalty rates, overtime rates, coverage, duration of FPA and governance arrangements between the parties. Bargaining may also cover redundancy, leave entitlements, skills and training, health and safety and inflexibility provisions. Many of these issues are covered by separate legislation which will just complicate matters under FPA’s.

FPA explained in brief.

Where 10% or 1000 workers in a sector or occupation can organise themselves, they can initiate the FPA. Unions will be the organising bodies for workers and there is also a “public interest” test. This test looks at the overall conditions within an occupation or sector and decides if a FPA is in the best interests of those working in that occupation or sector. Once the threshold is reached, all workers inside the occupation or sector will be subject to the FPA. Employers will have no say in initiating process, it is exclusively an employee driven process.  All employers who work with those occupations or sector will be required to negotiate and settle an agreement. Opting out for employers is not permissible.

Business groups and unions will conduct the bargaining on behalf of those covered by the FPA in question.

If agreement cannot be reached after two attempts, it then goes to the Employment Relations Authority who will determine the T&C’s of the FPA.

There are numerous and significant operational challenges to the FPA system that potentially could cause major disputes and the ever-possible unintended consequences.

There are strong grounds for concluding that if implemented FPAs, will be harmful to the well-being and prosperity of New Zealanders.

  1. There is a significant risk of slower productivity growth from FPAs locking in inefficient practices and reducing labour market flexibility. These problems will be amplified by the disruption from automation and innovation to the future of work. History also suggests FPAs will harm industrial relations, which will also impact adversely on productivity.
  2. If the FPA process is successful in forcing up wages, there is a risk that FPAs will cause job losses in firms unable to recoup the costs of higher wages from customers. The burden of job losses is likely to fall disproportionately on the unskilled. Higher wage rates will raise the hurdle for the unemployed, particularly inexperienced (young) and unskilled workers.
  3. If FPAs are compulsory they will take away workers’ freedom to choose not to be represented by unions in their wage negotiations.
  4. There is a serious risk of harm to consumers from firms increasing prices for goods and services to recoup increased labour costs arising from FPAs. The effect of increased prices will be felt most acutely by New Zealand’s least well-off.

FPA’s are a return to national awards, which time and history has shown are not effective. Government policy must not be used as a marketing tool for unions, who need to find a way to become more relevant to today’s world, not resurrecting the past. Unions have a place as a modern voice for workers offering solutions for the modern workplace, but instead threaten to create years of industrial dispute and chaos.

We do need to increase productivity, have more flexibility, be responsive to an ever-changing world market and above all help grow NZ for all its workers, families and dependants. FPA’s are not the answer, they create a whole new raft of problems and we will feel their legacy for decades while other, more forward thinking countries grab a greater share of the international market.   

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