Penalty Rates

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GUEST OBSERVER
In the current review of Modern Awards before the Fair Work Commission, employers are challenging the level of penalty rates.
At the same time, the Productivity Commission says excessive penalty rates for Sundays reduce hours worked, mean unemployment is higher than it needs to be, and reduce options for businesses and consumers. It wants Sunday penalty rates in some sectors to be set at the Saturday rate.
A penalty rate for Sunday work was first implemented in Australia for working “unsocial” hours in 1919. The 1947 “Weekend Penalty Rates Case” expanded penalty rates to Saturdays, while Sundays were set at a rate of double time. Later decisions specified that workers would need to be compensated for the loss of opportunity for family life and social time resulting from weekend work.
More than 60 years on, employers argue the world has changed. It has, but many of the arguments employers make are not supported by the evidence.
Myth 1: Given extended trading hours, it’s no longer abnormal for people to work weekends. 
Most employees still do not work unsocial hours. According to the Australian Work and Life Index, 38% of workers work unsocial hours; only 32.2% of workers work weekends and 18.9% of workers work evenings after 9pm regularly. These figures include the 13.1% of workers who work both evenings and weekends regularly.
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Myth 2: It’s only young single people that work weekends.
While being single with no children is more common than other family types among these workers, they are not a majority: there are also many couples both with and without children, and sole parents.
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Women are also more likely than men to work weekends. HILDA data indicates that only 22% of male and 21% of female weekend workers were dependent students; in other words, 78% of all weekend workers were not dependent and pay their own bills.
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Myth 3: The disadvantages of working weekends are only bad for those who work very long hours.
Employers argue that the adverse effects associated with working weekends are only relevant to those who work very long hours, and that the days and times themselves are no longer relevant, either because people no longer engage in the activities which previous decisions attempted to protect, or because these activities can be made up on other days and at other times.
But those who work on weekends do so at the sacrifice of time with friends and family, time which cannot be simply made up through time spent at other times during the week. This is particularly acute on Sundays, which remain a time for spending time with family. In spite of claims to the contrary, the differentiation between Saturdays and Sundays remains relevant in modern Australian society.
In general, the recompense of penalty rates is the key reason for willingly working weekends; with far fewer doing so to meet their own flexibility needs. However, the experience of the Work Choices era, and the importance and power of employer expectation, does suggest that many employees would not, in the absence of penalty rates, be able to avoid weekend work due to fear of losing their jobs, and indeed employees being forced to work weekends for no extra pay seems the most likely consequence of removing penalty rates.
Myth 4: Those who work in industries that pay penalty rates are not low paid.
Many workers on penalty rates are among the low paid. According to the Australian Work and Life Index, 37.8% of workers who work weekends only and receive penalty rates rely on these to meet household expenses. This increases to 48.8% for those working both evenings and weekends, and 52.2% for Sundays only.
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Myth 5: Reducing or eliminating penalty rates would increase employment.
The empirical evidence for increased employment as a result of reducing penalty rates is non-existent. <a href="https://press.anu.edu.au/wp-content/uploads/2014/11/Paying-the-Penalty-The-High-Price-of-Penalty-Rates-in-Australian-Restaurants.pdf">Employer arguments</a> have been based essentially on economic theory, which is merely hypothesis in the absence of empirical confirmation. What may be relevant in terms of the impact of wages on employment is that none of the available empirical evidence suggests minimum wages have a significant effect on net employment, a point reiterated by the Productivity Commission.
While some studies do suggest a substitution effect, this would be a matter of balancing one set of employed workers against another – older workers versus youth. In the absence of minima the wages of those who are employed would be lower. However, a number of studies suggest no effect at all, and some suggest a positive effect.
Given the evidence, it is difficult to see any benefits likely to accrue from the abolition or reduction of penalty rates for employees, employment levels or greater availability of services to the public.
 
Ray Markey is director of the Centre for Workforce Futures, Macquarie University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/ray-markey-16292" target="_blank">here</a>.
 
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Myths about penalty rates and those who rely on them

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GUEST OBSERVER
Economists find it difficult to agree on the subject of exactly how penalty rates affect employment and business. There is a dearth of empirical evidence on the subject because constructing an experiment to test the exact role of penalty rates in employment or business viability would be near impossible.
Anecdotal evidence from some businesses in the hospitality and retail sectors supports Mr Frydenberg’s claim that they’re not opening on Sundays because of penalty rates, but the direct evidence is far from conclusive.
<h2>Do penalty rates reduce employment?</h2>
It is true that penalty rates can reach 200% for certain awards. Sunday premium rates depend on a number of factors, including the occupation grade of the employee, and whether or not they are employed on a casual or permanent basis.
Direct evidence on the employment effects of penalty rates, and whether any such effects are driven more by demand or supply of weekend work, is really very limited. Some researchers have concluded penalty rates reduce demand for labour; other experts are unconvinced.
On supply side, the employment effects of Sunday penalty rates are quite complex. For those who value weekend time for lifestyle, family or religious reasons, the incentive to work on a Sunday will diminish if penalty rates are reduced. However, many workers have limited options to substitute from weekend to weekday work in the absence of a Sunday wage premium. Some employees may actively seek weeken<a href="https://www.qtic.com.au/news/modern-face-weekend-work-%E2%80%93-report-fair-work-commission-penalty-rates">d</a> work for a variety of reasons.
Employment effects are likely to be stronger on the demand side, with penalty rates unarguably imposing additional wage costs on employers. Savings from lower penalty rates offer businesses the choice to employ more workers at the same costs, or the same number of workers at lower costs.
Whether employment would increase following a reduction in penalty rates, and by how much, depends on the balance of positive responses to lower wage costs among businesses, and the negative reactions of workers to lower remuneration. There is some potential for a market-determined wage premium to emerge in the absence of penalty rates to ensure that working on a Sunday remains attractive.
<h2>Do penalty rates cause restaurants to close?</h2>
Are we seeing higher rates of closure in the restaurant sector? And more pertinently, can these closures be attributed to the penalty rate system above other factors?
Of those businesses trading in June 2010 in the food and beverage services sector, ABS data show that 70.3% survived to June 2012, and 51.7% to June 2014 - the latter survival rate being 10 percentage points below the average for all industries. So yes, there are higher rates of closure in the restaurant sector.
However, this may reflect the greater “churn” among businesses in the hospitality and retail sectors more than the effects of penalty rates. Overall business counts have remained relatively strong over the last period.
<a href="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%208.50.57%20AM.png" target="_blank">Click to enlarge </a>
<img src="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%208.50.57%20AM.png" alt="">
Survival rates of businesses operating in June 2010 ABS Cat No 8165.0: Counts of Australian Businesses, including Entries and Exits, June 2010 to June 2014
It’s harder to find direct evidence to support the claim that penalty rates are the dominant cause of extensive restaurant business closures – if by “closing” we mean going out of business altogether, as opposed to simply closing on Sundays.
It appears Mr Frydenberg meant that latter – that restaurants and cafes were closing on Sundays, as opposed to closing down altogether. His spokesman said by email that:
"The Assistant Treasurer’s statement was primarily based on the findings of the Productivity Commission’s Draft Report in relation to the impact of Sunday penalty rates and the level of Sunday business activity; not the registration of businesses generally."
According to ABS figures, wages contribute more to the overall costs of doing business in the hospitality and retail sectors – averaging 43% of total retail business costs and 37% for accommodation and food services - compared with the overall industry average (28%).
A higher proportion of those wage costs are incurred at weekends and evenings, these being the periods of greatest demand for restaurant services. This does mean that penalty rates are likely to impose a greater cost burden on restaurants, cafes, bars and retail outlets relative to businesses in other sectors.
Penalty rates are likely to be more damaging during downturns in the business cycle, with lower consumer demand putting greater pressure on businesses in the hospitality sector who already work to tight profit margins.
A spokesman for Mr Frydenberg said that the Productivity Commission’s Draft Report makes several references to Sunday rates hampering business activity – notably on pages 483, 522, 250, 25 and 519.
He pointed to a statement from the Chamber of Commerce and Industry Queensland’s submission, which said:
"44% of (surveyed Queensland) businesses noted that they have decreased or substantially decreased the number of full time staff. Taken together, the results suggest that rising labour cost loadings are affecting business decisions about staffing hours and negatively impacting employment."
Mr Frydenberg’s spokesman cited evidence from a 2015 survey of 1000 restaurant and cafe operators conducted by Jetty Research on behalf of the Restaurant and Catering Industry Association, which found that:
"of those surveyed that didn’t open on Sundays and/or public holidays, 70% said that “this was because of penalty rates or an inability to trade profitably.”
However, this finding is based on responses from only 10% of the survey. Of the 90% of respondents in the same survey who stayed open on Sundays and/or public holidays, around half (51%) reported that they did so because of “increased profitability”, with one quarter (24%) reporting that Sunday opening made them less profitable. Of all respondents, 52% said they would employ more staff if penalty rates were reduced, and 42% said they would open additional hours.
The full response from Mr Frydenberg’s spokesman can be found <a href="https://theconversation.com/response-from-assistant-treasurer-josh-frydenberg-46075" target="_blank">here</a>.
<h2>Verdict</h2>
It is true that there is feedback from some restaurants and cafes that they are closing due to the high cost of Sunday penalty rates. However, even when you look at the restaurant and cafe industry’s own survey, only 10% of businesses surveyed closed on a Sunday. Of the 90% that remained open on a Sunday, more than half did so because they made a profit. Less than a quarter said penalty rates were reducing their profits. The evidence that restaurants and cafes are closing on Sundays because of prohibitively high costs is, at best, ambiguous.
Direct evidence of the employment and business impact of penalty rates is hard to come by. It is not possible to say for sure that penalty rates, above all other factors, are forcing restaurants and cafes to close their doors on a Sunday.
<h2>Review</h2>
The author of this FactCheck correctly notes that the evidence of the impact of penalty rates on employment and business operations in the food and beverages industry is limited in Australia.
There is some anecdota<a href="https://www.pc.gov.au/inquiries/current/workplace-relations/draft/workplace-relations-draft-overview.pdf">l</a> and qualitative evidence that shows for particular businesses, higher penalty rates have reduced employment. Some quantitative studies show that increasing labour costs are likely to lead to a reduction in the demand for labour but there is limited recent evidence on the direct effects of penalty rates on the demand and supply of labour over the weekend. Standard economic theory predicts that an increase in the wage will lead to a reduction in the demand for labour but the effects on the supply of labour are less clear.
The relationship between the survival of businesses in the food and beverage industry and pay rates is a subject on which more evidence is required.
Alan Duncan is director, Bankwest Curtin Economics Centre, Curtin University and can be contacted <a href="https://theconversation.com/profiles/alan-duncan-100759" target="_blank">here</a>.
Anne Daly is professor of economics at University of Canberra and can be contacted <a href="https://theconversation.com/profiles/anne-daly-184578" target="_blank">here</a>.
Both are authors for The Conversation
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Penalty Rates

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