The Third Way: Welcome to the Third World

The Devil Is In The Detail

Ken Phillips

Introduction

Fellow 'political troglodytes and economic lunatics'. You will recall that Bob Hawke used these words to describe HR Nicholls Society members in 1986.

I can now report, however, that according the Australian Centre for Industrial Relations Research and Training (ACIRRT), we are not to blame for what apparently is the calamitous state of our society in 1999. The Labor Party is to blame.

According to our third way, new wave, ideological counterparts of Sydney University academics at ACIRRT, the HR Nicholls Society, along with others, created the 'neo-liberal agenda'. But 'If Labor had not embraced the neo-liberal project, Australia's economic direction would have been different.' To paraphrase Winston Churchill's response to Hitler: 'some troglodytes, some lunatics'!

With Australia experiencing strong economic growth and falling unemployment, and inflation apparently under control, the 'neo-liberal agenda' has on the face of it improved the lives of Australian citizens. But no. All the ACIRRT third wayers want is to wallow in despair and gloom. ACIRRT needs, looks for and manages to find an oppressed class, in this instance the financially well-off but allegedly overworked. In finding psychological depression in the affluent, ACIRRT hopes, one assumes, to win middle-class support for an ideologically driven justification for regulations that ACIRRT and its fellow-travellers shall oversee.

My task at this conference is to look at the detail of the 'third way' agenda proposed by ACIRRT, for here is an instance where the devil is certainly in the detail. In this context I have been asked examine the 1999 Queensland industrial relations environment as a primary example of the new agenda for controlling people's working lives.

ACIRRT's 1998 book, Australia At Work, needs to be taken seriously. The collapse of the Berlin Wall has not ended the ideological battle for centralised control over society. The international cold war is over but the debate about who controls society now occurs within each nation. The actions each nation takes in response to this debate will affect its international competitiveness and its capacity to create and share wealth. The HR Nicholls Society is involved in this fundamental debate about how a society creates and shares wealth.

ACIRRT's third way would suppress wealth-creation and entrench structural poverty.

Australia At Work is an astonishingly poor piece of work. It is not based on genuine research but on wishful thinking that reflects long superseded and invalid assumptions about how humans interrelate and behave. But the book has become a key weapon in a political campaign to impose centralised regulation of a level and intensity never witnessed before in Australia. It has already had some notable success. Its agenda is reflected in ACTU policy, is supported within the ALP, and is without doubt influencing the thinking of all major Australian political parties.

Before focusing on the ACIRRT agenda in detail, I should place it in the context of some broad developments in the international economy.

A New Economic Order?

It is now generally accepted that the sustained non-inflationary growth of certain western economies is challenging traditional economic theory. Some commentators claim that we are witnessing a new economic paradigm. Low unemployment is not generating wage-induced inflationary pressure. The trend lines in the US, UK and now Australia cannot be ignored.

I cautiously offered a possible explanation of this new trend at an HR Nicholls Society Conference two years ago. I am now much more confident. I submit that the new paradigm is in large part explained by the penetration of market principles into the internal operations of firms.

When internal markets operate inside firms, the monopolistic and destructive behaviour of management and internal collectives of workers cannot drive remuneration beyond the capacity of the firm to pay. In this internal marketplace, individual competition and creativity flourish, so driving up firms' performances. Firms which do not take this approach risk death by competition.

All of us naturally want and strive to create monopolies for ourselves: to create an environment in which we are protected from economic catastrophes and remain financially secure. This desire for monopoly is widely recognised as self-defeating because, if everyone succeeds in becoming a monopolist, the result is oppression, income inequality, low productivity and general impoverishment. A widely accepted primary role of government is to encourage competition through the prevention of monopoly.

Yet for most of the 20th century the primary activity of management has been the creation of internal monopolies within firms and/or within industry sectors. It has been thought that the firm should protect the people in it, particularly management, from external competition. As a result, competition has operated between firms but not within firms.

A major tool for the achievement of internal monopolies has been an implicit contract between employers and employees: in exchange for their loyalty to the firm, workers can expect job security within it. This model of the firm has been reinforced by governments through external industrial regulation and institutions like trade unions. In Australia, the labour monopoly enforcer is, of course, the Industrial Relations Commission.

This Australian labour regulatory environment has been erroneously defended in terms of the presence of an unequal power relationship in the workplace and the need to protect workers. This view underpins ACIRRT's arguments. Nothing could be further from the truth. The primary function of labour regulation has been to support management in the creation of monopoly at the expense of the individual worker. Unions have been complicit in this objective

The Australian commercial building industry is a prime example. Limited numbers of near-monopoly participants can, by colluding on workforce arrangement with the unions, ensure that competition is limited. CFMEU documents refer to 'cartels' of companies where 'a captive market (is) delivered to them by the unions' to have 'the effect of limiting the numbers of players in the market.' This anti-competitive activity is facilitated and enhanced by Australia's industrial relations system.

In key Western economies, however, the foundations of internal business monopoly are collapsing. This is happening spontaneously---which is why economists have difficulty explaining the current non-inflationary growth trend. The explanation is that, in countries such as the US and the UK, more recently Australia, but apparently not yet in Germany, Sweden and France, labour-market deregulation is undermining monopolistic practices inside firms. In their place are practices that treat all people as self-managers who are not protected against the consequences of poor performance. The only factor which can allow increases in individual incomes inside the firm is the ability of the firm to pay, which in turn depends upon its degree of competitiveness.

Let me give two examples. The British oil firm BP Amoco has destroyed its centralised structure, eliminated middle management, and operates through 140 competitive, performance-based units. In such an environment people with poor performance cannot hide within a bureaucracy.

The privately owned Koch Industries, rated as the 18th largest business in the US, valued at $53 billion with more than $25 billion turnover a year, is internally managed by what is known as Market Based Management. The owner, Charles Koch, attributes the success of Koch Industries to more than 25 years of applying market principles to its internal management.

Two examples do not a trend make. But repeat these examples millions of times, in millions of businesses in millions of different ways, and a change dynamic has emerged within a society. That new dynamic is looking very much like sustained growth without wage-induced inflation.

To anyone who works in a regulated, loyalty based, internal monopoly-driven organisation, my explanation may be hard to comprehend and appear threatening. But if you work in an environment where your loyalty is to yourself and your performance is competitively naked, you have difficulty understanding why others don't understand.

My proposition is that the emergence of sustained economic growth with low unemployment and no wage-induced inflation is tied to the emergence of legal and management environments which allow and encourage the penetration of competitive market principles into the internal operations of firms.

The Australian industrial relations system suppresses this competitive market-driven change dynamic. The ACIRRT agenda would kill it off.

ACIRRT's Assumptions

ACIRRT's position rests on the classically flawed belief that the essence of the work relationship is inequality of power between employers and employees, with employees always the losers. Hence the view of ACIRRT and its followers that the work relationship must be centrally controlled.

This view is wholly false because it fails to match the reality of human interaction. In democratic, law-abiding societies, power vacillates between ever-changing alliances of the individuals who work within the firm. Only the law pretends that there is an identifiable employer who controls brainless employees. ACIRRT's analysis is not only wrong; in its defence of centralised control of the workplace, it can legitimately be accused of espousing monopoly and of aiming to impose its own definition of fairness and equity on society as a whole.

The Devil's Details

Australia At Work is heavy on false but high-sounding principles but light on specific proposals. However, the following policy wish list can be distilled from the book:

• Return to Keynesianism macro-economic management.
• Expand labour-market programmes guaranteeing jobs to the long term unemployed.
• Introduce an incomes policy based on the Accord.
• Introduce higher taxes.
• Force contractors on to PAYE tax to support the industrial-relations systems.
• Extend industrial relations regulation to all income-earners.
• Create a central authority to direct and attract investment.
• Peg payments (dividends) to shareholders
• Regulate incomes of high earners (top managers, CEOs, etc.).
• Impose a super tax on high-income earners who defy income regulations.
• Control and direct innovation.
• Favour manufacturing.
• Introduce portable rights to maternity, paternity, sick, and long-service leave, and redundancy payments.
• Regulate labour-hire arrangements which give security of employment.
• Regulate and organise the transition from school to work.
• Require workers to share jobs in recessions.
• Extend the social security system.
• Regulate incomes based on fair relativities (businesses' capacity to pay to be ignored).
• Regulate working time, setting minimum and maximum working hours.
• Regulate the number of people who can attend work at businesses.
• Regulate the amount of overtime.
• Increase leisure time.

On a simple reading, this agenda takes the breath away. It seems implausible, a little crazy and surely so unachievable as to not be worth worrying about. Surely any Australian political party which pursued this agenda would be subject to popular censure?

Yet fact is often stranger than fiction. ACIRRT's agenda, which was released only in late 1998, already has an impressive record of success. Here are some examples.

ACIRRT's Successes

1. Portable rights to maternity, paternity, sick, long service leave and redundancy payments.

The closure of the Oakdale colliery in New South Wales and the company's non-payment of accrued entitlements to the sacked workers demonstrates the inequity of Australia's labour regulation regime. The withheld entitlement system allows businesses to use workers' entitlements to balance their cash flow and avoid the factoring-in of all labour costs. The system encourages sloppy management.

The equitable answer to the Oakdale situation is to require the cashing-out of entitlements so that workers receive their entitlements in their daily pay, as is the case with casual wage structures. We should trust workers with their own money, not trust sloppy management to take care of it for them.

But no. The answer being proposed by unions and political parties is more big brother. Don't give the money on a daily basis to the workers. Put the workers' money into big-brother, state and union-controlled funds. Good for unions! Good for financial institutions! Good for bureaucracies! But not good for workers. This is the nanny state at work. The political assumption is that workers are not mature enough to manage their own money.

2. State-regulated labour hire arrangements which give security of employment.

This little item is code for union-controlled labour hire and monopolistic collusion between labour-hire companies and unions. The success of this item on the ACIRRT agenda is substantial.

The ACTU has a national agenda to eliminate labour hire companies. The CFMEU is the most active union, using thuggery to rid sites of labour hire. A CFMEU publication has exposed the real agenda, which is to create cosy cartel operations with select labour hire companies. A May 1999 Labour Hire Options Paper lays out the CFMEU strategy for 'the cultivation of a select number of body hire companies' where 'a captive market (is) delivered to them by the union' which has 'the effect of limiting the number of players in the market.' The paper discusses 'the pursuit of preferential arrangements with a small cartel of body hire companies...', ensuring that '...it would represent a radical intrusion into the prerogatives of management (if not a restraint of trade)'

To further thicken the monopoly plot, company searches reveal that the CFMEU has large shareholdings in at least two labour-hire companies.

3. Regulation of working time, setting minimum and maximum hours of work.

4. Requiring workers to share jobs in recessions.

These items are, I understand, in place in the European Union. The transfer to Australia is but a small political heartbeat away!

5. Extending industrial-relations regulation to all income earners.

6. Regulating incomes of high-income earners (top managers, CEOs etc.).

These two ACIRRT items achieved significant legislative success in Queensland on 18 June 1999 with the royal assent to the Queensland Industrial Relations Act 1999. Advice on the blueprint for the legislation came from the Industrial Relations faculty at Sydney University, next door to ACIRRT.

Section 275 (1) of the Act states 'The Full Bench may, on application by an organisation, a State peak council or the Minister, make an order declaring a class of persons who perform work in an industry under a contract for services to be employees.' This one legislative sentence seeks to achieve something never before attempted in Australia. It makes it possible to bring normal commercial contracts within the ambit of labour regulation. It envisages a reach for industrial relations regulation that is truly breathtaking, historic and unprecedented. The practical application of this provision is fast unfolding with a landmark test case to occur this year.

The economic destruction in Queensland flowing from this legislation will take some years to become apparent.

As already noted, the historical justification for labour regulation (and that used by ACIRRT) is the belief that employees are in an oppressive unequal power relationship with employers. At common law, this unequal power relationship is identified by the courts with the existence of the traditional master-servant, 'right to control', employer-employee relationship. This legal, unequal power relationship is termed a contract of service. Where contracts of service (employment) exist, labour-market regulation can plausibly be justified on moral grounds: if the employee has, at least at law, an oppressive, demeaning, controlled legal relationship with the employer, then an industrial relations system is needed to protect the employee from the possible abuse of the employer's legal power. The Oakdale Colliery issue is an example.

However, according to law, so-called contracts for service are not employment contracts. Contracts for service involve relationships in which the parties are at law equals. Parties entering a contract for service do so on an offer-and-acceptance basis. Unlike with an employment (contract of service) contract, the party that is paying for the service exercises no legal 'right to control' the party providing the service.

Contracts for service, broadly speaking, are the normal commercial contracts which drive an economy. In the Oakdale Colliery, if the workers had been independent contractors, they would have been under contracts for service, and their entitlements would have been cashed out and paid daily. The company would not have accumulated a withheld entitlement debt and the problem facing the workers would not have arisen. The Oakdale problem is a consequence of employment law and regulation. Prescriptive regulation for contracts for service is minimal in comparison to contracts of service.

However, the Queensland Industrial Relations Act 1999 takes an historic plunge into applying labour regulation to commercial contracts for service. The Act stipulates no limits on the legislative reach of the Queensland Industrial Relations Commission. The commercial reach of the Act is limited only by the applications presented to the Commission and the whims of the Commissioners regarding the volume and type of power they wish to grant to themselves.

Allow me to provide some evidence to support this assessment. The first application to have commercial contracts for service to be declared employment contracts of service was made in July 1999 - a mere 13 days after the Act received royal assent---by the AWU against shearing contractors in Queensland. The hearing for the application is set for mid-November 1999.

A reading of the Transcripts of Proceedings in respect of the Directions Hearings before the Full Bench of the Commission on 30 July 1999 reveals the full power of Section 275.

The following quotes are instructive.

Mr Herbert for the AWU stated '...the orders that will be sought are that persons engaged in or in connection with, in effect shearing, ... will be sought to be the class of persons in relation to whom we will seek orders that they be deemed to be employees.' Chief Commissioner Hall asked 'You're not seeking to pick up family members shearing sheep on a sheep station, are you?' Mr Herbert replied, 'That's certainly not the intent at all....'

To clarify the matter Mr Herbert said, 'Can I say also on the record that the purpose of this application, or the intent of this application is fairly clear but I can make it clearer now so that parties can approach this matter with the knowledge of what it is that the AWU is attempting to do in this application.' Later Mr Martin for the respondent had this to say: 'When I came in I wasn't certain if I understood the application. Now I am certain; I don't understand....' Further, Mr Martin added: 'My learned friend said that there would be an amendment to deal with persons who are engaged in or in connection with---those are words of the widest application. It would mean just off the top of my head....'

Chief Commissioner Hall interrupted: 'Somebody called in to repair the shears.' Mr Martin:

'A mechanic, a truck driver, anybody who's been engaged in a contract of the type about which they object.'

In this exchange, the full scope of the Act is revealed. As I said earlier, the commercial reach of the Act is limited only by the applications presented to the Commission and the whims of the Commissioners as to the volume and type of power they wish to grant to themselves.

The commercial implications are enormous. With this Act, no commercial operation in Queensland operating under commercial contracts for service is beyond the reach of the industrial relations system. The implications are limited only by the imagination of the possible applicants, usually unions, and how far they believe they need to go to enhance their power base. If an applicant union wishes to apply to have working family members of a small business bought within an award, it can go ahead and do so. This Act extends the scope of the IRC to regulate incomes of all income earners including CEO's and arguably owners of businesses, consistent with the agenda of ACIRRT.

In addition, the new Act requires union 'encouragement clauses' to be inserted in all awards.

The Consequences

This legislative Pandora's Box has huge potential implications and could well lead to the following outcomes:

The housing industry. The domestic housing industry operates almost exclusively around contracts for service through sub-contractors, and produces some of the cheapest and best housing in the world. Unions have long sought to enter this market to gain membership and control. The door is now open in Queensland. A union application would be simple and could come from either the AWU or CFMEU. Award application would result in a huge escalation of construction costs.

The pastoral industry. The test-case application is against shearers who currently as contractors can work on Sundays, but if under the award would be prevented from doing so. Award application would see shearing costs rise in Queensland beyond the level in other States, severely damaging Queensland's pastoral industry. The prospect of shipping sheep to New South Wales for shearing is not beyond possibility.

The IT industry. Lobbyists for the IT industry have been so concerned about this legislation that they have extracted a promise from the Queensland IR Minister that they will not be touched. However, the Minister does not control the unions or the Commission, and cannot prevent unions from making applications under Section 275. A new union for managers and professionals, the APESMA, is eager for membership, at war with other like unions, and could well find Section 275 the perfect weapon for taking over Queensland's IT industry. Such a move could easily prompt the IT industry, which has no respect for geographical boundaries, to desert Queensland for sunnier business climes.

The movie industry. Queensland has developed a strong movie production industry and snares production from the world's major movie production houses. The industry is driven by contracts for service; negotiations over offer and acceptance are the normal method of engaging production staff. The production staff consider the relevant union to be a joke, more damaging than helpful to the industry. This union has a prime opportunity to re-enter the market through Section 275 and impose its will and demand membership.

A back door to unfair dismissals: It will not only be unions seeking to directly use Section 275 of the Queensland Act. The other source of exploitation will come from jurisdiction-hunting solicitors whose aggrieved clients are in a dispute over a contract for service. The dynamics that have occurred with the NSW unfair contracts provisions will be replicated with Queensland's Section 275. In NSW, the unfair contracts provisions have been used almost exclusively by high-fliers in dispute with large corporations. The David Jones case involved a dispute and ultimate pay-out to an ex-David Jones executive of $400,000 plus; and Jana Wendt used the unfair contracts provisions in her dispute with Channel Seven. Someone involved in a contract for service need only to interest a union in making an application, and Section 275 becomes a perfect vehicle for both an aggrieved individual and an ambitious union to target a previously untouched area.

The franchising industry. The back-door unfair dismissal process is the most likely dynamic to apply with franchising. Franchising is a huge growth industry because the franchisor-franchisee relationship avoids the problems of employment regulation. Large commercial businesses have been constructed where commercial contracts govern the internal relationships. The highest-profile franchisors are McDonald's, KFC, Harvey Norman (where each department in each store is an individual franchise), Colonial Bank (where branches are franchised) and Aussie Home Loans. Currently, aggrieved franchisees in dispute with a franchisor conduct their dispute largely within the terms of the franchise agreement. However, if an applicant could have a franchise contract declared a contract 'in connection with', a franchise dispute would become subject to the rulings of an Industrial Relations Commissioner, overriding normal commercial dispute procedures. Such an eventuality, quite possible under Section 275, could destroy franchising in Queensland.

Contracting out. The implications of Section 275 for franchising apply also to contracting out. Given the right circumstances, businesses or governments could find Section 275 effectively voiding their contracting-out processes.

The point of these specific demonstrations is that Section 275 has no constraint. When a government seeks to extend the reach of employment regulation beyond genuine employment, the implications threaten the very operations of an economy. It can only be assumed that the Queensland Government brought in this legislation to support an ailing union movement, believing that the application could be limited to areas where unions felt they have been losing. I do not believe that Section 275 can or will be thus contained.

The test case is in preparation now. No business organisation in Australia can afford to ignore its outcome in mid-November. Similarly, every Australian government or aspiring government that wishes to impose centralised control over all income earners, as ACIRRT recommends, will be looking to Section 275 as a model.

ACIRRT's Ideological And Political Technique

We need to understand what ACIRRT is doing and why its technique is so powerful and influential. Australia At Work has agenda-setting influence precisely because it is such a bad piece of research. It assumes rather than proves its propositions, so that its recommendations appear self-evidently desirable. In addition, its recommendations are so sweeping, and contain such massively detrimental flow-on effects, that effective counter-arguments require considerable detailed research. Yet ACIRRT treats the issues with cursory single paragraphs. It astutely operates on the assumption that, regardless of the facts, if a proposition is continuously repeated in an apparently respectable manner, it will ultimately gain popular and political acceptance. In rebutting ACIRRT's arguments, therefore, supporters of workplace freedom can easily be put on the defensive.

ACIRRT seeks to justify a widely held view in the community that our working lives need to be centrally controlled to save us from feeling tired and overworked. We at this conference may understand the facts that make this proposition a nonsense. However, the ACIRRT agenda is likely to win political support from significant sections of the public, both conservative and non-conservative. Its success is already apparent.

Conclusion

In drawing to a close I want to return to what I believe is the heart of the issue. ACIRRT bestows academic respectability on an ideological marketing programme. It seeks to create a monopolistic position for itself and its partners in exercising central control over the working lives of Australians. Its does so on the false assumption that the workplace is the arena of a power-struggle exclusively between two parties.

I hope to have sufficiently demonstrated that ACIRRT's agenda, or parts of it, are highly likely to find political acceptance unless counter-arguments are advanced in a sustained and robust manner. The consequences of any substantial implementation of ACIRRT's agenda, particularly in the light of a new emerging economic paradigm, would be decreasing competitive capacity, rising unemployment, decreasing wealth creation and increasingly inequitable wealth distribution.