Penalty rates are strangling small business

The Australian, July 22, 2016:

Mark Scanlan sits at an outdoor table at his Kirribilli establishment, poring over his accounts. The restaurateur is comparing his books covering the past 12 months with those from seven years ago, and there is a worried expression on his face.

Less than a 1km down the road lies Kirribilli House, the Prime Minister’s official Sydney residence. Yet on this chilly winter’s day, Scanlan, warmed by a cup of his restaurant’s excellent coffee, ponders the outcome of a decision that could decide the fate of his businesses but lies completely outside Malcolm Turnbull’s control.

Scanlan is fervently hoping the Fair Work Commission will announce a cut to penalty rates. Next month, the independent industrial umpire is due to hand down its decision on whether to reduce the weekend and public holiday penalty rates paid under seven industry awards. Employers want the commission to reduce loadings of up to 250 per cent on public holidays and the 200 per cent Sunday loading. The unions fiercely oppose any cuts.

The commission spent more than 18 months pondering the mammoth case led by the hospitality industries. But even though its decision will determine the income of more than a million Australians, the issue of penalty rates was largely absent from the eight-week election campaign and subsequently became invisible.

The Coalition, scared of the unions’ capacity to mount a Work Choices style backlash that helped to throw John Howard out of office in 2007, is silent on the issue — much to the frustration of its business and industry support base.

Labor, as the architect of the independent review of penalty rates with its 2009 Fair Work Act reforms, is also hamstrung. Nonetheless, the unions campaigned on penalty rates in marginal seats, even if the Medicare scare overshadowed their efforts. United Voice, the hospitality union behind the campaign, tells The Australian it believes its strategy proved instrumental in bolstering Labor support in at least 10 marginal seats and contributed to the Coalition’s lower-house electoral wipe-out in Tasmania.

Yet since the Coalition’s narrow victory on July 2, both parties seemed to have taken a vow of silence on the issue — until yesterday, when Bill Shorten wrote to Turnbull seeking to co-author an extra submission to the commission “in a spirit of bipartisanship”. The move was dismissed as a stunt.

The Fair Work Commission is pondering evidence taken from more than 140 witnesses during 47 days of public hearings, as well as 475 written submissions and witness statements.

That evidence is sharply divided. Existing rates are “outdated” and burdensome, employers loudly argue, and reducing penalties would help to expand businesses and hire more workers. Cutting penalty rates would reduce incomes for the nation’s lowest paid workers by 14 per cent, the unions respond with equal vehemence.

Scanlan’s balance sheet cuts through this wall of noise. It tells the story of an Australian businessman fighting a losing battle against rising costs.

With his three Garfish Seafood restaurants dotted across Sydney’s north shore, Scanlan became an advocate for penalty rate reform after taking a hard look at his accounts four years ago and noticing how labour costs hurt his bottom line. “We used to trade seven days a week, breakfast, lunch and dinner nonstop,” he tells The Australian. But a break-even analysis revealed there was no commercial sense paying the extra rate to his staff. Three years ago he took a tough decision. He would shut his restaurants on Sunday nights and on public holidays; with the exception of Good Friday, “which of course is fish day”, cutting the hours for his permanent staff and taking on fewer casuals.

Now Scanlan is conducting another analysis. Again, it doesn’t look good. His Kirribilli restaurant takes broadly the same revenue as seven years ago, but 2015-16 profits are a mere 5.4 per cent of that revenue, having fallen 3 per cent since 2008-09.

The big problem is payroll costs, which reached almost $1 million in 2015-16, including superannuation and annual leave but excluding WorkCover premiums. “For every dollar I take I’m paying 50c in wages,” Scanlan says. “If interest rates were at 5 per cent, I’d sell all my crockery and try and sell the business and put my money in the bank.”

As it is, he needs to cut costs further. Since the 2008-09 financial year, his overheads have risen 7.4 per cent to 65.49 per cent of his yearly takings, even after shaving more than 4 per cent from his food and drink bill after instructing the chef to be smarter about menu design while maintaining quality.

Scanlan made more tough decisions, sacking the middleman who supplied his alcohol. Now he shops at Dan Murphy’s for alcohol and Woolworths for soft drinks every week, saving $10 a carton on beer.

“I hate it, giving a near monopoly like Woolworths the business and taking it away from some independent,” he says. “But there’s just nowhere else to squeeze.”

In the wake of the Rudd Labor government’s 2009 industrial relations reforms, which introduced a uniform national award for every industry, Scanlan’s labour costs spiked. Julia Gillard, as industrial relations minister, selected Victoria’s Sunday penalty rate regime as the benchmark, forcing a rise in costs for business in Queensland, NSW and South Australia, where penalties were 50 per cent less.

With Tony Abbott elected prime minister in 2013 the Coalition backed calls for change from business and employer groups. Turnbull, too, has echoed the view that Sunday has lost the “special” significance it had for past generations and should not attract higher penalties.

In its final report on the workplace relations system, commissioned by Abbott and published late last year, the Productivity Commission concluded there was an economic benefit to reducing penalty rates and recommended aligning Saturday and Sunday rates for non-essential workers.

But despite this strong basis for change, Employment Minister Michaelia Cash repeatedly has declined to intervene in the Fair Work Commission process. Her industrial relations policy, published quietly in the middle of the election campaign, focused on union governance, corruption and boosting gender diversity.

Labor, on the other hand, made a formal submission to the commission against the proposed cuts. While not matching the Greens’ election pledge to legislate to ensure penalty rates never fell, the opposition indicated it would consider some safeguards.

The Opposition Leader helped design the modern award review system, giving control over penalty rates to the independent umpire when he was industrial relations minister in the Gillard government. As former union boss and Labor federal minister Martin Ferguson has warned, it would be “hypocrisy” for Shorten to intervene in the process.

Ferguson, in his capacity as chairman of Tourism Accommodation Australia, stresses the importance of helping employers boost jobs in hospitality and retail as we shift “from a mining-led to a service-based economy”.

Shorten, when pushed on the issue in the lead-up to the federal election, made one of his more bizarre campaign pronouncements. Asked for his response should the commission order cuts to penalty rates, he countered: “What if alien life makes contact with Earth? They’re not going to.”

If Sunday penalty rates were reduced to Saturday levels, the independent grocers sector would save $147m a year, says Jos de Bruin, chief executive of Master Grocers Australia. “Our members have said the savings would go direct into employing more people and to provide more customer service on Sundays,” he says.

In the Newcastle region of NSW, grocer Phil Crawford employs more than 40 people at his two independent stores. He has reduced his workforce to a skeleton staff on Sunday, when he rosters on one manager and gives the shifts on the checkout to 15-year-olds — they are cheaper to employ. Despite this, his smaller shop in East Maitland makes a loss. “You have the people who want to work on a Sunday; it might be ideal for a senior shop assistant or a mother but they’re not getting the shifts,” Crawford says.

Sunday shelf stackers are too costly, so he doesn’t employ them, putting pressure on the Monday crew to ready the store before the first shoppers arrive. “You have to work harder when you come in on Monday to recover the shop,” he says, adding that if Sunday rates were less onerous, he would happily offer extra weekend shifts.

It’s the same dilemma on public holidays. “You’ve got the public holiday situation where you pay double time and a half,” he says. “I open because the competition (does) and if I don’t the customers will go somewhere else, but it’s mostly 15-year-olds.”

Crawford doesn’t want to take pay out of his workers’ pockets. “I don’t think we should be taking off people what they’re currently earning. The people who are currently employed on those rates, they should maintain what they’ve got, but moving forward, so there’s a natural progression for when people retire, resign, move on, the rates (should be) lower for those coming in. As far as the nation is concerned, the world is changing, Sundays now are just really unfortunately another day of the week. If people want to work on Sundays, there should be every opportunity,” he adds.

Employers gave survey evidence to Fair Work Commission that cutting penalty rates would lead to extended opening hours and more jobs.

In a win for the industry case, the commission agreed to accept the Productivity Commission’s report into its evidence, including its findings on Sunday trading in restaurants in New Zealand, which show that in New Zealand cities with no penalty rates there are 10.4 per cent more businesses open and a 26.5 per cent increase in opening hours on Sundays compared with equivalent Australian cities.

Industry lobby Restaurant & Catering Australia submitted modelling to the Fair Work Commission showing employers “understaff” on Sundays and public holidays. Aligning the Sunday rate, which is 150 per cent in the industry specific award, with the 125 per cent Saturday rate would increase jobs by 40,000, its modelling shows. The industry wants the 250 per cent public holiday rate reduced to 150 per cent for permanent and casual staff.

Unions claim industry fails to make a convincing case that cutting penalty rates would boost jobs — a point that could yet determine the commission’s decision.

“Employers produced no practical evidence that reducing penalty rates would increase employment,” says Jo-anne Schofield, national secretary of United Voice, a union that covers hospitality workers. “There is no evidence — the matter is settled.” On the contrary, reducing workers’ wages would reduce consumer spending and damage the economy, she says.

United Voice and the Shop, Distributive & Allied Workers Association deluged the Fair Work Commission’s panel with more than 5000 statements from “interested parties” — working mothers, university students, poor families and elderly workers pleading for the commission to leave penalty rates untouched. The commission heard from workers that the cuts would jeopardise their mortgage or rent payments, weekly food budgets and extracurricular activities for their children.

Employer organisations do not want to abolish penalty rates, says Stephen Cartwright, chief executive of the NSW Business Chamber. “We’re saying to take them back to the levels they were a few years … The extent that they’ve grown to has gotten ridiculous, and they’re having a negative effect,” he says.

Restaurant owners and other small businesses that should be getting incentives to offer jobs to young Australians instead are forced to scale back their business.

“I’ve been in this role for seven years, the voice of discontent in this industry has grown louder,” Cartwright says. “An area which should see considerable employment growth is being strangled by penalty rates.”