He's speaking in the context of state interference with the market. "Playing business and labor off against one another" is used to generate public support for state interference. In a theoretical pure capitalist market, state interference would be minimal beyond an overarching protection of the sustaining institutions of the market. Conflicts between workers and employers would obviously continue, but the state would be expected to neither intervene nor seek advantage. (IMO this expectation is unrealistic.)
As to the "separation between worker and employer", that's really dependent upon ownership more than anything else. A coöp, for example, would not have such a separation, because the workers are the owners.