Australia: Leverage and the Collective Bargaining Equation

For an employer embarking upon collective bargaining, its understanding of the ‘bargaining equation’ is critical in developing its negotiation strategy. Put simply, when should the employer ‘hold’ or ‘fold’?

In the 1990s, the move toward enterprise based bargaining (and away from centrally arbitrated awards) provided parties with an opportunity to introduce arrangements tailored for the particular workplace. For employers, enterprise bargaining was more an opportunity than a threat.

Today, enterprise bargaining is more a threat than an opportunity. For most employers, the goal now is to reduce, as far as possible, the higher cost/lower control demanded of them in negotiations. At the same time, they are often stuck with an existing enterprise agreement with obligations which might have made commercial sense five or ten years ago but not today. And unlike other commercial agreements, enterprise agreements can only be replaced (by another one through collective bargaining) or terminated by the Fair Work Commission (but only in rare circumstances).

Any employer embarking on collective bargaining needs to carry out a fundamental analysis in order to assess its side of the bargaining equation – that is, the point at which it is prepared to agree to new claims (and wear the long term cost of such claims) or not (and face the cost of industrial action). To contextualise this: an employer need not make an enterprise agreement. The compulsion in the system is to bargain in good faith, but there is no requirement to agree. Given that genuine productivity based bargaining is illusory, employers usually ‘bargain’ in order to diffuse union leverage. That leverage may involve the right to take protected industrial action, other industrial action which is often difficult to monitor (such as ‘go-slows’), a public ‘anti-employer’ campaign and the capacity of the union to stir employee antipathy against the employer. Sometimes this leverage is realised through the taking of such action. Often it is not, and the employer baulks at the fear of it occurring.

Ultimately, the employer capitulates where it assesses that the cost of the union leverage (perceived or actual) outweighs the price of making the collective agreement. However, the former is usually short to medium term at best. The latter represents a long-term cost to the business which compounds year upon year. The great challenge for many employers is to make an informed assessment in this regard. It is not uncommon for the short-term cost (leverage) to be overestimated and the long-term price (being the deal) underestimated.

On the flipside, why does a union need to make a collective bargaining agreement? The collective bargaining process provides a union with an obvious opportunity to assume and grow its relevance in the workplace. It is a time to strengthen and grow the all-important membership base. Put another way, if the union is not active in its representation of members at this time, when will it be? The enterprise bargaining process provides a union with the theatre to play its drive for member solidarity and growth. The process is a vehicle for relevance. So for a union, the process is often as important as the outcome.

What is the union’s capitulation point? In turn, what is the employer’s leverage? The employer holds ‘the cheque book’. Its capacity to withstand the union leverage is a key ingredient of any shifting of the tide in the bargaining equation. Employees are loathe to lose pay as part of collective bargaining negotiations (which is an inevitable product of taking industrial action). Only the most hardened of workforces, often supported financially by the union, will be prepared to take industrial action beyond the short term. Pressure mounts on the union when they have been unable to deliver the deal that they have promised and employees have borne some ‘pain’ as a result. For the union, the benefit of continuing the campaign is outweighed by the cost of doing so.

Evaluating the bargaining equation is a key ingredient for any employer embarking on a collective bargaining process. This is particularly so for those who are faced with a challenging negotiating environment.

This article was written by Chris Gardner, Partner, Melbourne.

Herbert Smith Freehills is conducting a training program on ‘Enterprise Bargaining Essentials’ in Melbourne on Wednesday 17 April 2013. More information is available on our website.