Breaking through – innovative strategies to reduce labour costs

Low commodity prices look as though they are here to stay into the medium term. Right across the spectrum of Australia’s resources sector are operations which were conceived, financed and commenced during an unprecedented commodities boom.

Management at these operations – and the businesses that service them – now confront the reality that a step change in the cost of production is required. Costs of production, including labour costs, are being scrutinised with increasing focus.

With labour costs existing within a heavily regulated statutory framework, it is a significant challenge to halt their growth, much less secure material reductions.

The task is not impossible though, and increasingly there are examples where operators and contractors have been able to achieve meaningful reductions.

Four key pathways should be considered, with each having the capability to deliver meaningful gains.

1. Are you using the tools already available?

Modern awards and enterprise agreements by their nature interfere with managerial rights. Inevitably, there are areas where the minimum standards they contain reduce the available options for change.

But this does not mean every option to produce cost reductions should be suspended pending, for example, the negotiation of the next enterprise agreement. 

Businesses should:

• Question custom and practice at the worksite very carefully. Do work practices or customs that limit or hinder productivity really arise from the applicable instrument? A thorough audit nearly always identifies practices that exist simply because ‘that’s the way it’s always been done’. Examples include reducing or changing how overtime is worked and the use of contractors and casuals .
• Where an audit identifies changes, assertively navigate consultation and dispute resolution procedures to implement change.
• Where dispute resolution procedures take the matter out of management’s hands and into the Fair Work Commission (FWC), use this as an opportunity to make the case for change.

2. Do you need to tolerate an outdated agreement?

Situation for employees

The law allows for variation of enterprise agreements, even before their nominal term expires. Whilst employee agreement is necessary, a simple majority in an employee ballot is all that is required.

Hence, a clear and coherent explanation of business rationale for change via direct employee communication is encouraged. If the environment has changed so significantly since the enterprise agreement was entered, employers are able - and should – clearly explain to their employees that its terms are no longer sustainable. Sustainable operations are in the interests of both employers and employees.

The employer can put variations to the agreement to an employee ballot at any time and on as many occasions as necessary. There is even scope to design the ballot process in whatever way best suits the business. If the ballot succeeds, the FWC must order the variation of the instrument, even if benefits are reduced, subject to employees remaining better off than the modern award.

Situation for contractors

‘Transfer of business’ provisions in current legislation mean that the enterprise agreement of an outgoing contractor will transmit to a new contractor with employees who take up work with a new contractor, where the new contractor uses some of the same assets to perform the work. However, the new contractor can choose not to employ the employees because they will bring the enterprise agreement with them.

If an incumbent contractor is unable to achieve a variation of their enterprise agreement to make them competitive in the market, there is a risk that the principal will terminate the contract and engage a competitor. The employees of the first contractor cannot be certain that they will be offered roles with the new contractor. 

This means it is in the interests of employees to agree to sensible variations to ensure their employer remains competitive and this can be used to help make the case for a vote in favour of reducing rates to remain competitive.

3. Clever bargaining

Where an enterprise agreement is coming to the end of its nominal term, there is an opportunity to re-negotiate a replacement that embodies significant cost savings. To  achieve real change:

• Have a detailed knowledge of the system so that the leverage points can be identified in advance.
• Thoroughly prepare. Devise a plan well in advance and stick to it closely.
• Clarify the outcome you are seeking. Particular cost reductions you need should be thoroughly investigated and understood.
• Leadership and employee engagement are critical. Protected industrial action will be available and you should plan to minimise its impact.

Finally, a key fact to remember is that agreement is voluntary.

4. Can I terminate expired enterprise agreements which are unsustainable?

Yes, there has always been a power enabling the FWC to order the termination of agreements which have passed their normal expiry date. Although used sparingly, in many respects this is because very few parties have sought such orders, hardly surprising in the boom environment of recent years.

This is changing and in the resources sector the most recent development has been the tribunal’s decision to terminate an enterprise agreement applying to Peabody at its Coppabella and Moorvale mines. The company had insourced work from Sedgman, making Sedgmans’ enterprise agreement binding on Peabody. 

Negotiated at the height of the boom in 2011, the tribunal found the change in the state of the coal industry since then to be a relevant factor. According to the decision:

Another relevant factor is the change in the state of the coal industry since the Sedgman agreement was negotiated in 2011. The price of coal has fallen during that period by more than half. This has placed pressure on the whole industry in Australia, including the Coppabella and Moorvale Mines. Thousands of coal workers have lost their jobs, and the labour market has been completely transformed.

The FWC also highlighted that it was never the intention for agreements to operate in perpetuity and that they have “finite nominal life”.

Make the change

Australia’s prescriptive and, in many respects, inflexible industrial relations system is a reality of doing business here but it can be confronted in a methodical way and gains in the form of reduced costs are indeed possible. Embarking on the analysis and formulating a plan has no downside. Indeed, clear communication of business realities to all stakeholders, in the context of management’s real commitment to achieving change, has its own benefits.

This article first appeared in National Resources Review.