Reflections on the Electrolux Judgment and The Right to Strike

[An Address to the Young Liberals Convention, Melbourne, 5 January 2002]

Ray Evans*

Executive Summary

The decision by three justices of the Federal Court (Willcox, Branson & Marshall JJ) in overturing the decision by Justice Ron Merkel in the Electrolux case has brought into sharp focus the decision by the Keating Government to provide legal immunity for 'the right to strike' in its 1993 Industrial Relations Reform Act. Although the Queensland Parliament had for some years provided legal immunity for trade unions from tort action, that legislation was repealed by the Bjelke-Petersen Government in the 1970s. The Brereton Act of 1993 was thus a milestone in Australian law, and the failure of the Howard Government to repeal that section of the 1993 legislation in its 1996 Workplace Relations Act (WRA) was a serious one. (Presumably the Democrats would not have accepted such a proposal.)

The Federal Court has now seized on the words of Sec 170LI which seek to confine the 'right to strike' to prescribed issues and occasions, and have interpreted them so as to provide a virtual carte blanche to the unions in their ceaseless quest to create and extract the rents which give meaning and purpose to their institutional lives.

Three issues now arise. The first is the justification which has been advanced by trade unions for more than a century for 'the right to strike'. The second is the folly of the Commonwealth Parliament in providing legal immunity for strike action under certain prescribed circumstances, and the third is the behaviour of the Federal Court in opening up the interpretation of the words of the Workplace Relations Act far beyond the intent of the foolish legislators who passed those words into law.

It would be easy for the Howard Government to wait on the High Court and hope that the Federal Court will be overturned on appeal. That temptation should be resisted. It is now imperative that the legislation should be changed and that the 'right to strike' provisions of the WRA be struck out. These provisions should be placed with the Unjust Dismissal provisions in the double dissolution pipeline.

 


Reflections on the Electrolux Judgment and The Right to Strike

A full bench of the Federal Court, (Wilcox, Branson and Marshall JJ), in the Electrolux case [1](21 June 2002), has widened the grounds under which unions can lawfully 'advise' their members to walk off the job and thus bring the employer's business (and probably other businesses) to a halt. This decision immediately prompted debate and criticism in the media. For example, in the ABC's 7:30 Report of 24 June, Kerry O'Brien repeatedly, but unsuccessfully sought to force Minister Tony Abbott into denying any legitimacy for 'the right to strike', and ACTU President Sharon Burrow repeatedly referred to 'international law' as providing legitimacy for such a right.[2]

For more than a century, trade unions have sought to identify the 'right to strike' as an essential part of democracy, along with the right to free speech, and the right to vote. But the common law courts have always regarded strikes as a breach of contract, and picketing, depending on the violence employed, as a criminal act. In Australia, the issue was fudged for decades as the common law courts often declined to hear plaintiffs who sought immediate redress from union militancy by directing them in the first instance to industrial relations tribunals.[3]

These tribunals have always contrived to avoid facing up to the basic illegality of union militancy, because to do so would fundamentally undermine their own legitimacy. The whole structure of labour market regulation, in which trade unions enjoyed a unique degree of legal privilege[4] (including privileged access to the arbitral tribunals established to administer it), has been built on the false notion that there is an imbalance of bargaining power between workers and employers. The right to strike was, according to trade union rhetoric, justified because the workers were powerless and the employers were all-powerful. The threat and implementation of the strike weapon was said to be necessary, therefore, to redress this imbalance of power.

However, the arbitral tribunals' policy of turning a blind eye to trade union unlawfulness could no longer be defended when, in 1969, Mr Justice Kerr, as he then was, of the Commonwealth Industrial Court, determined that he was obliged to direct that Clarrie O'Shea of the Tramways Union should go to jail for contempt of court. In 1986 Sir John Kerr, when speaking of the O'Shea case, said this:

    I treated O'Shea as an ordinary citizen would be treated for refusing to answer questions which he was properly directed to answer in legal proceedings. The powers I exercised are powers of the kind which exist in many jurisdictions to underpin the operation of the judicial system.[5]

O'Shea was released six days later when an anonymous benefactor paid the fines.

Breen Creighton, one of the most prominent of the labour lawyers within the ACTU orbit, and whose book[6] (with Andrew Stewart) is an excellent source of information on the history and the development of the common law in these matters, summarises the position thus:

    [13.06] It is hardly surprising that strikes and other forms of industrial action should encounter significant difficulties with the legal process, given that their essential purpose is to exert pressure upon other parties through the imposition, or threatened imposition of economic loss. This is reflected in the fact that so many of the early legal problems encountered by the early unions in both Britain and Australia related to strikes in general and the activities of pickets in particular. Indeed so far as the common law is concerned, virtually all industrial action would be unlawful as a tort, a breach of contract, and frequently a crime.

In an economy where people are free to find jobs and to leave them whenever they see fit, and where people can start businesses, often with very little capital, and through hard work and disciplined commitment build them up into successful enterprises eventually employing other people, in short, in an economy where the rule of law prevails, there is no imbalance of power between workers and employers, and the legal privileges granted to trade unions perform no useful social or economic function. The exception to this general rule is found in the public sector where employees must necessarily negotiate with an employer (the Government) who is not easily influenced by market disciplines and imperatives.[7] Where contracts are upheld by the courts, and property rights are respected, the use of strikes, pickets, and other forms of intimidation is no different in kind from the extortion rackets which the Mafia and other criminal gangs have operated in southern Europe and in the US, sometimes for long periods.

Trade unions live by extorting what are called 'economic rents' from businesses. These rents (to be distinguished from the rent we pay for leasing a flat, an office, or a shop) are revenues that can be siphoned off without threatening the viability of the enterprise.[8] The unions' capacity to mount a credible threat of striking to close down an enterprise forces the owners (or those responsible to them for managing the business) to choose between earning no revenue, or acceding to union demands for some part of the future enterprise rent in the form of above-market wages and working conditions and/or excessive staffing. This is equivalent to extortion by hold-up. This rent-extraction process deprives other people (primarily the business owners and the ultimate consumers of the products of the business) of income at least equal to the value of the extracted rents (often substantially more). Today the business owners are usually other workers whose superannuation funds are channelled into share ownership.

Where an enterprise has the capacity or the potential to generate rents by virtue of special and non-reproducible advantages such as are found in a rich mineral deposit or a prime construction site, the 'rent' corresponds roughly to the difference between the enterprise revenue, and the income which a marginal mineral deposit, or a marginal construction site, would generate. Rents can also be created in an industry by government-imposed restrictions (regulations) which give a firm or an industry a special advantage in the form of protection from domestic competition (e.g. the two airline policy), or protection from imports from overseas (restrictions or tariffs on imports). Unions lobby governments to achieve these outcomes. In this case the rent is approximately the extra revenue earned relative to an openly competitive situation. Again this results in a transfer of income from consumers to union members and officials.

Another source of rent, applicable in industries which produce non-traded goods or services, is created when unions turn themselves into monopoly suppliers of labour (no ticket-no start) and then force enterprises to pay above-market wages. In such an industry the number of workers will be lower than in an open market situation, and consumers will have to pay higher prices for products and services to enable the targeted enterprises to cover the higher labour costs. Such extortion, however, can only work if the entire industry is 'roped in' to the rent-extraction process. The arbitral tribunals, and the labour market legislation under which the tribunals operate, greatly facilitate that process.

In all cases, the rent-extraction process is based on the capacity of a trade union to act as a monopoly supplier of labour. This makes the threat to strike, or its implementation, no different in kind from the offer which a Mafia boss puts to a prospective victim, telling him that it is 'too good to refuse'. The argument which the trade union movement has assiduously promoted over the years, in an attempt to legitimise what in any other field of activity would be recognised as demanding money with menaces, (ie criminal extortion), is that the strike is a morally justifiable strategy. Workers, so the argument goes, are justified in combining to create a monopoly, in order to offset the imbalance of power which is claimed to be intrinsic to the employer-employee relationship, and then to negotiate terms and conditions of employment from the position of strength which monopoly power provides.

In order to maintain their monopoly position as a supplier of labour, the trade unions must rely on the threat of violent resistance to any attempt to cross a picket line. They have, consequently, sought tenaciously for many decades to legitimise the use of pickets and other forms of intimidation and coercion. A withdrawal of labour poses little threat to a firm which can employ other people to replace those who have walked off the job. Hence the picket line, and the use of the term 'scab', are essential corollaries to the use of the strike weapon, so as to ensure that the workers who have 'withdrawn their labour' cannot be replaced. The picket line is not only designed to prevent new workers from entering the plant, but also to prevent supplies and finished products from entering and leaving the plant.

The final stage in this extortion process is to require the employer to pay the striking workers the wages they would have earned if they had not been on strike, as a condition of returning to work. The process of transforming what is essentially criminal behaviour into socially acceptable conduct (accepted at least by many in the media and some in society generally) has been assisted by the regulatory authorities and arbitral tribunals which have acceded to the first increment of lawlessness, and then the next incremental demand, and so on, as part of a code of 'industrial realism'. Thus over the decades, and through the back door, the strike weapon was quasi-legitimised, inevitably leading to the increasing use of strikes and the threat of strikes as part of normal life. This climaxed in the early 1980s. The election of the Hawke Government in 1983 was a response to the Fraser Government's inability to uphold the law and thereby maintain peace and concord in the labour market.

During the 19th century, as common-law doctrine on the nature of the employment contract developed, the right of the employee to quit 'at will' became firmly established.[9] Balancing the employee's right to quit, was the employer's right to fire, 'at will', 'for good reason, bad reason, or no reason at all'.

Further, the common law held that employees could quit en masse, on the grounds that since it was entirely lawful for an employee to quit his own job 'at will', it could not be conspiracy for a worker to lawfully persuade his colleagues to all quit simultaneously. If it could be established, however, that the primary purpose of such a mass resignation was to injure the employer, then conspiracy could be argued.

But the argument that employees could, either individually, or en masse, breach their contracts of employment by 'withdrawing their labour' and then demanding that the employer should resume the employment contract, at the demand of the employees, as if no breach had occurred, was never accepted by the common law. As Breen Creighton succinctly described,[10] the common law judges recognised that the strike weapon was an instrument of coercion, designed to impose sufficient economic loss on employers to make them accept the terms the unions demanded as the lesser of two evils.

However, the common law (and common-sense) position regarding the illegality of strikes was cut down by the passage of the Industrial Relations Reform Act of 1993 (the Brereton Act) and re-affirmed in the 1996 Workplace Relations Act (WRA) (the Reith--Kernot Act), which provided statutory legitimacy to 'the right to strike' and to 'the right to lock-out'. And the Federal Court, not for the first time, is now using that statute as a vehicle to impose its own idiosyncratic view on how labour markets should be regulated in Australia.

To repeat the essential point. The use of the strike weapon by trade unions has been recognised by all participants in the labour market as a form of coercion, through which the firms which have been targeted have to choose between accepting the demands which the unions are making, or accepting the economic losses which the strikers are imposing on the firm. In theory, a firm could sue for damages from each of the participants in, say, a picket line, but the legal costs would be very great, and the likelihood of obtaining damages which would remotely cover the economic losses incurred would be most unlikely. Thus the use of the strike weapon has become 'normalised' over the last century. However, as Australia's airline pilots discovered in 1989, strikes and other forms of 'industrial action' were always unlawful until 1993.

If an ordinary criminal threatens to bring financial loss or ruin to a company through tampering with a product which can then bring death or sickness to an unsuspecting customer, then the full force of the law is brought to bear on the situation. But when a trade union makes demands on a firm which, if resisted, are then re-asserted through strikes, pickets, and other forms of implicit and sometimes explicit violence, the full force of the Industrial Relations Club is brought to bear to bring about a 'peaceful resolution' of the dispute, usually by pressuring the employer to acquiesce.[11] This process of appeasement has been extremely damaging to the welfare of Australians and to the economic strength and resilience of the Australian economy.

Because such a 'peaceful resolution' means that the trade union officials who are responsible for damages to the firm directly targeted, and to other parties, which can amount to hundreds of millions of dollars, rarely face criminal charges or civil action, the incentives to engage in this mode of extortion are very strong.

The Federal Government should now make the repeal of the 'right to strike' provisions of the WRA a major political issue, and just as exemption from the unfair dismissal provisions of the WRA for small business is in the pipeline as a double dissolution trigger, so repeal of the right to strike provisions of the WRA should also be put into the double dissolution pipeline. The Federal Court's Electrolux decision, the serious damage done to the steel and car manufacturing industries (and Australia's reputation) during the recent strikes and pickets at BHP's Westernport steel plant, and the closing down of the Pilkington Glass plants, have set the stage for such a campaign.

There is, however, a far more cogent reason for legislation to repeal these provisions, and to bring the issue to the attention and adjudication of the Australian people.

In recent years considerable thought and research has been given to seeking answers, again, to the old question which Adam Smith asked more than two centuries ago, viz, why are some countries rich, and others poor? This question has become increasingly pertinent as some of the poorest countries in the world, notably in sub-Saharan Africa, keep on getting poorer, despite receiving the best advice, and huge amounts of foreign aid, through the mediation of the World Bank and other international organisations.

One answer to this question has been put forward by American historian Francis Fukuyama in his 1995 book simply entitled Trust. Those societies in which the citizens can, as a matter of everyday life, trust one another most of the time to be honest in their business and social dealings, are able to create successful economies. Contrariwise, societies in which suspicion replaces trust are societies in which economic life becomes burdened with huge transaction costs, and prosperity is replaced with stagnation and decline. In such societies trust is only possible within the extended family and economic life is limited in scale and scope to the family firm.

Great concern has been expressed in recent months over the malfeasance of corporate executives, both in Australia and in the US, who have misled the markets on the true state of their companies and at the same time have enriched themselves at the expense of other shareholders, some of them fellow employees who, like the market analysts generally, were kept in the dark. The point has been made that we critically depend upon corporate leaders to be honest, since dishonesty can take years to become apparent and very great damage can be done in the meantime.

The universal support for bringing the full force of the law to bear upon those executives guilty of fraud and malfeasance, is a manifestation of the efficacy of time-honoured institutions and of values working behind the scenes to repair this breakdown in our system. Unless justice is done, and done thoroughly, the trust which people had in our accountants and auditors and company directors will be irretrievably lost. These are powerful arguments and they have not been challenged. No one has come out in support of the executives of Enron.

But no one has made the point that by legitimising strikes in the WRA and its preceding 1993 legislation, coercion and the threat of coercion has been placed beyond the reach of the law. The Federal Court now smiles upon 'industrial warfare'. The losses as a result of this legal immunity are arguably much greater than the losses consequent to the collapse of HIH or OneTel.

By conferring statutory legality on the 'right to strike', the Commonwealth Parliament has diminished Australia's most precious resource, our social capital. All business investment, large or small, is based on the premise that Australians who exchange promises in the form of a contract, particularly a contract of employment, will honour those promises. The vast majority of contracts which underpin the fabric of Australian economic life are never brought to court for adjudication. If that were not the case, our economy could not function. The bulk of our workforce would be engaged in litigation, with a catastrophic decline in the output of goods and services, particularly for customers abroad.

The Federal Court judges who decided Electrolux provide us with a description of a society overwhelmed by suspicion and litigiousness and inevitably, therefore, impoverishment. A key line in the conclusions reached by the Full Bench is as follows:

    'Fundamental to Part VIB of the Act is the notion that, within strict and objectively definable limits, organisations, employees and employers are entitled to engage in industrial warfare. We agree with the comment of North J in Australian Paper Ltd v Communications, Electrical, Electronic, Information, Postal, Plumbing and Allied Services Union of Australia (1998) 81 IR 15 at 18:

      The action of this statutory scheme is to allow negotiating parties, both employer and employee, maximum freedom consistent with a civilised community to take industrial action in aid of the negotiation of agreements without legal liability for that action.'

Neither extortion, nor the threat and use of violence on picket lines, should be tolerated in a civilised community.

It is worth stating the thesis again. The three judges who cited Justice North with approval are writing about the threats, or the implementation, of strikes or other forms of 'industrial action', which were specifically and openly designed to cause economic damage to Electrolux. The damage has to be nicely calculated in that it must be sufficiently onerous to force Electrolux to submit to the unions' demands, in this case the right to tax non-union members $500 per annum on behalf of the unions, but not so serious as to cause Electrolux to shut down its Australian operations. More importantly it establishes a precedent enabling unions to impose taxes on people who work in any sector of the economy where rents exist or unions can create rents through political processes or industrial action. This fully legitimates two powers that have been hitherto reserved for government, viz, the power to coerce and the power to tax. The power to tax, if it endures, will give the trade unions enormous financial resources.

Electrolux is a company which is fighting to retain market share against imports in a global industry which is extremely competitive. The fact that the future of the Australian whitegoods industry is anything but secure should be known, one would hope, to judges of the Federal Court. Faced with such criticism they would respond with the argument that their job is to state what the WRA means in the particular situation before them, and the fate of industries and individual workers is irrelevant to that task.

But the criticisms of the Federal Court's interpretations of the WRA continue to mount. Its willingness to block recourse by employers seeking relief from 'industrial action' to the State Supreme Courts should not be forgotten, and the attempt by Justice Wilcox to use his judicial position to influence the outcome of the 1996 federal election by attacking the Coalition's industrial relations policy, was a high point in judicial indifference to the reputation for impartiality which our courts once used to regard as their most important asset.

The unions can make a judgment concerning the degree of 'industrial warfare' which they believe will secure their objectives, confident in the knowledge that their actions will be 'protected', ie they enjoy outrageous privileges within the law. If the Australian whitegoods industry finds that it is not a sensible policy to continue to manufacture in a jurisdiction in which judges refer with equanimity to 'industrial warfare', then it would be nice to think that Wilcox, Branson and Marshall JJ, and their colleague North J, might then reflect, at least for a moment, upon the plight of the workers who will lose their jobs.

The legitimisation of the Right to Strike, like the Unfair Dismissal provisions of the same Act, promotes mistrust, discourages investment, and brings the law and the courts which interpret this legislation, into public contempt. It now falls upon the political leaders of Australia, in particular the Prime Minister and his cabinet, to seek from the people a mandate to bring this sad chapter in our history to an end.



Endnotes

*Ray Evans is President of the H R Nicholls Society. He is much indebted to Barrie Purvis and Geoff Hogbin for advice and comment in the preparation of this paper.

1. This Full Bench overturned a decision by Merkel J. The case hinged on interpretation of Sec 170LI of the Workplace Relations Act which seeks to define under what circumstances strike action is 'protected' (ie immune from traditional common-law consequences). Justice Merkel found that the Unions' demand for payment for a 'bargaining fee' was outside the fence as defined by the words of s 170LI. The three judges of the Full Bench decided it was inside. It is impossible to avoid the conclusion that, unless this judgment is overturned on appeal to the High Court, there will be not be much left outside the fence, ie the unions will be able to go on strike almost at will, and do so without any fear of legal consequences.

2. The use of ILO conventions to justify the right to strike is part of a wide ranging political campaign, now increasingly manifest throughout the Western world, which seeks to replace the authority and autonomy of the nation-state, in our current global polity, with a new form of 'global governance', modelled in large measure on the Holy Roman Empire of pre-Reformation Europe. There is nothing of itself reprehensible about such a political movement. What is reprehensible is that its protagonists will not acknowledge the far-reaching implications of the particular measures they promote.

3. At the end of the day the common-law courts would hear appeals for redress, but for small-to-medium sized businesses, justice delayed was usually justice denied. A business could quickly haemorrhage into insolvency by the time the arbitral tribunals had considered all the options, and the unions were well aware that intransigence on their part, and the loss of cash flow which drawn-out legal processes entailed, would usually persuade the employer to accept a 'pragmatic solution'.

4. Today, the most important form of legal privilege enjoyed by the trade unions is immunity from the Trade Practices Act (TPA) and the regulatory powers of the ACCC. Given that the primary purpose of the TPA and of its regulatory instrument, the ACCC, is the outlawing of monopoly and collusion in business and commercial life, it is extraordinary that the activities of trade unions in energetically creating monopolies in the labour market, the most important market of all, should be given statutory immunity. In 2001, the ACCC granted a dispensation to the Parliament of NSW to allow for price collusion in its Ethical Clothing Act (2001).

5. See Arbitration in Contempt, Proceedings of the First H R Nicholls Conference, March 1986 at http://archive.hrnicholls.com.au/archives/vol1/vol1-8.php

6. Breen Creighton and Andrew Stewart, Labour Law: An Introduction, 2000, Federation Press, page 380.

7. Where governments own and control the dominant share of industries such as the education and health services industries, immense difficulties arise in setting wages and other emoluments which will create appropriate incentive structures for employees, and provide efficient and market-responsive services for the public. Associations of employees with a high degree of membership are commonplace in this situation, but it is noteworthy that employee-employer relations in government instrumentalities (such as the public health and education sectors) are frequently characterised by bitterness and discord. Complete privatisation of these industries is the answer to this problem. Where government-employee relations are particularly intractable is in services such as the police and the armed forces, where governments are monopoly employers.

8. Extraction of rents may force the existing owner into insolvency, but the enterprise may still have positive value and remain viable under a new owner. This was not, however, the case with Ansett which even the Fox-Lew syndicate was unable to bring back to life, presumably because union miscalculation, combined with management indifference, resulted in an extraction of revenue which far exceeded the available rents.

9. Any other view of the employer-employee relationship would have implied a doctrine of servitude. Forms of indentured labour were recognised, e.g. in apprenticeships and in contracts involving maritime service, but indenture agreements were not looked on with favour by the courts.

10. Ibid., page 381.

11. See, for example, the history of the Leo Gorman case in H M Morgan 'I Pride Myself on Being a Clubable Man' in Proceedings of the 1987 HR Nicholls Conference Light on the Hill at http://archive.hrnicholls.com.au/archives/vol3/vol3-7.php



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