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Why trust and good faith in the employment relationship? The case of New Zealand Presentation to: Shanghai Institute of Foreign Trade By: Jamie Latornell, Academic Director (Management & Economics) Introduction The primary piece of legislation regulating employment relations in New Zealand is the Employment Relations Act 2000 (the Act) Passed into law on 2 October 2000 Amended in December 2004 Significantly different from its predecessors, the Employment Contracts Act 1991, and the Industrial Conciliation and Arbitration Act 1894 in that it explicitly incorporated the concepts of trust and good faith into the legislation 2 Structure of this presentation New Zealand – facts and figures Key provisions of the ERA Definitions of ‘trust’ and ‘good faith’ Review of the different legislated approaches to employment relations over the years in New Zealand Key features Outcomes Underpinning socio-economic/political ideologies Conclusion – why trust and good faith in employment relations? 3 New Zealand population Population: 4.1 million 80% of population lives in cities – 1.2 million in Auckland – 370,000 in Wellington – 367,700 in Christchurch Median age: 33.9 years European 69.8%, Maori 7.9%, Asian 5.7%, Pacific Islander 4.4%, other 12.2% 4 New Zealand labour force 2.13 million 10% in agriculture 27.3% in manufacturing 65% in services Unemployment = 3.7% Labour force participation rate Male 74.8% Female 60.2% 5 New Zealand government Parliamentary democracy General election held every 3 years – next one in 2008 Major political parties are: Labour party (centre-left) National party (centre-right) Minor political parties are: New Zealand First (centre-left) United Future (centre-right) ACT Maori Party Green Party 6 New Zealand legal system Based on English law, including traditions of the ‘common law’ Special recognition to Maori provided through the Treaty of Waitangi Special land legislation and land courts exist for Maori 7 New Zealand economy Gross Domestic Product (GDP) = US$94.6 billion (2005 estimate) 4.3% from agriculture 27.3% from manufacturing 68.4% from services GDP per capita = US$25,200 GDP real growth rate = 2.2% 8 New Zealand foreign trade (1) Major trading partners (exports/imports): Australia (19.95% / 19.56%) United States of America (13.73% / 12.17%) Japan (10.67% / 10.22%) People’s Republic of China (5.62% / 11.37%) United Kingdom (4.53% / 2.98%) 9 New Zealand foreign trade (2) Major goods exports: Dairy (18.87%) Meat (14.61%) Wood (6.35%) Machinery (4.93%) Aluminum (4.08%) Fruit (3.76%) Fish (3.72%) 10 Key provisions of the ERA (1) Section 3 The object of this Act is to build productive employment relationships through the promotion of good faith in all aspects of the employment environment and of the employment relationship 11 Key provisions of the ERA (2) Section 3 (continued) By recognising that employment relationships must be built not only on the implied mutual obligations of trust and confidence, but also on a legislated requirement for good faith behaviour By acknowledging and addressing the inherent inequality of power in employment relationships By promoting collective bargaining 12 Key provisions of the ERA (3) Section 3 (continued) To promote observance in New Zealand of the principles underlying International Labour Organisation Convention 87 on Freedom of Association, and Convention 98 on the Right to Organise and Bargain Collectively 13 Definition of ‘mutual trust’ (1) Interestingly, the ERA does not contain a definition of the term ‘mutual trust’ At least since 1985, New Zealand courts have begun to develop the concept of trust as a mutual obligation between the parties to an employment contract and have applied it as an implied term of all employment contracts Even so, the courts have not provided an explicit definition of ‘mutual trust’ 14 Definition of ‘mutual trust’ (2) In the absence of an express definition within the legislation or within court decisions, we must look to the plain and ordinary meaning of the words Therefore, a situation involving trust relations is one where: Both parties to the relationship are dependent on the other for the achievement of some result; and Both parties are at risk of loss if the result is not achieved An employment relationship clearly meets this definition of a situation involving trust relations 15 Definition of ‘good faith’ Section 4 The parties must deal with each other in good faith, which means: – Not directly or indirectly doing anything which will mislead or deceive the other party or is likely to mislead or deceive the other party Requires to be active and constructive in establishing and maintaining a productive employment relationship in which the parties are, among other things, responsive and communicative 16 When does the duty of good faith apply? Includes situations such as: Bargaining for a collective or individual employment agreement Any matter arising out of or in relation to a collective or individual employment agreement Consultation regarding the effect on employees of changes to the employer’s business Proposals by an employer which might impact on the employees 17 Why trust and good faith? Why has the New Zealand government chosen to: Mandate trust and good faith as integral parts of employment relations legislation? Attach these concepts to all aspects of the employment environment and of the employment relationship? In my opinion, there is a complex and interwoven set of economic, political and social forces which have produced this government action. 18 Approaches to employment relations legislation During its short history, New Zealand has had 3 distinct approaches to employment relations legislation The conciliation-arbitration approach (over 90 years – 1894 to 1991) The contractual approach (9 years – 1991 to 2000) The relational approach (2000 to present) Each approach has been based on a distinct socio-economic and political ideology 19 Conciliationarbitration approach Resulted from the Industrial Conciliation and Arbitration Act 1894 Described as an Act to encourage the formation of industrial unions and to facilitate settlement of industrial disputes by conciliation and arbitration A highly formalised and highly centralised approach to employment relations Built on four main features 20 Features of conciliationarbitration approach (1) If a trade union registered with the government they obtained ‘exclusive jurisdiction’ over a particular type of worker Eliminated competition between unions for members Compulsory arbitration was provided for the settlement of wage-fixing disputes, in exchange for strict restrictions on the right to strike or lockout Significantly reduced the incidence of strike action 21 Features of conciliationarbitration approach (2) ‘Blanket coverage’ of wage awards Once a trade union and an employer (or group of employers) reached a settlement, it was extended to all employers and employees in that particular industry or occupational grouping, anywhere in the country – Nearly eliminated wage competition between employers Compulsory union membership Dramatically reduced the need for trade unions to focus on the needs of their members 22 Ideology of conciliationarbitration approach (1) This highly formalised and highly centralised system of wage-fixing was coupled with a trade policy of high tariffs which were protective of the domestic economy (‘domestic defence’ Resulted in what has been termed a “wage-earners’ welfare state” 23 Ideology of conciliationarbitration approach (2) The conciliation-arbitration approach is consistent with a Keynesian socio-economic/political ideology which assumes: A market economy is not self-regulating and does not automatically result in an automatic, spontaneous and harmonious tendency towards a market-clearing general equilibrium The state should therefore play an active interventionist role in managing the economy in order to maintain full employment and stimulate economic growth The state also has a role to play in redistributing income in order to counter social inequity 24 Outcomes of the conciliation-arbitration approach (1) For a time, the outcomes were highly successful (1950s-60s) High level of worker protection – Through the comprehensive set of minimum wages and working conditions High level of economic growth – One of the highest levels of per capita GDP in the world High levels of equality, equity and egalitarianism within society – Through the redistributive effects of the wageearner’s welfare state 25 Outcomes of the conciliation-arbitration approach (2) Over time a number of negative outcomes accumulated (1970s-80s) Large numbers of small, inefficient operations processing imported raw materials for domestic consumption Ability of producers to pass wage increases along to consumers contributed to inflationary pressures in the economy Rigid wage relativities between industries and occupations were viewed as a barrier to productivity, income and employment, adversely impacting employers’ ability to adapt to a changing world economy 26 Emergence of a neoliberal ideology In the 1980s in New Zealand (as elsewhere) the Keynesian ideology was replaced by neo-liberal socio-economic/political ideology which assumes: An economy is always tending towards general equilibrium with the full employment of resources The state should therefore play a strictly limited role in managing the economy and redistributing income and wealth within society. Focus should be on maintaining: – Low inflation – Price flexibility in markets and – Minimal welfare state 27 Emergence of the contractual approach to employment relations Embedded within the Employment Contracts Act 1991 Described as “an Act to promote efficient labour markets” A highly decentralised, deregulated and informalised approach to employment relations Built on five main features 28 Features of the contractual approach (1) An employment relationship is a private contractual relationship between an employer and an employee Imbalance of power between employer and employee is irrelevant Individual choice of employers and employees in contractual arrangements is a key consideration, therefore there should be few restrictions on contractual arrangements 29 Features of the contractual approach (2) The state should refrain from intervening in labour markets other than to support fair market exchanges Unions are unwanted and unneeded third parties in employment relationships 30 Outcomes of the contractual/ neo-liberal approach (1) Significant shifts: From centralised to decentralised, enterprise-based wage-fixing From collective to individual employment relationships Increases in: Employer power Adversarial, litigious settlement of employment relations disputes Inequities in the redistribution of wealth Decreases in: Real wages and working conditions Continuing stagnation of the economy 31 Emergence of the relational approach Embedded within the Employment Relations Act 2000 Described as an act to build productive employment relationships A decentralised, but more regulated approach to employment relations Encourages cooperative and collaborative behaviours between employers, employees and trade unions Encourages collective bargaining but does not make trade union membership compulsory 32 Ideology of the relational approach Built on a ‘Third Way’ socio-economic and political ideology which: Attempts to combine the broad concepts of neoliberal economic management with an increased degree of state involvement in labour market policies, education, economic infrastructure development and research and development Assumes markets are largely self-regulating, but the state can intervene in some areas to increase economic growth rates and counter inequality 33 Conclusion (1) Why trust and good faith in the employment relationship? There is a complex and interwoven set of economic, political and social forces which have produced this government action – The neo-liberal/contractual approach did not produce sustained economic growth and instead contributed to increased inequities and divisions within society – Large portions of New Zealand society believed the neo-liberal/contractual restructuring of the government had gone too far and was morally and ethically bankrupt 34 Conclusion (2) – A significant driver is the emergence of a ‘Third Way’ socio-economic/political ideology within the political party which has formed the government – The decline in the presence of trade unions in the workplace and the increases in employer powers result in need for government to provide measures for employees to be protected from the actions of some employers 35