A costly solution for small business

The year was 1995. A small group of mainly twentysomething recent Liberal Party recruits had gathered at Sydney's North Ryde RSL Club for the inaugural meeting of their new branch. Presiding over the meeting was local MP and then shadow industrial relations minister John Howard.

Branch formalities had ended and Howard invited questions from the floor. One recently graduated solicitor present posed this question.

"Mr Howard, you've often said that the Liberal Party is a mixture of liberals and conservatives. Would it be correct to say that the policies of the party tend to be more conservative than equivalent policies of the ALP?"

This was no trick question. As one of the more experienced Liberal MPs, Howard was well positioned to answer it. From memory, his answer went something like this.

"Not always. In some areas, the ALP is more conservative in that their positions are historically well-entrenched. In my portfolio of industrial relations, our policies like deregulating the labour market and curbing union dominance would be considered revolutionary."

This certainly was the case back then. In a December 2005 address to the Australian Liberal Students Federation, self-confessed "industrial ayatollah" Des Moore from the Institute for Private Enterprise referred to the 1993 establishment of the Industrial Relations Court of Australia "to implement the first national unfair dismissal legislation … After three months, a cap had to be put on IRC compensation because the judges were prone to making million-dollar awards …"

No doubt there is a strong element of free market revolutionary mythology in these claims. However, certainly many participants in the system saw it as a cash cow. One solicitor boasted to me at that time of filing unfair dismissal claims almost as a matter of course each time one of his workers-compensation clients was dismissed. After all, he said, most employers were happy to pay something just to make the matter go away.

In due course, a host of limitations was placed on unfair dismissal claims. These included caps on compensation, specific criteria to determine how a dismissal would be deemed unfair and exemptions for certain kinds of dismissals and businesses. Generally, each party had to pay their own legal fees. For workers without union representation (i.e. the majority) and paying by the hour for a private solicitor, taking a matter to arbitration had little attraction.

Even before WorkChoices, the unfair dismissal remedy in the federal Workplace Relations Act was heavily skewed in favour of employers. However, the availability of the remedy at federal and state level had an impact on how employers behaved when they considered dismissing employees. Notions such as natural justice and a fair go created a workplace culture in which employers regularly communicated performance issues with employees. Sound HR practices became the order of the day even in smaller enterprises.

Many of my own employer-clients used to refer to a "three strikes and you're out" rule. In fact, no such rule existed in any federal unfair dismissal laws. Unfair dismissal laws created a climate in which the values of fair go became standard business practice.

The unfair dismissal regime under WorkChoices may well undermine this workplace culture among employers whose workers are excluded from making an unfair dismissal claim. Howard suggests that the removal of a large number of Australian workers from the unfair dismissal jurisdiction is a major factor in lowering unemployment and creating 276,000 new jobs. He told Radio National on April 12 that "there is a greater incentive for small business to take on new staff now that the threat of unfair dismissal action has been removed".

Many labour market economists disagree. Still, economists rarely agree on anything. Let's look at it from a simple layman's perspective.

Imagine how the average punter's spending patterns would change if they felt less security in employment. If you knew your boss employed fewer than 100 employees, would you risk making long-term financial commitments? Or would you be looking for a new job with a larger company?

If you managed to find work with a not-so-small business, you'd be waiting until your six-month exclusion period expired. But you can still be sacked provided your boss cites "genuine operational reasons", even if it was only one of numerous factors in his decision.

With so many employees unable to access unfair dismissal (and with so many plaintiff personal injury lawyers desperately looking for work), already other options are being tested. All are far more expensive for employers to defend than an unfair dismissal claim. We might end up with a situation where a larger business ends up paying less in legal fees than a smaller business for the same kind of dismissal.

All of which makes one wonder whether having a less employee-friendly unfair dismissal remedy will really help small businesses and the economy.