New Zealand has a longstanding employment law contradiction. Laws designed to protect ordinary workers from arbitrary dismissal have inadvertently constrained firms when dealing with underperforming senior managers.
Most workers know the frustration of watching incompetent management drag down a team. Boards seem powerless to act swiftly. When considering dismissing an underperforming chief executive, directors must first develop a performance plan. They must consult extensively. Then monitor progress over months. All while the business hangs in the balance – along with workers’ jobs.
The case for reform is overwhelming. In 2014, the Productivity Commission singled out weak managerial capability as a major factor in our poor productivity record. Australia addressed this problem in the mid-1990s by excluding high-income earners from its unfair dismissal laws. The International Labour Organisation has accepted this exemption. New Zealand is only now catching up.
The bill excludes employees earning more than $180,000 from bringing unjustified dismissal grievances. This reform implements arguments advanced in the New Zealand Initiative’s 2021 research note, Nothing Costs Nothing, though at a lower threshold than we originally proposed.
In practice, the reform means employers can dismiss underperforming high-income earners by giving notice, just as workers themselves can quit on notice. That is a modest change affecting fewer than 4% of the workforce. High-income earners will still retain all other personal grievance rights, including protections against discrimination and harassment. They can even contract back into unjustified dismissal rights if they choose.
This reform is not “fire at will” as the unions argue. It is a targeted reform that preserves protections for ordinary workers while removing barriers to strengthening management. It will make boards more willing to act on poor performance. It will encourage firms to take chances on promising candidates for senior roles. And it will reduce the hidden costs of weak management that ultimately threaten workers’ job security.
The second reform addresses a different but equally important source of uncertainty – the blurred line between employees and contractors. Ask any Uber driver or freelance consultant about their employment status. You will likely hear a story of regulatory uncertainty that benefits no one.
The line between contractor and employee has been unclear for years. It is often litigated long after agreements were signed. This unpredictability confounds workers and businesses alike.
The bill’s new “gateway test” provides a safe harbour for genuine independent contractors. Five conditions must be met: a written independent-contractor agreement; the ability to work for others; no minimum-hours obligation or the ability to subcontract the work; freedom to decline additional tasks; and an opportunity to seek independent advice.
This new gateway test represents significant progress. It gives legitimate contractors confidence in their status. It helps firms and consumers benefit from innovative business models that create genuine flexibility.
But as the Initiative noted in its submission to the select committee, the gateway test’s drafting is unnecessarily narrow. It should cover both traditional contracting and modern facilitation models, such as rideshare and delivery platforms.
Under these models, work is performed for the end customer rather than the platform itself. This means typical platform arrangements may fall outside the gateway test’s requirement for a written independent-contractor agreement. A small definitional change is needed to ensure certainty for the full range of legitimate contracting arrangements in the modern economy.
Critics claim the gateway test invites worker misclassification. But the criteria guard against abuse. Genuine contractors will benefit. Sham arrangements will not.
The productivity imperative
As I argued in a recent column, chronic underinvestment in productive capital is a major drag on New Zealand’s productivity. We cannot remedy that deficiency overnight. But that makes it even more important that we address other constraints on productivity growth within our reach.
Every percentage point of labour productivity growth helps bring higher wages, better working conditions, and expanded opportunities. By improving management quality and reducing regulatory uncertainty for contractors, the bill makes it easier for firms to invest, grow, and employ.
Select committee scrutiny should refine the contractor gateway test. But Parliament must not be deterred by political noise from implementing reforms that will make our labour market fairer and more dynamic.
Prosperity is built on productivity. This bill represents an important step towards putting New Zealand back on the productivity growth path.
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