What about the workers ?: unfair dismissals

If there’s one area where the Howard government’s Senate majority (or near-majority) seems likely to make a big difference, it’s in relation to our working lives. While the government’s commitment to free-market policies has waxed and waned, it has been absolutely consistent in representing the views of employers, whether they have demanded labour market deregulation (as in the stripping back of awards) or tighter regulation (as in anti-strike laws). The government and its supporters would, of course, claim that what is good for employers is good for employees, and there is clearly a good deal of truth in this claim. Still, there are plenty of occasions when employers and employees come into conflict (in such cases, it is more natural to refer to workers and bosses). I plan a series of posts looking at aspects of the government’s reform program, and the state of employment relationships more generally.

Of all the items on its agenda, the removal of unfair dismissal laws, at least for small businesses, is probably closest to the government’s heart. A contested dismissal is something like a contested divorce in the feelings it arouses on both sides, and the government hears all the time from the employer side of the dispute.

In economic terms, the problem starts with the fact that an employment contract has a lot of implicit or hard-to-verify terms. The worker promises to turn up on time, work diligently, be competent, and not cause trouble and dissension in the workplace. The boss promises to act fairly, not to harass or bully the workers and so on. Once both parties have committed to the relationship, they each have the opportunity to cheat on these commitments. How this works out depends on the institutional rules, the state of the labour market and so on. Whatever happens there are going to plenty of people who perceive the outcome as unfair, and plenty of cases where this perception is accurate.

The aim of unfair dismissal laws is to set up a clear procedure that employers must follow to dismiss underperforming employees. This is widely seen as acceptable for large employers with organised HR departments to keep track of such things. But for small businesses, it’s a burdensome process. On the other hand, anyone who’s dealt with small business employers knows that they vary a lot. The good ones are much better than big corporations, the bad ones a lot worse.

What about the empirical evidence? As with many things in economics, the literature on unfair dismissals starts out with a big publication finding clear-cut results, only to descend into a morass of agnosticism. A paper by Lazear in 1990 found strong negative correlations between the strength of employment protection laws, proxied by severance pay, and desirable labour market outcomes such as employment and participation rates, hours worked and so on. Jason Soon cited it in his paper on unfair dismissals. But Lazear’s results have not stood the test of time. Here’s the abstract of a recent paper What have we Learned About the Employment Effects of Severance Pay? Further Iterations of Lazear et al.

In this study we examine the contribution of severance pay to employment and unemployment development using data on industrialized OECD countries. Our starting point is Lazear’s (1990) empirical dictum that severance payment requirements adversely impact the labor market. We extend his sample period and add to his parsimonious specification a variety of fixed and time-varying labor market institutions. While the positive effect of severance pay on unemployment garners some support, there is no real indication of adverse effects for (the three) other employment outcomes identified here. Moreover, with the possible exception of collective bargaining coordination, the role of institutions is also more muted than suggested in the literature

This ILO study gets similarly unclear results. Generally speaking, employment protection laws lower the variance of employment and unemployment but have no clear effect on the average levels.

In political terms, it’s worth considering the relationship between unfair dismissals and unions. Legal protections for workers are, to some extent a substitute for unions. But one of the functions of unions is to help their members take advantage of legally available protections such as unfair dismissal laws. On the whole, I think the implementation of the government’s reform agenda is likely to be good for unions, by sharpening the perception that workers can’t rely on the goodwill of bosses.

48 thoughts on “What about the workers ?: unfair dismissals

  1. As Paul points out, the 20-staffer limit will lead to spurious arrangements that let large employers exploit these weaknesses too. The main way this will occur is to hire workers through multiple small labour hire companies. Labour hire is already a disgustingly filthy rort, which I will write about later.

    In terms of anecdotes, I’ve seen an executive sack a keen, hard working young secretary for, as near as I could tell, no good reason. I later found out the guy had been well known in previous companies for regularly sacking his secretaries, like a power trip. I think of that young girl returning to her Western suburbs home wondering what she had done wrong.

    I’ve seen an arrogant dot com manager ignore an Indian programmer on his last day to the extent the Indian guy was nearly crying, because he expected and was accustomed to acknowledgement, thanks or at least good wishes. This was not a sacking, but involved similar issue of workplace brutality.

    I’ve seen a technology company hire engineers from a rival purely to disrupt that rival’s business, and then sack those engineers as soon as the rival had been stuffed.

  2. Another one I won’t forget – the day a bank got rid of a floor of credit card services people. At 9:30 am, through our glass partition, we saw all the credit people milling around and standing, seemingly in shock. They had all just been sacked, without any warning. A crowd of security guards emerged from the lifts and 80 or so clerks were escorted away. Within ten minutes the lives of those people, with their ambitious mortgages and assorted other lives we used to hear discussed over the partition, were massively disrupted.

    A team from one of the accounting firms had supervised it all. You really have to ask what’s right about knee-capping people like that.

  3. I had a mate whose wife worked in the IT section of a major bank.
    They ‘restructured’ the section by sacking peole by numbers ie 1,2,3,4 number 5 you are sacked.

    I kid you not. It isn’t what I learnt at business school!

  4. Homer, if they’re making people redundant (and that tends to be what “restructuring” means at a bank) then they are well within their rights to sack people by number. It’s more common to target, say, union members.

  5. the 20-staffer limit will lead to spurious arrangements … through multiple small labour hire companies.

    Tony, this will become an even bigger problem when the government legislates to prevent labour hire workers being considered employees of the company they actually work for. Huge loopholes will appear.

  6. Robert, that’s the way it is now, surely? I’m not familiar with WA or whether you have different state laws there. In the eastern states, labour hire is mostly about creating a fiction that employees aren’t really employees. A few court decisions have disturbed that fiction, but that’s still how it generally works.

  7. That’s generally how it works, yes, but there have been some important cases here (esp in the construction industry) that have improved the situation. But the Coalition will legislate those workers back into a dodgy, unprotected situation.

  8. The effect of legalising unfair dismissals will be that labour will sheild capital from the risks of economic downturn, and even management failure. Wages can be turned from fixed expensdses to variable expenses. This is the real threat.

    We will end up seeing workers employed to service a specific opportunity, and sacked if that opportunity is miscalculated in some way. The culture of employment will change, with everyone who is not highly skilled and sought after effectively casualised in terms of tenure.

    It could even effect banks credit policys and credit insurance rates for people who are less competitive in the job market.

    Oh well at least those 400 lumberjacks have got their jobs….. you know cause the coalition really cares about semi-skilled workers’ employment tenure, and symbolisnm is so important.

  9. Why would you want to work for a crap boss anyway? If you get sacked for no good reason then you will have no trouble finding a new job and a new boss who appreciates you.

    As a Small Business Owner with one full-time and one part-time staff I pay well above the award to retain my exceptionally talented staff. If I sack either one of them I am up for big costs trying to hire and train new staff and that costs money that I’d rather split between the ATO and the mortgage.

  10. If there’s one area where the Howard government’s Senate majority (or near-majority) seems likely to make a big difference, it’s in relation to our working lives.

    I guess that the use of ‘our’ is poetic licence. Last time I checked, to fire a university professor is necessary to prove that s/he is a serial killer or leader of a pedophiles’ ring.

  11. Razor’s right – sacking people and hiring a replacement costs a bomb, with all sorts of hidden costs (including the possibility that the replacement is no better). Rational bosses don’t do it lightly. My point, Tony, is that clumsy laws won’t prevent the many irrational ones from doing it; something your anecdotes seem to support rather than counter.

    No one seems to have picked up on the best argument against employment protection legislation (EPL in the jargon) – it massively increases the cost of taking on an iffy recruit. The argument is exactly analogous to that against restrictive landlord and tenant legislation; make it hard to evict a bad tenant and no landlord will take a chance on someone from a group with a higher than average risk of being a bad tenant. This increases ‘statistical’ discrimination, with the well-known effect of creating a self-reinforcing effect (if you’re in a group that’s discriminated against, the long run payoff to effort is less, so you tend to make less, so the discrimination against your group becomes more individually rational on the employer or landlord’s part, so the reward for your effort is less, and so on).

    As John’s post acknowledges, there is little evidence that EPL increases the overall rate of unemployment much, but plenty that says it decreases turnover amongst the unemployed. That is, instead of most people experiencing short spells of unemployment in their life a smaller minority experience long-term unemployment, with consequent risk of creating a self-reinforcing underclass.

  12. Having been the victim of an ‘unfair’ and very craftily constructed dismissal episode, one might imagine that I’m dead against any alteration of unfair dismissal laws. Not so. There is, however, no such animal as employer goodwill. A process of legal protections for workers against unscrupulous bosses who fire at the drop of a profit margin must remain in place. Equally, that process must allow for rightful and justified representation on behalf of the employers to remove unproductive workers when same can be proven beyond reasonable doubt to not be abiding by their employment terms and conditions.

    It’s a very fine line, and not one which can be clearly defined because there are cheaters on both sides of the worker-boss divide. However, simply negating the protections of one side in favour of the other will never solve the argument.

  13. Niall: I highly doubt that your dismissal was unfair. The unfair part was that you got hired over the competing candidates in the first place.

    All this talk of “unfair dismissal” seems to assume that you have some sort of entitlement or “right” to take money from someone else. I don’t see how you can justify forcing someone to keep giving you money if he no longer wants to do so.

  14. yobbo, this is not meant in an argumentative fashion, but just to point out the philosophy surrounding this issue.

    Employers don’t hire people out of the goodness of their heart; they do it to further their own interests either by increasing their profits or justifying the continuation of their management salary and bonuses. So workers don’t take money from anyone. In fact, employers take money from the labour of the workers.

    Opponents of regulation like to paint themselves as self-made men operating outside of government. Yet they’re the biggest beneficiaries of government. They rely on police to stop theft, expensive court systems to arbitrate business disputes, schools to train workers and ports and airports for transport.

  15. I’m in the throes of an unfair dismissal case myself. I’ll post more once it’s not sub judice, but for now people should look up what the same employer did to Leo Raffoul on the AIRC site. Bigger organisations are just working the system, using HR departments as tools to produce an appearance of due process by controlling the selection of evidence and avenues of internal redress to make it appear that a fair go is on offer. And it has become standard operating procedure.

    Meanwhile “reforms” from both sides of politics have just turned into sitting on the safety valve, e.g. capping possible payouts makes it impossible to negotiate settlements that actually do salvage the careers of the victims and so forces us into hearings rather than settling for less. It’s as counterproductive as rent controls ever were, a futile attempt at controlling the market.

  16. With the increase casualisation of the Australian workforce in small businesses and the growth of labour hire firms across Australia, ordinary Australian workers will have very little job protection if unfair dismissal laws are removed. Just look at the growing number of cases in the industrial commissions and the number of employers being prosecuted by state WorkCover authorities, the thin edge of the wedge!

  17. John, on the impact of unfair dismissals reform on unionisation, David Autor finds the opposite effect that you predict. His model is that more lax unfair dismissals regimes boost the temporary help sector, which is typically non-unionised. See http://www.nber.org/papers/w7557.

    Looking forward to your subsequent posts on the IR reforms.

  18. Andrew, your conclusion does not necessarily flow from Autor’s findings. JQ’s point was that increased precariousness of work will prompt workers to see more value in unions. Even though more of the workforce will probably be engaged through labour hire arrangements (which Autor terms Temporary Help), that still leaves the remaining staffed workforce to see increased value in unions. That increased participation might or might not be greater than the reduction caused by labour hire.

    By the way, there have been some pointers to this effect already. The CPSU recently found dramatic upsurge of membership among professional people facing the threat of having their jobs offshored.

  19. Tony, David Autor’s findings relate to net employment – suggesting that, in the US at least, the “scared workers joining unions” effect was swamped by the “growing temporary help/labour hire sector” effect. I agree that the reverse could potentially be true in Australia, but based on the available empirical evidence, I’m going to stick with my original view, for the time being at least.

  20. I’ve just put an update on my own experiences with unfair dismissal in the Monday message board for 8.11.04. Please read it and reflect on what it means for the wider world as well as for people in the same boat as me – or who could easily be soon.

  21. Social Inequity and Changes to Unfair Dismissal Regulations
    The Howard government is making another attempt to pass changes to Industrial Relations law in regards to unfair dismissal and small businesses through the Senate. Small business (under 20 staff)

Comments are closed.