High Dollar Trumps Penalty Rates as Business Concern

In the last newsletter, we discussed whether wages in Australia were rising too fast for productivity growth. In this article, we look at one component of wages which isn’t captured in an employee’s base rate yet is a material cost for employers – penalty rates.

The topic has been a hotly discussed area of industrial relations in recent times. The retail and hospitality industries had been particularly vocal about the costs of employing staff on the weekend or after hours. They indicated that businesses often lost money if they opened on a Sunday or public holiday due to high wage costs, which can rise to 2.5 times the hourly base rate depending on the employees’ employment agreement and award.

The issue was put to the Fair Work Commission, which noted that retail and hospitality workers were traditionally low paid and decided there was no compelling case to reduce the evening or weekend penalty rates set out in applicable awards. Around the same time, the Labor Government pledged to change Australian law to ensure those covered by awards receive penalty rates.

The International Labour Organisation has created a database detailing information where available on statutory labour conditions in different countries. For comparison purposes, Egan Associates has extracted data on countries of interest:

Country

Required weekly rest period

Pay for working on rest day

No. National Public Holidays

Pay for work on public holidays

Australia

No current provision.

No  current provision; Govt promised to enshrine penalty rates in law

8

No current provision; Govt promised to enshrine penalty rates in law

Canada

One day a week

No statutory provision

9

At least 1.5 times the regular wage

China

One day a week, state institutions two days

200% of normal wages if no day in lieu provided

7

300% normal wages

France

One day a week

Up to 200% and a day in lieu

11

No Provision

Germany

One day a week

Day in lieu

Depends on the state

Day in lieu

India

One day a week

Day in lieu, in some cases overtime rates

No statutory provision

No statutory provision

New Zealand

To be worked out with employer

No statutory provision

11

50% loading

UK

One day a week

Day in lieu

9

No statutory provision

US

No statutory provision

No statutory provision

No statutory provision

No statutory provision

As can be seen from the table, some countries have more prescriptive statutes than Australia on compensation for work during rest periods and others have less. We should note, however, that this table only contains provisions set down in law – there may be other guidelines not set out in legislation.

Weekend and public holiday rates are not the only additional labour costs incurred on business. Other examples include higher payments if an employee works in a non-ideal environment such as a cool room, if an employee works a broken shift or if an employee spends time away from home.

In many cases, the options of reducing the amount spent on such payments are limited.

The Australasian Institute of Mining and Metallurgy submission to the House of Representatives inquiry into Fly In Fly Out (FIFO) workers stated that in 2010, Fly In Fly Out workers received $8,600 more salary than workers who lived in the region where they were working. Yet, the inquiry also found it is costly to try and create communities for employees to move permanently, because high demand pushes up the cost of housing in these communities. There are also tax incentives not to do so. If the company pays for housing for workers, the payment attracts Fringe Benefit Tax, while FIFO flights are tax deductable.  In addition, the 12-months Living Away from Home Allowance rule does not apply for FIFO workers and these workers can claim rural zone tax offsets. These tax concessions make FIFO a more cost effective option, although more expensive in salary terms.

However, those who express concern about penalty rates might be missing the bigger problem, according to Coca-Cola Amatil MD Terry Davis, who said recently at a Bloomberg economic summit in Sydney that the effect of the high dollar was overshadowing concerns about high penalty rates. Changing penalty rates or bringing more workers in on 457 visas would not change the currency impact, he believed. 

“A lot has been made about Australia’s high cost base but it’s a high cost base relative to what a US dollar was, and what the euro was and what the pound was,” the Australian Financial Review quoted him as saying.

Many look to the Reserve Bank to reduce interest rates to push down the value of the dollar, but since organisations can themselves do nothing to affect the exchange rate – the major factor affecting their cost base, it brings the focus back to the quality and quantity of output per employee hour of input (productivity) rather than cost per employee hour of input.

Deloitte’s Board Effectiveness: the Director’s Cut 2013, which canvassed the biggest issues on the agendas of CEOs and Chairs of ASX200 companies over the next 12 to 24 months, found productivity was the leaders’ top concern, both within their company and at a macro level.

“At the macro level, many Chairs and CEOs were concerned about Australia’s competitiveness, especially in the face of economic headwinds and factors such as the high Australian dollar. They believe there is an urgent need to enact reforms, especially in the area of industrial relations, to enhance productivity,” Deloitte noted.

In order to aid organisations to survive in the challenging currency environment, before any government policy is introduced, it should first pass a litmus test of “what will this do to macro- and organisation-level productivity”? This may mean that penalty rate changes are not acceptable, but if so, the reason will not be one solely of labour cost. Any analysis of Australia’s relative competitive position clearly needs to address the relative level of wages and output per unit of time in a universal currency context.

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