THE Australian Industry Group has applied to cancel Christmas and New Year's Day penalty rates for workers, arguing companies shouldn't have to pay staff extra - despite the NSW government declaring them public holidays.

The employer group has argued to the Fair Work tribunal that penalty rates should only be paid to staff working the substitute holidays - the following Monday and Tuesday - as Christmas, Boxing Day and New Year's Day fall on a weekend.

But the government yesterday defended its right to decide which days were public holidays, and said workers should be paid accordingly.

''Any attempt to attack penalty rates will tilt the balance too far in favour of corporations and big business and away from working families,'' the NSW Minister for Industrial Relations, Paul Lynch, told the Herald.

It is the first time employers have dealt with the Christmas season under the federal government's full Fair Work system.