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The Health & Safety Reform Bill & the affect on businesses in New Zealand

Introduction

The Health and Safety Reform Bill (The Bill) is expected to come into power in the second half of this year (2015). The Bill is a result of the Pike River disaster (2010) and is the “biggest change to health and safety in 20 years” Hon. Simon Bridges (MP).  Mr Bridges claims in his press release “Good health and safety is good for business.  It is an investment in improved productivity.” In this essay I will critically analyse the topic statement and supporting literature:

“The health and safety requirements to be imposed on directors in the wake of the Pike River disaster are so onerous and uncertain, and the penalties for breach so severe, that they will destroy more value for New Zealand than they create.”

Firstly, I will highlight the key change to the legislation, and how this is going to effect directors, overlaying the practicalities of implementing the legislation. Secondly, I will highlight the penalties and discuss their impact. Thirdly, I will analyse the costs and benefits of the new legislation and look to test the supporting literature and government guidance. Finally, I will conclude my analysis and findings.

Key Changes & Practicalities 


From the risk management briefing prepared by Chris Pearce of Risk Management Ltd to the law industry in 2013 one of primary changes from the existing legislation is the introduction of the term ‘PCBU’, which is adapted from the Model Act, taken from Australian health and safety regulation (Peace, C. 2013).

The Model Act introduces the concept of a “person conducting a business or undertaking” or PCBU. A PCBU is defined as, and has as a primary duty of:

(1)   A person conducting a business or undertaking must ensure, so far as is reasonably practicable, the health and safety of:

(a) Workers engaged, or caused to be engaged by the person; and

(b) Workers whose activities in carrying out work are influenced or directed by the person, while the workers are at work in the business or undertaking.

(2) A person conducting a business or undertaking must ensure, so far as is reasonably practicable, that the health and safety of other persons is not put at risk from work carried out as part of the conduct of the business or undertaking.  (Law Society 2014)

This change has been brought about primarily to “increase the safety of contractors, especially those in the forestry industry" – Hon. Simon Bridges (MP). I argue the logic here is sound, the legislation is looking to put the onus on the end to end supply chain, rather than the managers or directors who are directly responsible for their subordinates. The difficulty in implementing PCBU will be in deciding who is ultimately responsible.  For example, according to the Ministry of Business Innovation & Employment (MBIE) the following are all examples of PCBUs in a shopping centre.

The owner of a multi-tenanted shopping centre, the manager of the shopping centre, each of the businesses operating from shops in the shopping centre and those carrying out ancillary activities such as cleaning, security and shopping trolley collection.

In the MBIE definition of a multiple PCBU environment, it would be feasible to anecdotally assume the potential difficulty in finding a single PCBU guilty of an offence. As there are multiple PCBU’s in any one area there would be an incentive for a particular party to pass the blame up or downstream, depending on case law. I refer back to the topic question in relation to the uncertainty that the new legislation will create, where does the responsibility start and where does it stop? The uncertainty which is evident will create incentives and drive motivations to limit ones exposure. As a result of the penalties being so severe, entities would be prepared to put significant resources to defend their names and to also avoid the fines.

Risk Management Ltd state in their briefing to the law society, case law available from the United Kingdom and Australia will be used to decide who is ultimately responsible for the infringement. That being said, the previous ability to outsource the responsibilities to contractors, lowered the threat to Directors and made it arguably clearer as to who was the entity responsible. Clearly, this created undesirable results, seven deaths and 137 injuries since 2011 at ports around the country are testament, (CTU, 2014). Arguably, it was easier to identify the responsible party.  I propose having multiple PCBU’s for any one workspace/worksite will lead to disputes and litigation that will increase the cost of doing business, at least initially. Over time with more New Zealand based precedents becoming available the application of the law will become less costly. 

Whilst a three million dollar fine may not seem a lot to a large listed organisation, the potential damage to their reputation could far outweigh the penalty of conceding. The subsequent legal proceedings as a result of the uncertainty and the onerous nature of the penalties could destroy more value than they create. Inversely the fear of retribution will likely entice organisations to comply, over time. The rush to comply will cause an initial cost outlay as per my thesis. The benefits of Health and Safety reform are not linear, and will be quantified in the long run with costs primarily worn in the short run. The majority of the current literature and government guidance is focused on the long run benefits and ignores the constraints placed on organisations and directors during the implementation phase.

The implementation of the PCBU health and safety requirements will be unclear between industries and will lead to organisations doubling up in order to comply. For example a contractor who contracts to multiple organisations may be encouraged to purchase their own personal protection equipment (PPE) in order to be efficient and appealing to potential employers. Whereas the directors of an organisation which uses contractors will likely be failing in their duties if they do not have the appropriate PPE available on demand to contractors, thus an increase in the cost of doing business and increases in inefficiencies. 

Penalties & Their Impact

The severity of infringements have been split into three categories with penalties ranging from up to a $3 million fine for a corporate and five years in prison for an officer, down to a $50,000 fine for an individual worker.

Category 1 Reckless conduct: applies to a person who has a health and safety duty and, without reasonable excuse, engages in conduct that exposes an individual to a risk of death or serious injury or illness, and is reckless as to the risk. The maximum penalty for an individual PCBU or officer is $600,000 (or $300,000 for an individual who is a worker or other person) or five years’ imprisonment, or both, and for a body corporate is $3 million (McVeagh, Russell 2014)

The impact on directors of the increased penalties will likely have a series of run on effects. Before a director takes on the responsibility (especially in high risk areas such as mining, fisheries, ports and forestry) directors will likely demand the businesses either have good health and safety processes or  good insurance, or both. Currently, directors and officers can obtain indemnity insurance through the likes of Vero Insurance. According to Vero:

 “coverage is provided for:

  • The costs of personal legal representation incurred by individual directors and officers in the defence of any civil or criminal proceedings.
  • Settlements by or judgments, including claimants costs awarded against directors and officers where no indemnity is given by the company” (Vero, 2014).

Clearly, as the exposure to directors increases by way of increased penalties, the cost of insurance will increase, all things held equal. This supports the thesis statement that costs will increase at the start of the health and safety reform and will likely decrease overtime as the benefits of better practices lead to less injuries and lower insurance costs over all.

 Category 2 Failure exposing to serious risk: applies to a person who fails to comply with their health and safety duty, and the failure exposes an individual to a risk of death or serious injury or illness. The maximum fine for an individual PCBU or officer is $300,000 (or $150,000 for an individual who is a worker or other person) and for a body corporate is $1,500,000.

 One of the seemingly unavoidable traits of insurance is moral hazard. Directors may hide behind their insurance cover and ignore the increased penalties, as officers and directors maybe covered by their employer there may not be a perceived increase in personal risk. Directors and officers are regularly incentivised by short term key performance indicators (KPI). The $300,000 fine may be of little concern if the insurance company will pick up the tab, and he/she has short term KPI’s to meet in order to achieve a bonus or milestone target. This was evident in the Pike River Disaster, coal prices were waning and officers needed to hit performance milestones in order to be remunerated as they felt they deserved. (Panckhurst 2012)  My argument here is, the maximum penalties have increased, yes, but who actually ends up paying the penalty, is the increase in premiums enough to change behaviour? The liability for the insurance companies has merely increased, which they will recoup through higher premiums. Directors may feel indifferent, and view this as a cost of doing business.

Category 3 Failure: applies to a person who fails to comply with their health and safety duty. The maximum fine for an individual PCBU or officer is $100,000 (or $50,000 for an Individual who is a worker or other person) and for a body corporate is $500,000.

The primary responsibility is on the directors and officers of the organisation, as they are deemed to be in the best position to make positive changes to health and safety (MBIE 2013). The issue with an uneven responsibility distribution is people will view their responsibilities differently. Whilst the Health and Safety Reform Bill makes provisions for non-compliant subordinates, there will likely be occurrences where subordinates push back to the implementation of health and safety reform as the penalties may be perceived as of less value than the benefits of the status quo.  Directors and officers will have to address the cultural issues as well as their compliance obligations.  

Cost Benefit Analysis

The Department of Labour (DoL , 2014) outlined a summary of the direct and indirect benefits from improved health and safety regulation from multiple bodies of academic research as follows:

Whilst in the long term I agree with above the findings, I argue that there are short and long run effects that have been ignored. In the short term, the insurance costs for directors will likely increase as their liability has increased as shown by the increased penalties (Vero, 2014). In the long run, however, as the realisation of the health and safety plans come to fruition there will be, all going well, less injuries which will result in lower insurance costs over time.

Fig 1 shows the relationship between the costs and the benefits over time, of health and safety

reform.

 

   

 

 

 

 

 

Again, however, as the number of cases increase, precedent will be set, speeding up the dispute timeframe. As the health and safety initiatives begin to deliver safer work places, litigation will reduce over time. One of the new powers is for Worksafe NZ to be able to give on the spot fines without prior warning (Lane Neave, 2014). MBIE noted that not being able to issue spot fines led to few fines being issued, another example of costs which will likely increase in the near term  (MBIE,  2014).  The DoL argues health and safety reduces the production time. Once again this summation ignores the economies of learning and the down time associated with staff training, committee establishment and the additional resources companies must provide their workers in order to comply with the Act.

A graduated integration to the new legislation is the most sensible approach. The Financial Markets Authority (FMA) has demonstrated this with the implementation of the Financial Advisers (Act 2008)

 The FMA is a government agency charged with regulating the financial markets.  The Financial Advisers Act (2008) came in to force in response to a different type of disaster to the Global Financial Crisis. The FMA was given powers of regulation and the ability the enforce penalties much like that of Worksafe NZ. However, they worked with industry, releasing guidance notes on best practice and gave businesses time to adjust to the new regime. If Worksafe NZ is rigid in its approach there will likely be resistance and lobbying from the industry. 

Conclusion:

A graduated enforcement approach by the regulatory bodies will assist in encouraging the adoption of the new regulations, as the Financial Markets Authority has demonstrated with the Financial Advisers Act (2008).  If the Health and Safety Reform Bill is enforced to the full extent of the Acts powers from the beginning, without sufficient guidance clarifying the underlying uncertainties, the Act runs the risk of being contested; due to industry discontent as a result of the severity of the incumbent penalties.

“The health and safety requirements to be imposed on directors in the wake of the Pike River disaster are so onerous and uncertain, and the penalties for breach so severe, that they will destroy more value for New Zealand than they create.”

The topic question, has a linear focus, as does the Department of Labours (DoL ,2014) summation of the international academic research, supporting health and safety reform. The implementation of the new Health and Safety Reform Bill, and the costs derived from its enactment; ought to be thought of as diminishing over time, before reaching a steadier state (Fig1). The benefits of the new legislation are inverse, increasing over time. Therefore, in the short term, the new requirements will destroy more value than they create. In the term long, the benefits to workers and overall process improvement, will generate greater efficiencies than the costs imposed.

Articles

Bridges, Hon Simon(2014). Press Release: Health and Safety Reform Bill introduced. Retrieved from: http://www.beehive.govt.nz/release/health-and-safety-reform-bill-introduced

CTU, (2014) Council of Trade Unions, Press Release: CTU tells select committee to make workplaces ……safer. Retrieved from:http://www.scoop.co.nz/stories/PO1411/S00055/ctu-tells-select-committee-to-make-workplaces-safer.htm

Vero, (2014) Indemnity Insurance – Directors and Officers. Retrieved from: http://www.veroliability.co.nz/dirvz/liability/liability.nsf/Content/Products_DirectorsAndOfficersLiability_Policy

References

DoL, (2014) How Health and Safety makes good sense. Retrieved from: http://www.dol.govt.nz/publications/research/good-sense/good-sense_05.asp   

Financial Advisers Act (2008) Retrieved from: http://www.legislation.govt.nz/act/public/2008/0091/latest/DLM1584202.html

Financial Market Authority (FMA, 2014) Corporate Governance in New Zealand Principles and ……Guidelines. Retrieved from:

http://www.fma.govt.nz/assets/Report-and-Papers/Consultation/Corporate-Governance-in-New-Zealand-Principles-and-Guidelines-Consultation.pdf

Health and Safety Reform Bill. Retrieved from:http://www.legislation.govt.nz/bill/government/2014/0192/latest/DLM5976660.html

Lane Neave. (2014) Health and Safety Reform Bill: Are you Ready? Retrieved from: http://www.canterbury.ac.nz/hr/docs/WPL_HealthandSafety1.pdf

Law Society, New Zealand, (2014) A summary of the new workplace safety regime: Retrieved from:  http://www.lawsociety.org.nz/lawtalk/lawtalk-archives/issue-841/a-summary-of-the-new-workplace-safety-regime

Peace, C. (2013). Everything changes, nothing changes? The likely effect of new health and safety ……legislation on building and construction organisations. Paper presented at the Building & ……Construction Law conference, 2013, Auckland, NZ. Lexis Nexis.  Retrieved from: .http://www.riskmgmt.co.nz/images/general/RML_2013_WP0134_Everything_changes,_nothing_changes_NC.pdf

MBIE, & IoD. (2013). Good Governance Practices Guideline for Managing Health and Safety Risks (Guidance Note DOL 12371). Wellington, NZ: Ministry of Business, Innovation and Employment; Institute of Directors of New Zealand Inc. Retrieved from http://osh.govt.nz/, 30 ……April 2013 Retrieved from: ……http://www.acc.co.nz/PRD_EXT_CSMP/groups/external_ip/documents/guide/wpc134250.pdf

McVeagh, Russell, (2014) Health and Safety Reform Bill introduced. Retrieved from:  http://www.russellmcveagh.com/Publications/ViewPublication/tabid/176/Title/health-and-safety-reform-bill-introduced/pid/282/Default.aspx

Panckhurst, G., Bell, S., & Henry, D. (2012). Royal Commission on the Pike River Coal Mine Tragedy (Volume 1). Wellington, NZ. Retrieved from:www.pikeriver.royalcommission.govt.nz, 6 November 2012

Filed under General \ Jeremy Sullivan

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