Employment Law Change Needed To Improve Productivity

New Zealand's productivity growth is being hampered by employment protection laws that constrain boards and business owners from firing poorly performing senior managers, warns a report from The New Zealand Initiative.

In Nothing Costs Nothing: Why unjustified dismissal procedures should not apply to the highly paid, Initiative chair and senior fellow Roger Partridge found strong arguments for New Zealand adopting an Australian-style carve-out of high-income earners from the unjustified dismissal provisions of the Employment Contracts Act 2000.

“No one wants vulnerable workers being unjustifiably dismissed. But by constraining firms from getting rid of underperforming bosses, laws introduced to protect the jobs of ordinary workers may be placing those jobs at risk,” says Partridge.

“The difference between C-grade and A-grade managers may very well be the difference between business success or failure.”

Even if not placing jobs at risk, the report finds that by restricting firms from dismissing underperforming senior managers, unjustified dismissal laws constrain firm performance and productivity, and therefore workers’ wages and overall wellbeing. This finding is supported by a 2014 Productivity Commissions report singling out low managerial capabilities as a cause of the country’s poor productivity record.

“Australia deals with this problem by exempting most high-income earners from that country’s equivalent of our unjustified dismissal laws. New Zealand should do likewise,” says Partridge.

In 2017 a private member’s Bill proposed introducing Australian-style flexibility but was voted down after concerns were expressed about the Bill’s complexity and the low, $150,000 threshold at which the high-income exemption was triggered.

To address these concerns, the Initiative recommends an initial threshold of $250,000, the starting salary for Ministers of the Crown, who serve at the Prime Minister’s pleasure and can be dismissed without cause.

“This threshold would capture less than the top 1% of income earners, while capturing the CEOs and senior managers whose roles have the most significant impact on productivity,” say Partridge.

Regulations would permit the threshold to be adjusted annually to track increases in New Zealand’s median income.

“This report points to an opportunity for a win-win reform for firms and workers - and for society,” concludes Partridge.

Read more: Nothing Costs nothing: Why unjustified dismissal procedures should not apply to the highly paid is available here.

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