Employees would be able to take public holidays at a different time with full penalty rates and negotiate for longer annual leave in lieu of pay rises under a wide range of proposed changes to Australia's workplace relations framework.

The Productivity Commission into workplace relations released its draft report on Tuesday, detailing a wide range of potential changes to the workplace relations laws, settled under the previous Labor government.
Commission chairman Peter Harris stressed that the changes were about repairing weaknesses rather than replacing long-standing protections for employees.

He said the minimum wage and awards should remain the same, as the Fair Work Commission's modernisation standards had worked well: "We've squeezed as much lemon as we can out of this."

Overall the commission found the system was working well, with few wage break outs, inflation not a problem, unemployment periods tending to be shorter and while there was more casual work, it was up only marginally since 1992.

Penalty rates for cafe, entertainment and retail workers on Sundays - usually double the rate of their base pay - could fall to the same level as Saturdays. This should be reviewed every four years, in line with other rates.

While workers were once compensated for working on Sundays because the community previously did not accept a seven-day work week was necessary, demand for weekend services had grown over the past few decades, with more women in the workforce, lower levels of church goers and longer shopping hours.

The commission expected employment and hours worked on Sundays to grow as a result.

Given the high levels of competition, consumers, not businesses would ultimately benefit from deregulated penalty rates, particularly "more convenient access to services and in some cases lower prices"

The commission however found serious flaws in the structure of the workplace umpire, the Fair Work Commission.

These included systematic biases of commissioners depending on whether they were drawn from employer or employee ranks.

"The appointment process for commission members is clearly flawed, and has resulted in inconsistencies between members' decisions," the Productivity Commission said in a statement. "This has raised questions about the fairness of the umpire."

Commissioners drawn from the union movement were more inclined to uphold unfair dismissal claims, Mr Harris said.

The commission also proposed a new model for smaller businesses to negotiate agreements around award rates with their employees, called "enterprise contracts". It found that unlike larger organisations, small businesses rarely engaged in enterprise bargaining because they found the concept "confronting".

Rules for creating enterprise contracts would be attached to the Fair Work Act.

Greenfield agreements - negotiated between new businesses and unions to represent their future employees - may be subject to a three-month cut-off, after which one or both could submit their final offer to the Fair Work Commission for approval or rejection.

By far its harshest findings related to the Fair Work Commission itself, which was crtiicised as lacking rigour in its labour market analysis and which was found to be poorly equipped as a tribunal for adjudicating on unfair dismissal claims.

While describing the web of protections for employees - often criticised as onerous and complex - it found that Australia "has one of the more light-handed suites of arrangements".

The Fair Work Commission itself, according to the Commission, was also structurally flawed and should be reworked to include a minimum standards division and a tribunal division. The minimum standards division would oversee changes to the minimum wage taking into account macroeconomic factors as well as the impacts of potential wage decisions on key sectors including, importantly, the unemployed.

The FWC was also often dominated by an "overly legalistic" approach to issues like wage regulation, rather than the merits of the matters before them.

Employers were sometimes forced to pay compensation for procedural mistakes, even when employees were at fault in unfair dismissal claims: "An employee may engage in serious misconduct but may receive considerable compensation under unfair dismissal provisions due to procedural lapses by an employer."

Employers who exploited migrant workers could also face larger penalties, the report said. While they currently could face fines or imprisonment for hiring migrants unlawfully, "an employer may still benefit from hiring and exploiting a migrant working in breach of their visa conditions" largely because they did not have to give them back-pay in line with their minimum entitlements under the Fair Wrok Act.

The Commission proposed to strengthen the Fair Work Ombudsman's role to monitoring employers and conduct more investigations and audits.