Institute The Impact Penalty on T H McKell

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M Economic C Rural K E L L I N S T I T U T E of Rate NSW

Cuts

A RETAIL INDUSTRY CASE STUDY

THE McKell Institute

About 1. McKell Introduction

the

Institute

The McKell Institute is an independent, not-for-profit public policy institute dedicated to developing practical policy ideas and contributing to public debate.

The McKell Institute’s key areas of activity include producing policy research papers, hosting policy roundtable discussions and organising public lectures and debates.

The McKell Institute takes its name from New South Wales’ wartime Premier and Governor–General of Australia, William McKell.

William McKell made a powerful contribution to both New South Wales and Australian society through progressive social, economic and environmental reforms.

For more information phone (02) 9113 0944 or visit www.mckellinstitute.org.au

The opinions in this report are those of the authors and do not necessarily represent the views of the McKell Institute’s members, affiliates, individual board members or research committee members. Any remaining errors or omissions are the responsibility of the authors.

THE McKell Institute

Institute McKell THE

| The Economic Impact of Penalty Rate Cuts On Rural NSW: A Retail Industry Case Study

DISCUSSION PAPER

Contents

Foreword 4

Executive Summary 5

A Historical Context 6

The Shifting Climate 7

The Regional/Urban Divide in NSW 8

A Focus on the Retail Industry 9

Data Sources, Methodology and Assumptions 10

From Bad to Worse: Two Scenarios to Reduce Penalty Rates 11

Who Owns our Regional Retail Sector? 12

The Economic Impact of Potential Penalty Rate Reductions or Removals on Regional NSW 14

Conclusion 17

Appendices 17

References and Footnotes 22

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Foreword

It is with great pleasure that we introduce the McKell Institute’s study into the importance of penalty rates to Australian workers.

In this latest discussion paper, the McKell Institute briefly overviews the history of penalty rates in Australia and gives a snapshot of the contemporary debate on the topic. Then, focusing on the retail sector it looks at proposals aimed at reducing or removing penalty rates all together.

As an important addition to the public debate on the subject it examines and quantifies the disproportionate impact that rural and regional centres in NSW will endure as a result of these changes.

The report accurately identifies the extent that businesses owned outside those regional centres (generally in Sydney and Melbourne) will profit at the expense of regional workers. More important are the second line impacts that will be felt when the employee has less money to spend locally, leading to decreased revenue and increasing the divide between the city and the country.

While we recognise that businesses in the bush face increasing challenges, they will not create a pathway to ongoing profitability by cutting penalties and the decent treatment of the very people who work to make them successful.

We hope that the findings of this report reach its intended audience and that its messages are understood. Furthermore, we hope that those in the Federal Government pushing for changes in this sector pause to consider the unintended consequences of their proposals, not only on the workers and their families but also on the towns and cities of regional Australia.

The Hon John Watkins CHAIR, MCKELL INSTITUTE

Sam Crosby EXECUTIVE DIRECTOR, MCKELL INSTITUTE

| The Economic Impact of Penalty Rate Cuts On Rural NSW: A Retail Industry Case Study

DISCUSSION PAPER

Executive Summary

Penalty rates have long protected the Australian weekend. For over a hundred years they have incentivised regular hours of work and compensated working families for the time apart.

Now there are increasing calls from employer groups and parts of the Federal Government to cut back penalty rates in an effort to increase the profitability of companies and the nation’s level of productivity.

While the effects of such a change would be widely and deeply felt throughout the nation, in homes and around kitchen tables of wage earning employees, there will be a disproportionate impact on the towns and local economies in rural and regional NSW. In the country where workers typically earn $5,300 per year less than their city counterparts they’ll end up facing a disproportionate burden inflicted on them by this potential change.

This discussion paper looks at the impact of a reduction or a removal of penalty rates in the retail industry in rural NSW. The retail sector is the second highest employer of regional workers accounting for some 12% and the highest private sector employer. It would be one of the first and hardest hit if any such proposal did eventuate.

In new analysis by the McKell Institute it is estimated that retail workers in Rural NSW would lose between $89 million and $315 million each year depending on the extent of the cut to penalty rates and the level of local ownership of the retail stores. This cut is equivalent to an average pay cut per retail worker of between 4.6% - 16.5% of their salary. More worrying for the town themselves is the $26 million - $111 million in disposable income that would be lost across Rural NSW.

The extent of the impact varies from region to region. The Federal electorate of Patterson could expect to be impacted between $1.2 million and $5.4 million whereas the electorate of the Riverina would be impacted between $2.2 million and $9.4 million.

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A Historical Context

Penalty rates have been a feature of the Australian industrial relations system for over 100 years – having been established just after Federation in 1909, in the Commonwealth Conciliation and Arbitration Commission.

In Barrier Branch of Amalgamated Miners Association v Broken Hill Pty Company Ltd (1909), Justice Higgins awarded penalty payments valued at time-and-a-half of ordinary payments be made for work on the seventh day in any week, an official holiday and ‘all time of work done in excess of the ordinary shift during each day of twenty hours’.1 Higgins awarded the penalty rates, firstly as compensation to employees being made to work at inconvenient times, but secondly to act as a deterrent against ‘long or abnormal hours being used by employers’.2

The rationale for penalty rates; that employees should be appropriately compensated for working long hours at inconvenient and unsociable hours, was reaffirmed almost forty years later by the Commonwealth Conciliation and Arbitration Commission. It decided that Saturday work should be paid at 125% of the base rate, and people working on Sundays should receive double-pay. Shortly afterwards in 1950, the NSW Industrial Relations Commission noted that ‘employers must compensate employees for the disturbance to family and social life and religious observance that weekend work brings’.3

More recently, the new modern award objective under the Fair Work Amendment Act (2013), introduced by the former Labor Government which took effect in January 2014, places a requirement on the Fair Work Commission to consider the need for extra remuneration for people employed during ‘overtime; unsocial, irregular or unpredictable hours; working on weekends or public holidays;

or working shifts’, when making sure that these modern awards provide a just safety net, ultimately providing safeguard for penalty rates.4

While not a uniquely-Australian privilege, they have stood the test of time reflecting the egalitarian nature of the Australian psyche. Over the last century they have attracted bi-partisan support, with some of this remaining in place today among the current conservative Government. Conservative Liberal MP Andrew Laming said that “there’s a long history of paying penalty rates and I don’t see any need to change it”.5 Similarly, Alex Hawke acknowledges that “we may not be able to do anything about penalty rates; and we may not want to, because they are an enshrined part of our workplace relations system”.6 Even Prime Minister Abbott concedes that “penalty rates are very important to people...if you’re a low paid worker one of the things that you often love to do is work late nights, weekends, because it does substantially increase your income.”7

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DISCUSSION PAPER

The Shifting Climate

More recently, elements of the business lobby are now agitating to reduce or abolish penalty rates. The Australian Retailers Association’s chief executive Russell Zimmermann stated that “you should be able to work any five days out of a seven day week, and have that constitute a working week. We should not be talking about unsociable hours any longer”.8

In 2013, the full bench of the Fair Work Commission rejected a case by the employer association for the restaurant and catering sector to reduce penalty rates in five awards across the hospitality and retail sectors.9 This heightened concerns of employees and their unions that this pillar of the industrial relations system was under attack. Then on appeal, in May this year the Fair Work Commission overturned its previous ruling in the hospitality award and reduced penalty rates for casual employees for Sunday shifts by 25%. A decision that Employment Minister Eric Abetz labelled as “ground breaking” and the National Retail Association chief executive Trevor Evans described as “exciting”.10

Since the election of the Liberal-National Coalition Government in 2013 there has been an increased

level of activity by employer groups advocating a reduction or removal of penalty rates. This commentary and activity has emboldened senior coalition MPs such as such as Federal Liberal MP for Wannon Dan Tehan, who said that “penalty rates on weekends should be halved”.11 Similarly a range of coalition MPs including Warren Entsch, Russell Broadbent, Wyatt Roy, Craig Laundy, Dennis Jensen and Zed Seselja, have all called for a review of penalty rates, specifically so that businesses can be ‘liberated’ from paying weekend and overtime rates to their workers.12 Conservative State Premiers are now also urging the reduction of penalty rates with Queensland Premier Campbell Newman claiming that penalty rates on public holidays were a ‘problem’ and urging his federal colleagues to consider cuts.13

The Economic Impact of Penalty Rate Cuts On Rural NSW: A Retail Industry Case Study

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The Regional/Urban Divide in NSW

There has been extensive analysis on penalty rates and their effect on shopping hours and labour productivity. There is however a much less publicised story regarding the effect that reducing or removing penalty rates would have on regional and rural areas.

These regions already lag significantly behind their metropolitan counterparts on a variety of socio-economic measures including most importantly income per household.

Federal

The NSW Government notes that the percentage of households with a gross weekly income under $500 is amplified by remoteness.

Electorates Classified as

Correspondingly, over a quarter of city-based households have a

Rural Electorates minimum weekly income of $2,000, while only 9.1% of regional and remote locations have comparable incomes.14

Calare

In analysing the disproportionate effect that penalty rates have on NSW

Cowper regions this study has been conducted using NSW Federal Electorates as its geographic units, one of the useful regional classifications that

Eden-Monaro the ABS uses to analyse the State. For the purposes of our analysis, the following electorates have been defined as rural (i.e. areas outside

Farrer Sydney, Wollongong and Newcastle):

Gilmore

Hume

Hunter

Lyne

New England

Page

Parkes

Paterson

Richmond

Riverina

| The Economic Impact of Penalty Rate Cuts On Rural NSW: A Retail Industry Case Study

DISCUSSION PAPER

A Focus on the Retail Industry

In evaluating the impact that reducing or removing penalty rates would have on regional and remote communities this paper focuses on recent proposals to reduce or remove penalty rates in the retail industry.

2011 Workforce by Industry

2011 Workforce by Industry – Rural NSW

– Non-Rural Electorates

Health Care and Social Assistance 101,356

The retail industry was selected due to its size and significance as an employer in Rural NSW. It is the second largest industry, just behind health care and social assistance and the largest private sector employer in the regions. It alone accounts for 12 per cent of the workforce employing over 93,000 workers.15 Retail Trade in Rural NSW has one and a half times the number of workers in education agriculture, construction or manufacturing. Furthermore, as a proportion of the workforce,

Health Care and

Other 865,341

Social Assistance 262,902

Retail Trade

Other

13%

93,253

287,442

11% Administrative

and Support Services 244,040 36%

12%

38%

11%

8%

Education and Training

10%

Retail Trade 231,470 67,383 8%

9% 7%

8%

8%

Construction Agriculture,

64,497 Forestry

6%

7%

8%

Manufacturing 201,374 and Fishing

Accommodation 60,920

Accommodation

Manufacturing and Food Services

63,720 63,175

and Food Services 147,194

Construction 165,559

Education and Training 181,537

a higher proportion of rural workers are employed in retail trade (12%) than in non-rural electorates (10%). As a sector it includes supermarkets, department stores, hardware and garden supplies, as well as clothing, pharmaceuticals and car retailing (see Appendix 1 for a complete list). Finally, along with hospitality it is the largest private sector employer at the forefront of the push to reduce penalty rates.

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Data Sources, Methodology and Assumptions

This report has drawn on a range of data sources for its economic modelling including:

I. Australian Bureau of Statistics (ABS) 2011

most medium to large employers in rural retail outlets Census of Population and Housing – in particular

are retail chains owned outside of the local area). workforce data pertaining to industry, Federal

The proportion assumptions were also varied to Electorate of residence and income. Appendix

obtain high and low estimates. 1 contains the classification scheme used for Industry of Employment (INDP) categories within the Retail Trade category;

From this analysis we were able to estimate the number of employees in each electorate who are employed by non-local businesses as well as the II. Australian Bureau of Statistics Counts of

level of disposable income lost to the local economy. Australian Businesses, including Entries and Exits, June 2009 to June 2013. Data from Statistics Counts of Australian Businesses (obtained at the SA2 ABS geographical classification level) has been reclassified by Federal Electorate.; and

Additionally, the ABS Census shows that, in 2011, there were around 93,000 workers in the NSW rural retail workforce. These numbers have been used as the base line for all estimates in the study. The impact of this is reflected in each electorate as below:

III. Data provided by the union representing

retail workers (the Shop, Distributive & Allied Employees’ Association) based on examples of trading hours from a regional centre.

Drawing on these data sets, the researchers then

ELECTORATE ESTIMATED RETAIL WORKERS used 2011 census to estimate the numbers of retail workers in each Federal Electorate. The data provided by the SDA was then used to estimate the average income loss to individual workers. This was

Calare 6,687 Cowper 6,735 Eden-Monaro 6,841

conducted looking at two separate scenarios, both

Farrer 6,576 for a partial reduction as well as a full abolition.

Gilmore 6,333

The researchers then estimated a 32.5%

Hume 6,664

marginal tax rate to quantify the level of disposable

Hunter 6,362 income lost and provide a post tax, or net impact.

Lyne 6,363 These figures were then combined to estimate

New England 7,004 the total income lost to retail workers in each Federal Electorate.

Page 6,930 Parkes 6,641 Data from the ABS Counts of Australian Businesses

Paterson 6,078 were used to estimate the number of employees by business size in each Federal electorate while assuming that most of the larger businesses (20+

Employees Potentially Affected by Penalty Rates Cuts in NSW Rural Retail Businesses

Richmond 6,702 Riverina 7,337

employees) were not owned locally (as it is clear that

Rural NSW 93,253