Fair pay agreements will squeeze small business

Column written by Ashley-Jayne (AJ) Lodge and published on the Capital Letter website on Friday 28 May.

Further regulation is on its way for employers in the way of Fair Pay Agreements. Workplace Relations and Safety Minister Michael Wood describes the introduction of FPAs as the biggest change to workplace laws in several decades.

The Government has announced that the Fair Pay Agreement system will be introduced in late 2021. This follows public consultation on the 2019 working paper “Designing a Fair Pay Agreements System” where over 600 submissions were received. The draft legislation is due in late 2021, and would likely come into force in 2022.

The FPA system will allow industry or occupation wide bargaining for minimum terms and conditions of employment. For example, all workers employed as sewing machine operators could seek to negotiate with all businesses that employ sewing machine operators for a standard set of minimum terms for all workers employed in that occupation. Or, all workers employed in the clothing manufacturing industry could seek to negotiate with all of the clothing manufacturing employers for a standard set of minimum terms for the entire industry.

The intention of the FPA system is threefold: to address a perceived ‘race to the bottom’ in some sectors, where businesses compete for work by reducing wages or employment conditions; to rectify the significant reduction in union membership (70 per cent in the last three decades); and to address the lag of wage growth behind increases in labour productivity.

Drastic change

The FPA system that has been devised may well achieve those things. But it will also drastically change the labour market landscape, and have a detrimental impact on small to medium businesses, which are the backbone of our economy.

Bear in mind the introduction of the FPAs system is just one in a long line of changes this Government has introduced over the last 18 months, or has signalled will be introduced in the near future. This includes a number of increases to the minimum wage (from $15.75 per hour in 2015 to $20 per hour in 2021) and increases in statutory parental leave, bereavement leave, and sick leave entitlements. As a result, in many cases FPAs will increase the cost of products and services, and in some cases, FPAs will drive SMEs out of the market altogether.

The Government says the FPA system will “incentivise businesses to invest in training and innovation”. Most New Zealand businesses are already investing in training and innovation. Very few are sitting on their hands, doing what they’ve always done. Covid-19 was incentive itself for rapid innovation and change. Those that couldn’t adapt, failed. What FPAs will do is drive the cost of labour up, and force businesses to recover that cost somewhere else, realistically in the price of the products or services they provide.

If parties can’t agree on the minimum terms required in an FPA, the Employment Relations Authority will fix those minimum terms. This could include fixing hours of work, overtime, and wages. The system takes away the autonomy of businesses and workers to bargain for their own terms in a free and open market, and places that power in the hands of Government.
There will be a number of consequences.

Compulsory unionism

The FPAs system will require much stronger and better resourced unions. There will be benefits for workers who belong to a union, with the bargaining parties able to agree to include a preferential payment in the FPA for union members. Unions will be entitled to access to workplaces, and employers will have to pay for union stop work meetings.

Some commentators have described the impact of FPAs as a return to compulsory unionism. That is a significant change to New Zealand’s employment landscape. We haven’t had a strong union movement since the Employment Contracts Act was introduced in 1991. Expect to see an enthusiastic resurgence in the next 12-18 months.

Wages will increase. Small businesses with low margins who cannot absorb the cost of further increase in minimum entitlements will be driven out of business, unless they can negotiate an exemption from the FPA which is likely to only be temporary in nature.

Cover for contractors?

The Government also signalled it will be considering whether contractors should be covered by FPAs. This would significantly change employment law in New Zealand and detract from what the FPA system is intended to achieve. Contractors are not subject to employment law, such as minimum entitlements, and to extend coverage of FPAs to contracts risks undermining the well-established legal principles on classification of workers.
FPAs will no doubt increase wages and minimum terms of employment for some occupations and sectors. In some situations that will be a good thing. However, they are also likely to result in an increase in prices to the end consumer, and a reduction in the number of SMEs able to sustain the ever growing regulation and increasing cost of doing business in New Zealand.

Want to know more?

If you have any questions about Fair Pay Agreements please contact our specialist Employment Team.

Link to Capital Letter

This article was included in Edition 12 of our employment newsletter – Employment News which you can read here.