Fair Pay Agreements: How Labour can help people get on at work—not just get even

Despite calls from the Bank of England for workers to show wage restraint as inflation increases, the current cost-of-living crisis demands much greater urgency in creating the means for working people to lay claim to the value of what they do at work. As we argued in a recent paper for Progressive Britain, for too long governments of all stripes have relied on redistributive cash transfers to smooth over income shortfalls, rather than addressing the conditions and relations under which wealth is produced in the first place.

The challenge for Labour is how to rebalance power in the workplace after three decades in which worker interests have been undermined. Labour market institutions, the very bodies which mediate and enforce social partnership in competitor countries in Europe and elsewhere, have been severely weakened in UK over successive decades.

Keir Starmer and Rachel Reeves are right to set out an agenda based on shared prosperity, respect and security.  Delivering dignity for working people requires reshaping the landscape of labour relations in the UK economy. In particular, Labour needs to answer the question of how it will help people get on at work, and not just get even when things go wrong.

Collective bargaining is the traditional mechanism for balancing labour and employer interests at work. It remains the central means for doing so, with even the IFS recognising that addressing income inequality requires some form of mediation at work. Yet the latest statistics on trade union membership show that in 2021, just 1 in 4 people in the private sector were covered by a collective agreement.

Outlined in Labour’s recent Employment Rights Green Paper, plans to introduce Fair Pay Agreements (FPAs) provide a new approach to boosting social partnership in the UK. Modelled on current New Zealand legislation, FPAs focus attention on government-brokered compromises between employees and employers to raise standards in key areas of the economy, creating a floor below which pay and benefits cannot fall.


What is a fair pay agreement?

FPAs result from a formal negotiation process between employers in a given industry and worker representatives, establishing a set of minimum wage rates and terms of conditions in order to prevent the ‘race to the bottom’ that prevails in many sectors central to the contemporary economy. The process can be instigated by unions gaining the written support of either 1,000 employees or 10% of the workforce in a given sector, whichever is the least.

Where an agreement cannot be reached and fails two rounds of attempted ratification, New Zealand’s Employment Relations Authority (ERA) can step in and command one. In this sense, once the journey towards an FPA is instigated, it will result in an agreement, with most taking between nine months and a year to complete.

Each FPA becomes secondary legislation—meaning that breaches break the law rather than a contract. The law is policed and enforced (through penalties) by the ERA’s labour inspectorate—a role that could be assumed in the UK context by organisations such as ACAS, the Low Pay Commission or the Director of Labour Market Enforcement. In the New Zealand case, each FPA lasts for an agreed period of three to five years, after which it can be renegotiated.


What are FPAs doing for New Zealand?

FPAs anchor a broader set of reforms in New Zealand to enable workers to lay claim to value. Recognising the limitations of workplace bargaining in many quarters of the contemporary economy, and accepting the context of low private sector union coverage and density after decades of government attacks, FPAs pave a more practical path for workers in hard-to-organise sectors to extract concessions from employers. In so doing, the reforms promote precisely the shared prosperity, reward and security identified by Starmer as for the foundations for Labour’s revival.

Initially, the rollout of FPAs will be focused on priority areas to be determined by the New Zealand government. Social care is one such area, a focus emulated by Labour’s proposals in the UK. Care is typical of a sector where the tendering process compels firms to compete on cost, forcing down workers’ pay and conditions. Procurement policies could be harnessed to encourage uptake of FPAs in such sectors, incentivising providers to compete on the basis of quality rather than on the backs of workers.

FPAs provide a basis to raise standards beyond the current legislative minimum wage within economic settings hard-to-reach by conventional collective bargaining. The initial targeting of key industries enables the complementary introduction of wider reforms around union access rights and collective bargaining elsewhere in the economy.

In this way, FPAs act as a basis for workers and their unions to campaign for even better standards beyond the minimum floor. In a national context where union protections and rights are very weak, with the capacity to enter and organise workplaces either non-existent or very constrained, New Zealand’s FPAs permit unions access to address employees on issues relevant to the agreement. Whilst this must be the primary purpose of union visits to workplaces, it is also permitted to discuss secondary issues too. Unions are not allowed to strike to achieve an FPA, but under the terms of the legislation are able to take industrial action to ensure the conditions of an agreement are delivered by employers.


Fair pay and productivity

Confronted with claims that the extension of bargaining would return the country to the seventies, the Ardern government argued that, on the contrary, a more coordinated approach to pay and conditions would face up the future by steadying the shift to new skills and sectors sparked by automation, AI and the green transition.

In particular, the introduction of a floor preventing race-to-the-bottom wages and standards provides a means of overcoming the longstanding productivity challenge confronting economies like the UK and New Zealand. FPAs will, the government hopes, incentivise investment in skills, training and new technology rather than cost-cutting, and drive industry to engage in new product lines and value streams in order to compete domestically and internationally.

Whilst this approach was inspired by the tripartite compacts between labour, capital and the state found in European countries, the policy was constructed in such a way as to respond to the specificities of New Zealand’s industrial relations.

Whilst developed to respond to the specificities of New Zealand’s industrial relations, FPAs are inspired by the rich tradition of tripartite compacts between labour, capital and the state that underpin the most successful European economies. At the international level, the principle of sectoral bargaining has received support from the OECD, suggesting that industrial or occupational agreements produce higher wages, better conditions and improved productivity when compared to those struck at a workplace-by-workplace level.

However, as Sarah O’Connor notes in a recent Financial Times article, the same report also noted the necessity of underpinning this with the legal capacity for workers to also bargain at a firm level in pursuit of specific gains. In this respect, FPAs in the New Zealand context represent part of an toolkit of instruments and processes.  Independently and collectively, they contribute towards an economy where unions grant workers a greater voice in the workplace and workers have the power and agency to command better pay and conditions through a range of means matched to their specific circumstances.

In developing further its FPA policy for the UK, the Labour Party should also keep in mind the importance of such a pluralistic approach to social dialogue, in order to capture the complexity and diversity of contemporary working life.

This piece is part of our exploration of the future of work. See Harry and Andrew’s paper Labour and the Past Present and Future of Work here.