Shorter Private Sector Pay Agreements through 2022 now more likely in the face of inflationary press

As employers and workers face continuing uncertainty for 2022 about the outlook for inflation, these pressures have caused a number of trade unions to reset their strategy for pay bargaining in the private sector.

As a reflection of the uncertainty, guidance was first issued by the Private Sector Committee of ICTU on 13.12.21 that unions should seek pay increases in the range of 2.5% to 4.5% in 2022. It was also significant that the trade union supported Nevin Institute, then also reported its view that inflation would settle back to circa 2% in the second half of 2022 with an average close to 2% thereafter. However, on 11.02.22, ICTU has advised private sector members “to seek pay increases in the range of 2.5% to 5.5% in line with the rate of inflation”, and may push for similar adjustments in the public sector once negotiations on a new pay deal to follow on ‘Building Momentum’ begin, later in the year.

This follows an announcement by SIPTU that in light of the effects of inflation where gains that workers had made from previous pay rises are being eroded, the union “….will be seeking to ensure that in companies that are profitable our members get their fair share for the efforts they put in…”. They are to ask their officials to seek as much of an increase as possible when bargaining with employers.

What is clear is that the continuing rise in inflation will endure for longer than was first being predicted by economists over H2, 2021. These challenges are also being compounded by the fact that labour shortages for some skillsets are also pushing up wages in particular sectors.

Notwithstanding these immediate pressures and their effects which are more prolonged than first thought, there is a real risk that if they were to lead to longer term pay increases which become embedded employer costs, these will become unsustainable. It should also be understood that the impact of inflation is being felt by many businesses in their other input costs.

It is also important to recollect that annual average rate of inflation (CPI) over 2021 was 2.4%. While CPI is currently spiking at over 5%, the impact of the base effect on price movements remains unclear. The spike in prices is attributable to transitory trends e.g. due to energy and supply bottleneck issues following the pandemic which are more likely to ease through 2022.

Ibec in its most recent forecasts (Q4, 2021) predicted an annual inflation rate of 3.3% for 2022. The Central Bank (Quarterly Bulletin January 2022) , has observed that while there was some evidence of wage pressures emerging, wage increases are not broadly based, reflecting labour shortages and productivity increases in some sectors rather than generalised cost of living increases. The ESRI (QEC Winter 2021, 16.12.21) has stated that it expects inflationary pressures to ease considerably in H2, 2022. It expects an inflation rate of 2.4% in 2021 and 4.0% in 2022 but falling back quickly and close to 2.0% by Q4 2022.

Stratis advice to employers amidst the current uncertainty:

Any increase in the level of pay settlements which will embed long term employer costs which are not supported by productivity change cannot be justified by temporary inflation pressures. For those employers who will be addressing pay in 2022 and particularly for those where labour cost (as part of overall costs) is a significant competitiveness issue for the business, we are more likely to see shorter term agreements of one or two years in duration, when otherwise parties may have been willing to consider a longer duration.

However, pay increases will still remain off the agenda in 2022 for some employers reliant on the Irish domestic economy unless where this is driven by acute skill shortages and where employers will have to compete based on market rates. These trends may give rise to a diversity of settlements, with significant value differences emerging between sectors and even between companies within those sectors.

More specifically, for those employers who will be addressing pay with their employees in 2022, our advice is as follows:

• Any escalation in claims for pay adjustments must be critically examined and judged based on the economic, competitive and commercial circumstances of the employer. In the face of any increased employee expectations, negotiations will have to require agreement on cost offsetting measures and employers should avoid paying separately for change.

• Employers should not enter long term agreements which embed current inflation as the basis for pay increases in 2023 / 2024. Instead, shorter term agreements of one or two years in duration are more likely. If necessary, where the agreement extends beyond 12 months, this may need to allow for a review mechanism.

• Employers should actively table any necessary productivity improvements to help offset the costs of any pay settlement which otherwise could not be justified by the current spike in inflation.

• Where trade unions focus on the need to protect living standards in particular for lower paid categories employers may need to examine the potential for short term non consolidated adjustments, such as lump sums or other once off payments, or tiered increases which may be more beneficial to those categories in response.

• Any attempts by unions to reopen existing agreements for 2022 and 2023, already negotiated and concluded in good faith before the current inflation spike, should be strongly resisted. It is important to note that employers did not seek to re-open agreements when inflation was negative.

• The additional cost of Statutory Sick Pay will have to be factored in to payroll costs in 2022.

• At Stratis we would again encourage employers to be mindful of any knock on affects that conceding a claim may cause for other employers in their sector, region or nationally.

If you would like to talk to us about any of these issues, or about engaging your people through the period ahead, please get in touch with me at brendan.mcginty@stratis.ie or any one of our Partners.

Disclaimer: The information in this article is for practical guidance only and does not constitute legal or case specific advice. The answers to specific situations will vary depending on the circumstances of each case. This is not a substitute for specific professional advice relevant to individual circumstances facing your business.