The federal government's sweeping review of Australia's workplace laws will put penalty rates, pay and conditions, union militancy and flexibility under the microscope.

A leaked draft of the terms of reference for the Productivity Commission inquiry into the Fair Work Act, obtained by Fairfax Media, reveals the inquiry will examine the act's impact on unemployment and under-employment, productivity, business investment and the ability of the labour market to respond to changing economic conditions.

The number of working days lost to strike action, pressures on small business, employers' flexibility to bargain with their employees on issues such as working hours and the impact of red tape on business will be considered.

The inquiry is framed around the need to maintain ''fair and equitable pay and conditions for employees, including the maintenance of a relevant safety net'', but the broad scope of the inquiry will open the door to warnings from Labor and the union movement that the Abbott government plans to impose a WorkChoices-style system of individual contracts.

The inquiry will be launched amid a growing chorus of criticism from government backbenchers about the impact of penalty rates on business.

On Wednesday, Treasurer Joe Hockey refused to directly address penalty rates but said ''anything we can do to free up the labour market within the framework of what we promised at the last election is going to be a positive step forward''.

The review was a pre-election promise for the Abbott government and was due to be launched by March 7, but was delayed until after the March 15 state elections in Tasmania and South Australia, and possibly until after the WA Senate election on April 5 amid fears in the Abbott government it could be used by Labor and the union movement to mount a scare campaign.

The terms of reference, which are yet to be finalised and have not been signed off by cabinet, are carefully framed to ensure any recommendations ''maximise outcomes for Australian employers, employees and the economy, bearing in mind the need to ensure workers are protected, the need for business to be able to grow, prosper and employ and the need to reduce unnecessary and excessive regulation''.

It comes alongside the government's decision to launch a wide-ranging royal commission into the union movement, re-establish the construction industry watchdog and its attempts to push modest changes to Fair Work laws through the Parliament.

The draft says the commission will be asked to report back to government in April 2015. The next federal election is not due to be held until August 2016.

Senior officers of the federal and state bureaucracies will hold a phone hook-up next week to discuss the draft terms of reference, which was distributed earlier this week to the states by Employment Minister Eric Abetz's office.

Senator Abetz said on Friday that review would be thorough and broad but refused to spell out its scope.

''We're not in a position to pre-empt what's going to be in the terms of reference other than to say we did promise a comprehensive, broad review of laws,'' he told ABC radio.

ACTU president Ged Kearney said the government appeared to be ''putting the entire workplace relations system on trial''.

''Everything is up for grabs: awards, penalty rates, enterprise bargaining, protection from unfair dismissal. The inquiry means that all the elements of WorkChoices that people hated are back on the table, including individual contracts,'' she said.

''It confirms that the Abbott government is determined to weaken the industrial relations system that protects Australian workers and is part of their overall plan to undermine their take-home pay and decent standard of living.

''So much for Tony Abbott's pre-election promise not to attack workers' wages and conditions.''

Opposition workplace spokesman Brendan O'Connor accused the government of attempting to ensure ''its attack on workers' pay and conditions is hidden'' until after the state elections. ''Tony Abbott knows workers will lose as a result of his Productivity Commission review, that's why details are being kept secret until those elections are run and won.''

with AAP

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