Tenth Anniversary Conference

Work in New Zealand: Five Years After the Employment Contracts Act

Rod Lingard

At last month's Auckland Meat Processors board meeting, directors were discussing appropriate ways to successfully avoid personal grievance actions for unjustified dismissal. A fellow director said: "Rod, do you know I was sacked three times last year? By my employees! No warnings; no reasons; no chance to get legal advice; and only one month's notice. Now what's fair about that?" he said. "Nothing at all," I replied, "and it's not supposed to be. Fair procedures are only for workers because they apparently have less knowledge, less power and their job is innately special to them." Of course, it didn't escape my colleague's notice that he had experienced the vagaries of at-will termination from workers who had more knowledge, more power and for whom another job was suddenly more special.

This anecdote I think neatly encapsulates one of the Employment Contracts Act's (ECA) major deficiencies: institution interventionism wreaking havoc with the freedom to make contracts (or unmake contracts) as the case may be, under the guise of due process. That said, however, a lop-sided termination process is one of the few downsides of an otherwise masterful piece of reformist, if controversial, legislation.

Five years on, the ECA is still being credited, and discredited, with all manner of occurrences. At the macro level, there can be little argument about its impact which, together with the Reserve Bank Act, Fiscal Responsibility Act and Public Finance Act, gave New Zealand over that period 4% average GDP growth; a stable, low-inflationary environment; an unemployment rate of 6.1%; and 200,000 new jobs. But still the debate rages at the microeconomic level as to whether the ECA has genuinely improved the lot of all labour market participants, employers and workers alike.

To listen to the Greek chorus of politically-correct academics, whingeing union officials, and bleating social service commentators---what American philosopher Thomas Sowell calls "the anointed", you would think it was dark satanic mills all over again. But for the parties that directly matter, the ECA is beginning to look a winner.

Let's look at four aspects of this growing success story. Firstly, bargaining representation, or what once would have been called union coverage.

As a percentage of the total New Zealand labour force, union membership has shrunk to a shadow of its former self. Not that it was ever any great shakes, given that its peak coverage in the so-called hey day of New Zealand unionism back in the 1960s and 1970s never exceeded 65%. More significant however, is the evidence clearly showing that union membership in New Zealand was in a steady and relentless decline long before the ECA came into being.

Research studies conducted by Victoria University's Industrial Relations Centre showed that back in 1985, there were 683,000 members in 259 unions covering nearly 44% of the employed workforce. While these figures represent a 20% drop over the previous 20 years, perhaps even this result is somewhat inflated, given it follows the reintroduction of compulsory union membership a year earlier in 1984. Because a decade later in December 1994, and without the state-sanctioned coercion of unqualified preference, membership had plummeted to 376,000 members in 82 unions covering only 23% of the workforce.

The December 1995 figures are not out yet, but if the trend has continued to parallel of similar decline in collective bargaining, and the so-called `natural level' in a free and contestable labour market has not yet been reached, then union membership is likely to have further nose-dived, possibly as low as 15%-17%.

Some IR commentators dismiss this trend as an unsurprising reflection of similar international experiences, while researcher Harbridge himself claims that the bottom of the trough has been reached and that New Zealand unions, inspired by their ACTU comrades at Weipa, have similarly drawn "a line in the sand---albeit a late line." Pragmatic practitioners, such as New Zealand Council of Trade Union's President Ken Douglas, readily acknowledge that New Zealand unions are in a sick state. But rather than face the hard and brutal truth confronting New Zealand's unions, he instead blames the decline on what he sees as the twin evils of Rogernomics and the ECA.

The fact is, the unions have failed to adapt to a changing environment. In a deregulated post-ECA labour market characterised by the freedom to contract, they have largely become irrelevant. Or to use the marketplace analogy, existing customers are leaving in their droves and new customers are not bothering to shop at all. This is clear from the 200,000 new jobs created over the last five years, virtually none of which have been unionised. Little wonder, then, that presented with this shrinking customer base, the market for contestable bargaining representation services has become one of dog-eat-dog.

Take, for example, New Zealand's largest and arguably most successful private sector union, the NZ Engineering, Printing and Manufacturing Union. Even it has found stemming the slippage hard going, failing to translate significant employment growth in its sector into greatly increased membership. So instead, it resorts to `body snatching' other unions' members; monstering other financially-weakened unions into cat/mouse `amalgamations'; and scavenges for ex-members from liquidated unions such as the recently defunct Communication & Energy Workers' Union. This cannibalistic behaviour is undertaken to increase membership which, having fallen from 48,000 in April 1990 to 32,000 in April 1993, has subsequently risen in April 1995 to 36,000. In a classic case of expanding market share in an overall declining market those statistics are then dubiously reconstructed as a graph in ACTU/ACOSS report signifying a recent `upward trend' in union membership growth!

Divorcing this fiction from fact will perhaps explain why, five years on, this union has still not been able to regain its most spectacular loss---the 1,200 aluminium workers from Comalco's Tiwai Point smelter virtually all of whom are on individual contracts. Interestingly, the NZEPM is part of a group of unions that have experienced losses of less than 25% their pre-ECA membership. FinSec, the pre-eminent bargaining representative of employees in the banking and insurance sectors, is probably the star performer in this group, having experienced a genuine if modest growth in membership over its pre-ECA levels, contrary to both national and international trends. But in other unions, such as the once-big National Distribution Union and Service Workers' Union, the membership drop has been dramatic. They form part of an unenviable group which have all experienced losses in excess of 60% of their pre-ECA membership. As the contract bargaining evidence will show, strong employment growth in the services sector has done little to shore up these unions' crumbling edifices.

If there have been any bargaining representation experiences appearing contrary to trend, it is in the key area of the public sector. Not only did this sector's unions suffer the smallest decline of any sector---only 13% since pre-ECA days---their industrial campaigns also account for much of the recent increase in recorded work stoppages. While expectations of maximising election year leverage will only see this industrial activity spread even further throughout the public sector, the fact remains: teachers, air traffic controllers, fire fighters, and now many public servants from core Government Departments, have become the new union vanguard, the strike-happy militants of the 90s.

Inevitably, it is easy to see the reason why there is little pressure on New Zealand's public sector unions to change. Protected in many cases by occupational regulation, and ignored by a Government reluctant to address the national collective employment contracts that sustain their professional feifdoms, they remain quarantined from the reform process.

An interesting paradox emerges from these experiences: New Zealand's current National Government, as legislator, boldly introduced the most radical labour market reforms of any modern state in the industrialised world and yet, as an employer, it has tentatively pursued mostly ineffective strategies in attempting to extend its own labour market reforms into key public sector work places. Perhaps the answer lies, somewhat cynically, in the fact that the government, as employer, clearly foresaw it could derive sector-wide labour productivity improvements simply by resisting collectively-bargained wage demands under the cloak of maintaining its so-called `fiscal neutrality' expenditure controls on all government departments. Why? Because the anticipated development of individual contract bargaining right across the public sector, including the adoption of performance-based pay systems, could have seriously exposed the government to exceeding expenditure limits through the combination of widely-variable demand factors and hard-to-manage transaction costs associated with individual contract bargaining. Nevertheless, this is a disappointing example of best opportunities given the wide dispersion of bargaining outcomes and processes that were supposed to have resulted from the government's devolution of contract bargaining arrangements to most of the core government departments and associated crown agencies.

Looking beyond this shrinking island of union representation, it is becoming clear that most NZ workers are either managing their own contract arrangements, or they are hiring one of the growing multitude of free-range chickens scrapping around in the bargaining agent marketplace.

So turning to contract bargaining, it is also becoming clear from the evidence that collective bargaining, as a predominantly unionised process, has similarly free-fallen in tandem with plunging union membership.

An analysis of our Labour Department's December 1995 bargaining statistics shows only 19% of the employed labour force, or 316,600 workers, are covered by collective employment contracts. Furthermore, the same statistics show unions representing 84% of this minority bargaining group. This means only 17% of the workforce are now covered by union-negotiated collective contracts, which is about 266,000 employees not including non-union deals. The rest of New Zealand's labour force, well over 1.3 million employees, are on individual arrangements. Most are not union members.

Contract bargaining appears therefore to be a more appropriate generic term, given the deregulated labour market context within which it resides. It also accurately describes the actual process the parties engage in when they come together to negotiate agreed terms and conditions of employment.

Regrettably, however, not much is known about the specific measurable outcomes of contract bargaining as it applies to individual employees, because virtually no academic research of any substance has been undertaken on the matter. The general observations as measured by the latest qualitative business survey, nevertheless do indicate that under the ECA, around half the 562 companies studied reported increases in ordinary-time wage rates, performance-based remuneration, flexible work practices, multi-skilling, training and labour productivity.

But more fundamentally worrying for collective bargaining, the higher degree of under-performance in terms of wage outcomes eg the public sector, together with the growing suspicion that the collective bargaining group as a whole is seriously under-performing individual contract arrangements.

For the companies and firms that responded to the survey, the most significant labour market outcomes to arise out of the ECA were: enhanced productivity, operational flexibility; and greater training.

The survey has showed 55.6% of the respondent companies experienced increases in labour productivity and 58.4% experienced more flexible work practices. Just over half of the businesses experienced increases in training.

Larger firms had gained the most benefit from the Act, with 81% reporting greater operational flexibility and 71% a corresponding increase in labour productivity.

The increase in the training was also greater in the larger firms.

Smaller firms in the survey still fared well, with labour productivity and operational flexibility increasing by 35% and 40% respectively.

Other findings from the survey showed:

  • companies using individual contracts or enterprise collective contracts, are generally doing better than those with multi-employer contracts;
  • positive changes in labour market outcomes are more likely in large firms (with over 100 employees), and those companies where unionisation rates have fallen;
  • companies positive about the Act were more confident about future business conditions and had lower cost increases and higher output, higher productivity and profitability.

This survey confirms why the NZ Public Service Association (PSA), wedded as it is to maintaining national contracts, continues to under-perform its private sector counterparts in the area of wage increases e.g. last year's average movement was 2.8% public compared with 4.6% private.

Ironically, even the PSA's own membership has become more favourably disposed towards the ECA. This is demonstrated by an internal poll conducted last year that recorded an increase in ECA approval from 21% in 1992, to 38% in 1995, a period of virtually nil increase' for public servants.

Growing support across the wider community is even more emphatic, as a major public opinion survey from MRL which reported a significant turnaround of support in favour of the ECA. Charges of bias from the New Zealand Council of Trade Unions and its political supporters in the Labour Party and the Alliance have been predictable, yet they ignore the impressive results indicating employee job satisfaction at 78% and a hitherto unheard-of rating of 85% of employees satisfied with their exiting terms and conditions of employment.

When one observes these encouraging statistics, it is hard not to become dismayed by the increasingly dysfunctional effects on the reforms caused by institutional intervention, the third aspect of my address today.

The growing recourse to judicial activism by the Employment Court, particularly in matters concerning the sacred cow' of union privileges, has given rise to all sorts of fanciful law-making in the areas of union recognition, employee communications and rights of access for union officials. While this tendency appears to have been momentarily stalled by a rejigged Court of Appeal, a return to common law sanity is by no means assured long term. For even with the Employment Court dramatically having four major cases overturned on appeal on the same day (three of them significant losses for Chief Judge Tom Goddard), it still has an inevitable desire to meddle. Regrettably, it will not be curbed permanently unless and until its specialist jurisdiction is dissolved and its powers transferred to the civil courts.

From a positive perspective, the lower-level Employment Tribunal continues to perform a valuable mediation role as evidenced by this procedure's 80% success rate in resolving personal grievances.

But again, the remaining 20% consigned to a very legalistic and costly adjudication process, with appeals often gong to the Employment Court, only serves to again question why we persevere with this judicial interference in the contract termination process.

Much of the court's preoccupation with personal grievances has to do with an obsession for procedural fairness which, if it is not dealt with soon, will go on to become a judicial time bomb, not only constraining employer's ability to manage but compromising the manager's role itself.

Which brings me to the fourth and most dynamic aspect: the management imperative. Clearly, much of what has already been achieved, and will hopefully continue to improve further, is due to the initiatives and risks taken by managers in exploiting the reforms' opportunities.

All the above evidence from the NZIER survey is testament to the crusading zeal which New Zealand managers have applied to the task of making the workplace more effective and efficient.

What emerges from this is that owners have become more demanding in their expectations of management output and quality processes, which is perhaps why there has been a significant increase in personal grievance actions involving middle to upper managers terminated for poor performance.

The focus of leading-edge New Zealand companies seeking to gain maximum advantage from the reforms---a truly competitive labour market advantage---is to recruit, develop and retain the best manager for the job.

Perhaps a return to my own board experience will best illustrate how Auckland Meat Processors undertook this task. The very first project facing our new board upon acquisition was to replace the existing public servant manager with a new manager who was:

  • a leader (and coach)
  • a strategist
  • a communicator (walk the talk)
  • an inspirator
  • an innovator.
  • open and honest
  • technically---proficient

We found him, and have not looked back since. Productivity is up 20%; the management/staff relationship has improved out of sight and workers earnings continue to increase.

Next projects are to address middle management deficiencies and reduce our costly accident record, which indicate careful management of health and safety risks is becoming a greater priority than potential unjustified dismissal actions.

So five years on, New Zealand has achieved much through the ECA, but there is still much to be done, both in publicising the gains and protecting them from future threat. With its first election under a new mixed-member proportional electoral system due later this year, the ECA faces a renewed challenge from its political opponents.

In that context, the most insidious risk may not come from the prospect of statutorily-imposed `good faith' bargaining, as signalled by the Alliance, but the threat coming from within the employer remnants of the "IR club" seeking deals with the Labour Party. The prize? Reregulation for collective bargaining and the prospect of monopoly labour pricing coming in the back door.