Legal Opinion: Proper oversight needed of employment contracts

It is highly likely that many private sector pay cuts ‘agreed’ by employees in recent years were implemented in a context where the employees may have felt they had no other option, given the economic environment


Another week, another call for employment contracts to be ripped up. Since 2008, controversies about payments made under employment contracts have stoked considerable public unrest, whether in the public, private or not-for-profit sector.

The controversies tend to have similar features. Someone is perceived to be earning too much. Something goes wrong (a business fails; the State coffers are bare). The cries to rip up the contracts go out.

Contract law is underlain by the ideas that the parties should bargain freely, should not be under undue influence or pressure and should come to a mutually beneficial arrangement. The great labour law writer, Otto Kahn-Freund, writing in the 1970s, however, referred to individual employment contracts as a “great legal fiction”.

By this Kahn-Freund meant that in the employment sphere, there is generally a significant inequality of bargaining power; the employer, typically, has great power (in terms of resources and information) and the employee tends to have little, if any at all. There are some exceptions (think of top-tier professional footballers) but these are few and far between.

Kahn-Freund argued that the power imbalance should be redressed by State support for strong collective bargaining (via trade unions). This is something that is not readily an option for many Irish employees, given our weak collective bargaining laws, although the Government plans to legislate in this area shortly.

However, legislation does govern employment contracts in many areas; a contractual term that discriminates on gender grounds, for example, or that forces someone to work in breach of health and safety rules, cannot be enforced.

The core of the employment contract is that in general, terms agreed cannot be altered unilaterally by one side to its benefit or to the detriment of the other. Pay cuts, for example, cannot be simply “imposed” on unwilling employees. In many cases, actually enforcing these rights can be difficult for employees.

It is highly likely that many private sector pay cuts “agreed” by employees in recent years were implemented in a context where the employees may have felt they had no other option, given the economic environment.

In the public sector, of course, things are slightly different. Here, the State, as the employer, can impose changes to terms and conditions via legislation.

Hence, we have seen the Financial Emergency in the Public Interest (Fempi) legislation, which has been the basis on which public sector pay cuts have been implemented. Similar legislation has been enacted in other countries badly affected by the crisis. One such piece of Spanish legislation was referred to the International Labour Organisation (ILO) in 2011.

The Spanish government had rushed through emergency legislation, deemed necessary, it said, to secure the public finances, which replaced a collective agreement made with the trade unions, reversed a promised pay increase and imposed pay cuts.

The ILO committee hearing the case, while accepting that the Spanish government faced a hugely difficult economic scenario, felt it should still have engaged in a genuine consultation process with the trade unions and stressed that, even in a crisis, social dialogue procedures should be maintained. The Irish Government, of course, would point to the fact that it did negotiate cuts with the public sector unions under the Haddington Road Agreement.

Given that, at the time of the negotiations however, it published legislation providing for a far worse outcome for public sector workers than that envisaged under the agreement, again, the extent to which employees’ consent was freely given to the cuts is questionable.

The message from all of this is the same – although unilateral changes to contractual terms are legally problematic or may breach industrial relations procedures, in practice they can often be forced through.

As a result, we must accept that employees will act to defend contractual terms where they can. In a landmark case in 2011 involving JVC Europe Ltd, for example, an employee who was made redundant and then told to reapply for a virtually identical position on inferior terms and conditions was awarded almost €300,000 by the High Court for unfair dismissal. If media reports in recent days are to be believed, the HSE should take a careful look at this case.

It may be unpalatable that some bankers were earning huge salaries in the years post-2007, or that certain public sector workers are perceived to be benefiting from allowances unavailable to their private-sector counterparts, or indeed, that persons working for non-profit organisations are in receipt of earnings way above the national average. The time to look at these issues, nonetheless, is not after the contracts have been signed. We have all learned by now that proper oversight, rather than a focus on hindsight, is the way to go.

Prof Michael Doherty is head of the department of law at NUI Maynooth

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