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Dr Muriel Newman

New Employment Law Good for the Country

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Such was the noise over a law change to introduce a grievance-free trial period for new employees, that you could be forgiven for thinking that the new National Government was outlawing the trade union movement!

The response from the unions, opposition Members of Parliament, and left wing commentators has been hysterical. Amid mock surprise at the move, calls for protest action, and petitions to the Governor General, there has been no mention of the fact that for the last five years, the Labour Government’s own Small Business Advisory Group has been presenting Government Ministers with just such a probationary period recommendation, calling it “the single most important change needed in employment law”.

Since it was established in 2003, the Small Business Advisory Group has consistently identified the fear of hiring new employees as the single biggest impediment to business growth. In their 2008 report they explained: “Employment law can be a minefield for Small and Medium Enterprises (SMEs). Continual changes to the law and the complexity and uncertainties surrounding its interpretation have led to the triumph of process over substance in many employment disputes. SMEs often avoid taking on staff for fear of the potential risk if the employee proves not to be suitable. Many other countries have responded to this problem by putting in place laws to deal with the situation in a fair and equitable manner. For example, in the United Kingdom there is a qualifying period of 12 months before an employee can take personal grievance action for a performance-related dismissal”.[1]

In fact, along with Denmark, New Zealand is the only OECD country not to have some form of grievance-free probationary periods for new workers. Even in Australia, with its heavily unionised workforce, labour laws have probation periods of at least three months with moves afoot to change it to six months.[2]

Under the present Employment Relations Act, which was introduced by Labour in 2000, there is a provision for a probationary period for new workers. The problem is that if things don’t work out and the employer is forced to ‘let them go’, the worker remains free to bring a personal grievance case for unjustified dismissal against the employer. And with no shortage of help from the employment grievance industry that has sprung up over the last few years to assist newly sacked workers, the employer faces a stressful and costly legal process.

Often the ‘crime’ of employers is nothing more than a failure to have strictly followed the dismissal procedure. The average payout is now just under $9,000 in compensation, not including legal fees and the time involved. And there are some dreadful tales around of unscrupulous workers deliberately attempting to blackmail employers into paying lump sum compensation under the threat of taking personal grievance claims. A case in point is that of a woman hired by a clothing retailer to perform on-the-spot alterations to school uniforms, who had to be ‘let go’ because she couldn’t sew! It turned out that the sewing work she had provided to the employer as proof that she could do the job had been done by a friend. In this case, the employer, who had been grossly misled, preferred to pay up rather than get embroiled in a costly and lengthy legal dispute.

The problem is that these sorts of cases leave many potential employers afraid to hire help in case it doesn’t work out. And it is that attitude that has led the Ministry of Economic Development to conclude that this inability for small businesses to grow into larger enterprises is one of the biggest roadblocks to New Zealand’s economic performance.

In reality, New Zealand is a nation of small businesses. Small businesses with fewer than 20 full-time staff comprise 97 per cent of New Zealand’s 460,000 private sector enterprises. In comparison there are only 234 ‘big’ private sector companies in New Zealand that employ more than 500 staff.[3]

Sole operators make up by far the biggest proportion of small business, with around 314,000 enterprises. This is where a huge potential gain from a relaxation of employment laws can occur as many of these sole operators are stretched to the hilt and would welcome another pair of hands, if the risk of hiring the wrong worker was minimised.

Professor Richard A. Epstein, the James Parker Hall Distinguished Service Professor of Law at the University of Chicago, is this week’s NZCPR Guest Commentator. In his opinion piece Back to Basics for New Zealand Labour Markets, Richard reminds us of the critical importance of flexible labour market arrangements so that employers and employees can sort out an agreement that best meets all of their needs:

“The key principle for understanding labour markets is that the sound principles of their government depend on enduring features of the labour market, and not on the overall state of the economy. The legal regime that helps to institute prosperity in good times is the same one that works in hard times as well. Any temptation to claim market failures in labour markets is an open invitation to engage in counterproductive regulation. What then is the preferred scheme against which all alternatives should be measured? Answer: freedom of contract, which allows workers and employers to devise whatever agreement they see fit”.

Richard also reminds us that while not perfect, the Employment Contracts Act (ECA) – the predecessor to the present Employment Relations Act – sought to introduce a system of free contracts between employer and employee:

“But imperfect as the ECA was, its achievements were impressive nonetheless. Between 1991 and 1997 overall, New Zealand generated 220,000 new jobs in a country of 3,600,000 people. Unemployment rates dropped from 11 percent in early 1992, shortly after passage of the ECA, to 6 percent in 2000. During first two years after the passage of the ECA, about 10 percent of workers received lower pay than before, as bloated union contracts were thrown aside. But thereafter overall wage levels increased on a sustainable basis, driven by higher productivity”.

In his article Back to Basics for New Zealand Labour Markets, Richard warns of the dangers of giving trade unions too much power: Trade unions constantly stress the need for a “partnership” between management and labour to raise productivity to new levels. Sorry, it does not work that way. The only partnerships that work are those which are voluntarily formed. And those last only when each party can bring to the table something that the other partners both lack and need. But labour unions bring nothing to the table, if the goal is enhanced productivity. They know nothing about marketing, product design, finance, or for that matter effective labour relations… Trade unions are bad at improving productivity, given that their first priorities are to increase wages and prevent layoffs, not to maximize profits”.

The new bill that has just been passed into law by Parliament and which comes into force on 1 April next year enables employers in businesses with fewer than 20 staff to introduce a probationary period for up to 90 days during which new employees are prevented from taking a personal grievance case for unjustified dismissal. The trial period is voluntary, and no other employee rights are affected.

Under this new law it is expected that job seekers at the margins of the labour market, such as beneficiaries, new immigrants, young people without a work record, people with a criminal record, and others returning to the workforce after a long absence, who agree to the trial will have a far better chance of getting a job as employers will be much more prepared to give them a go if they know there is no risk of legal action if it doesn’t work out. Provisions have also been introduced to make it easier for those on welfare to give employment a try with the stand-down period suspended if they take on a job that doesn’t work out.

This new law looks to be a real winner, not just for job seekers who want to be given a chance to show their worth, and employers who will be far more prepared to take on additional workers – including those who pose a greater employment risk – but for the country as a whole as more flexible employment laws will create jobs at a time when we most need them.

1.Small Business Advisory Group, Small and Medium Businesses in New Zealand 
2.David Lowe, Committed employees have nothing to fear 
3.Ministry Economic Development, 
SMEs in New Zealand: Structure and Dynamics 2008