knowledge 28 July 2020 |

Sectoral Employment Orders Declared Unconstitutional

What is a Sectoral Employment Order?

A sectoral employment order (“SEO”) is a form of a statutory instrument, and collective bargaining agreement, adopted by the Minister for Business, Enterprise and Innovation (the “Minister”) on the recommendation of the Labour Court.  An SEO sets out terms and conditions of employment in relation to remuneration, sick pay and pension entitlements, applicable to an entire economic sector, which means that all employers within that sector are bound by its terms. 

Before the Court’s decision, under the 2015 Act, a trade union, or an organisation of employers, or both, could apply to the Labour Court for an examination of the remuneration, sick pay or pension scheme of the workers “of a particular class, type or group in the economic sector”.  The Labour Court then undertook an examination, subject to the satisfaction of certain criteria under the 2015 Act and, where it deemed it appropriate, would make a recommendation to the Minister in relation to conditions of remuneration, sick pay and pension benefits. The Minister had six weeks from the receipt of a recommendation to confirm the terms of the recommendation or notify the Labour Court of the reasons for its refusal to do so.  Where the Minister confirmed the recommendation, an order was drafted to give effect to its terms and approved by the Houses of the Oireachtas.  A failure by the employer to provide the conditions of employment stipulated in the SEO could have resulted in criminal prosecution.

Before the Court decision, there were three SEOs in force in the State:

1. S.I. No. 251/2019 - Sectoral Employment Order (Electrical Contracting Sector) 2019 (the “Electrical Sector SEO”);

2. S.I. No. 234/2019 - Sectoral Employment Order (Construction Sector) 2019 (the “Construction Sector SEO”); and

3. S.I. No. 59/2018 - Sectoral Employment Order (Mechanical Engineering Building Services Contracting Sector) 2018 (the “Mechanical Engineering Building Services Contracting Sector SEO”). 

The predecessor to SEOs, namely sectoral Registered Employment Agreements under the Industrial Relations Act 1946, were previously struck down as unconstitutional in 2013 by the Supreme Court in the case of  McGowan & Ors v Labour Court Ireland & Anor, and this was the reason for the introduction of SEOs under the 2015 Act.  Last month’s decision of Justice Simons sounds a fresh death knell for this type of sectoral pay bargaining in Ireland.

High Court Proceedings

The High Court proceedings were brought by members of Náisiúnta Leictreach Contraitheoir Eireann (National Electrical Contractors Ireland) (“NECI”), an organisation which represents a number of small to medium sized employers, who sought to (a) challenge the legal validity of the Electrical Sector SEO and (b) challenge the constitutionality of Chapter 3 of the 2015 Act, the parent legislation underpinning the SEO regime.

By way of background, in October 2018, two applications were submitted to the Labour Court as part of the statutory procedure leading ultimately to the making of the Electrical Sector SEO, with the Labour Court deciding to treat these as one joint application.  The first application was made on behalf of Connect Trade Union and the second was submitted jointly by two employers’ organisations, the Electrical Contractors Association and the Association of Electrical Contractors of Ireland. 

The Labour Court subsequently published notice of its intention to carry out an examination and NECI advanced detailed submissions on, among other things, the question of whether Connect, ECA and AECI complied with the “substantially representative” requirement; the definition of the “economic sector”; the implications of the proposed SEO for small to medium sized electrical contractors; and the potential anti-competitive effect of fixing a minimum wage for electricians, all of which were matters to which the Labour Court was obliged to have regard under the 2015 Act.

Notwithstanding these concerns, the Labour Court proceeded to recommend to the Minister the introduction of an SEO, and the Minister duly made the relevant order.

High Court Decision

The Court, in finding for the NECI, decided that:

1. the Electrical Sector SEO was not legally valid; and

2. Chapter 3 of the 2015 Act was unconstitutional as it did not meet the requirements of Article 15.2.1° of the Constitution.

Invalidity of the Electrical Sector SEO

The Court determined that the Minister for Business Enterprise and Innovation acted ultra vires (beyond her powers) in purporting to make the Electrical Sector SEO.  It is a condition precedent to the Minister’s jurisdiction to make an SEO that they be satisfied that the Labour Court has complied with the requirements of 2015 Act.   The Court determined that the Minister “erred in law” in concluding, on the basis of the report and recommendation submitted to her, that the Labour Court had complied with these provisions.

The judge decided that the statutory report and recommendation of the Labour Court was deficient on a number of grounds.  In particular, the report did not set out the conclusions of the Labour Court on crucial matters, nor did the report state a rationale for those conclusions.  For example, the Labour Court failed to address that the making of the SEO was “reasonably necessary” to ensure “fair and sustainable rates of remuneration” as stipulated in the 2015 Act.

In addition, the report failed to set out a proper summary of the submissions made by those interested parties who opposed the making of the SEO, including the NECI, and did not engage with those submissions.  

While the Court found that the Labour Court did have jurisdiction to define the economic sector itself, the Labour Court’s report did not adequately address the definition of the economic sector concerned, and did not specify the class, type or group of workers to which the recommendation should apply, as was required by the 2015 Act. 

In relation to pension entitlements, the Court decided that the terms of the SEO were also invalid insofar as they purported to fix the rate of pension contributions payable by reference to the actions of a third party, thus breaching the principle that a delegate cannot further delegate their function.

The Court concluded that neither the procedures leading up to, nor the content of, the recommended SEO complied with the necessary provisions of the 2015 Act.  On this basis, on receipt of the report, the Minister should have refused to make the SEO and that the Minister acted without jurisdiction in purporting to make the order.

Constitutional Challenge

While the Court found the Electrical Sector SEO to be invalid for the reasons set out above, the Judge decided to proceed to make a determination on the constitutional challenge, given that the constitutional issue had been fully argued during the hearing, both parties were in agreement that the matter should be determined, and the “exercise of judicial self-restraint would merely defer—rather than avoid—the necessity of a court having to rule on the validity of the legislation.”

The Court ultimately decided that the 2015 Act did not contain sufficient principles and policies in order to guide the “very broad discretion” conferred upon the Minister, and, indirectly, upon the Labour Court.  The Court determined that the statutory language was too imprecise to provide meaningful guidance to the Labour Court.  In addition, the 2015 Act failed to provide sufficient guidance to the Labour Court and the Minister in terms of the principles to be applied in determining the economic sector.  Furthermore, the Minister’s role was too limited to represent a meaningful safeguard against a breach of Article 15.2.1° of the Constitution.

The Court pointed out that imposing mandatory terms and conditions of employment across an entire economic sector requires making difficult policy decisions, with significant consequences, particularly given that the interests of the main stakeholders (employers and workers) may not be aligned.

In conclusion, the Court decided that Chapter 3 of the 2015 Act “involves a standard-less delegation of law making to the Minister, and one which would be almost impossible to challenge by way of judicial review.”  On this basis, the Court held that Chapter 3 of the 2015 was invalid by reference to Article 15.2.1° of the Constitution.

What does this mean for employers and workers?

As Chapter 3 of the 2015 Act has been determined to be unconstitutional, not only does this affect the Electrical Contracting Sector SEO but it also has consequences for the Construction Sector SEO and the Mechanical Engineering Sector SEO, along with any potential SEOs that were contemplated in other sectors.  As a result of the judgment, the terms of the three existing sectoral employment orders are effectively no longer legally enforceable. The implications of this are that technically, workers in the electrical, mechanical and construction sectors now only have the same statutory entitlements as any other employee – in other words, a right to the national minimum rate of pay and no statutory rights to paid sick leave or employer pension contributions.   Nonetheless, the practical implications of the decision are unlikely to be so stark.  Current employees will maintain an entitlement to the terms of the SEO, on the basis they form part of their existing contracts of employment.   In addition, from an industrial relations perspective, and on the basis of custom and practice and other voluntary industrial relations pay agreements in some of the sectors, employers are likely to maintain the rates and terms set out in the SEO when recruiting new workers.

Certain employers in these sectors may welcome the decision, particularly small or medium employers who may have struggled to adhere to the requirements of the SEO, particularly in recent times.  Larger employers, on the other hand, seemed to be in favour of the SEO, and may have concerns about industrial action along with the increased threat of competition from overseas companies within their sectors, who may benefit from lower employment costs to lower their cost base. 

However, on 9 July 2020, Tánaiste Leo Varadkar (the current Minister for Enterprise, Trade and Employment) confirmed to the Dáil that the government is appealing the decision to the Supreme Court.  We would caution employers against any knee-jerk reactions to this decision, or invoking any unilateral changes to terms and conditions of employment, particularly given the threat of industrial unrest, and we would advise employers to seek legal advice in advance of taking any actions on foot of this case.

What does this mean for outstanding contractor claims?

Construction contracts can contain wording permitting contractors to recover increased costs which arise as a result of a change in law after the date on which the contract was entered into.  In some instances, contractors have sought to rely on these entitlements to seek to recover the additional costs arising as a result of the SEOs; namely the cost of the increased pay to labour on site provided for under the SEO, where the SEO came into force after the date the contract was entered into.

The net effect of the High Court decision is that Chapter 3 of the 2015 Act, and therefore all SEOs issued under it, are unconstitutional and invalid.  Therefore, the question arises as to whether the SEOs were ever a change in law.  Arguably, as the legislation which gave force to the SEOs has been deemed unconstitutional, then the SEOs were never a change in law.  A difficulty then arises with pursing a claim on the basis that of the change in law provisions of the contract.   

Although the decision is under appeal, for the moment at least, a conciliator or arbitrator considering a contractor claim will be bound by the decision of the High Court in finding that the SEOs are unconstitutional and therefore are not a change in law.

How can we help?

Our Employment, Pensions & Incentives Team along with our Construction & Engineering Team have significant experience in advising employers and contractors in the relevant industries on a variety of issues, including claims under construction contracts regarding the SEOs.  We would be happy to discuss the consequences of this decision for your organisation. For further information, please contact the individuals below. Alternatively, your usual contact would be happy to assist.

Also contributed by Ellen Nolan.