Employers warn Labor’s push to lock in penalty rates is bad for business – but it’s not that simple

The Albanese government is pushing ahead with new legislation to protect penalty rates and overtime for about 2.6 million workers under the award system. Those workers are more likely to be female, younger and work casual or part-time.

Penalty rates are higher rates of pay to compensate for working overtime or at unsociable hours, such as weekends, late nights or public holidays.

Australia is not unique in having penalty rates. Other countries, especially in Europe, have similar arrangements. It’s less common in the United States and the United Kingdom.

But while penalty rates and overtime may be good for workers, they’re bad for business – right?

Surprisingly, it’s not that simple. Past experience in Australia and overseas shows that when workers’ pay or conditions get worse, it can end up creating headaches for business – especially those facing worker shortages.

What the government’s proposing

The Albanese government’s Protecting Penalty and Overtime Rates bill would enshrine a new “high-level principle” into the Fair Work Act.

It’s designed to override cases currently before Australia’s workplace relations regulator, the Fair Work Commission, where industry is pushing for greater flexibility on penalty rates and overtime.

If passed, the bill would stop the Fair Work Commission from allowing penalty or overtime rates to be “rolled up” into a single rate of pay “where it leaves any individual employee worse off”.

The Coalition says more consultation with small business is needed. But there are signs the Greens could support the bill, which would be enough for parliament to pass it.

The industries most affected by Labor’s proposed change include retail, hospitality, care and clerical work, where many workers are “award reliant”, or who often work at irregular or unsociable hours.

The government argues the bill does not prevent awards from being made more flexible for employers – provided workers are not financially disadvantaged.

Unions support Labor’s bill. They say workers on awards are typically in lower-paid roles, where penalty rates form a significant part of their take-home pay.

Why business is concerned

Earlier this year, the Australian Retailers Association and employers including Woolworths, Coles and Kmart proposed letting retail managers opt in for a salary pay rise of up to 35%, while trading off penalty rates, overtime and rest breaks.

While that proposal relates to managerial staff, some are concerned it could set a precedent for those arrangements to be extended to non-managerial workers. (The retailers’ association says “it never sought to remove penalty rates from the award” for those not wanting to opt in.)

This followed employers seeking similar changes to banking and clerical awards, affecting around 2 million workers.

The Australian Industry Group says Labor’s new bill is a “union thought bubble that will kill jobs” and

Labor should trust the independent umpire [the Fair Work Commission […]] to set fair terms for awards, not simply change the rules to ensure unions get their way.

Others warn it denies employees choice about how they’re paid, and will undermine workplace productivity – just when the government is trying to improve it.

Does cutting penalty rates create jobs?

For decades, employer groups have pushed for more flexibility to cut penalty rates, while unions have fought to keep them.

What can we learn from those past clashes?

We don’t have to look back far. In 2017, the Fair Work Commission decided to reduce Sunday and public holiday penalty rates for more than 700,000 workers covered by the retail, hospitality, fast food and pharmacy awards.

In that case, the Fair Work Commission agreed with employer groups that these reductions would create more jobs.

However, that conclusion did not bear fruit.

In 2019, researchers Martin O’Brien and Ray Markey analysed employment data and did a survey (with union funding) of more than 1,800 employees and 200 owner-managers in retail and hospitality. Their analysis found no evidence of jobs being created by the 2017 penalty rates reduction.

A 2017 report from the Australian Institute’s Centre for Future Work estimated the additional income generated by penalty rates adds $14 billion each year to the economy, which boosts aggregate demand. So when penalty rates are cut, there can also be consequences for the wider economy.

And arrangements exchanging penalty rates for higher base salaries have often led employees to be worse off overall – in some cases, substantially so.

When workers do better, business often does too

While workers are most likely to suffer when penalty rates are cut, there may also be negative consequences for employers.

The hospitality and retail industries, where workers are among the most award-reliant, are also the lowest paid. Both industries are characterised by persistently high job vacancies.

My research with Susan Belardi and Angela Knox on the hospitality industry found pay competitiveness is important for attracting and retaining workers – and addressing job vacancies.

Other Australian studies point to uncompetitive pay contributing to worker shortages.

The Organisation for Economic Co-operation and Development (OECD) has found collective bargaining – rather than individuals negotiating their own pay – can:

benefit not only workers, but also firms, as lower turnover and longer tenure can reduce hiring and training costs and increase productivity.

Other international research also shows sector-wide agreements with workers can help drive greater business productivity.

The evidence suggests that without penalty rates, not only would workers be disadvantaged, but business problems relating to worker shortages and productivity might end up worse than before.

Correction: an earlier version of this article included Bunnings among the retailers proposing an optional change to pay and penalty rates, however this is not the case. The article has been amended.