Stratis Issues Pay Guidance for Employers on Private Sector Pay in 2022

Temporary Inflation Pressures Cannot Set Private Sector Benchmark for Longer Term Pay Increases

  • “Any increase in the level of pay settlements which will embed long term employer costs cannot be justified by temporary inflation pressures.”

  • “Pay increases will remain off the agenda for some employers reliant on the Irish domestic economy.”

  • “How Public Sector pay is managed is critical, not just for the state of Public Finances but also in how Industrial Relations is managed in the wider economy.”

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

  • “Employers should be mindful of any knock on affects that conceding a claim may cause for other employers in their sector, region or nationally.”

Introduction

Covid-19 has had a massive impact on our economy and our society. The success of the vaccination programme roll out over the past 6 months has provided hope that we may be putting the worst of the pandemic behind us. Despite huge progress, for many businesses, in particular SME’s, their survival remains at stake due to Covid-19 and the effects of Brexit are still being navigated. While progress on measures to contain the impact of the virus remain critical to our economic recovery, Brexit also continues to cast a shadow with new trade frictions dampening recovery prospects for parts of the Irish economy. The recovery is not evenly spread across all sectors, and the crisis is leaving longer lasting effects on parts of the domestic economy such as across retail, tourism, hospitality and personal services, through shifts in the delivery of services or changing consumer preferences.


The Central Bank of Ireland (Quarter 3 Bulletin of 2021), has commented that:


“The progress of the vaccination programme, more positive consumer and business sentiment and supportive fiscal and monetary policy all bolster the outlook. Alongside a more positive external environment, this leads to expectations of relatively robust growth in headline measures of activity such as GDP, domestic demand and employment through to 2023. Assuming successful deployment of vaccines by the second half of the year, expect a pick-up in domestic economic activity and forecast domestic demand to grow by 2.9% in 2021, while GDP is projected to grow by 3.8%.”

The Central Bank acknowledges that the recovery in the labour market is likely to lag until the broader economic recovery becomes more well established.

Short Term Inflationary Pressures Should not Lead to Embedded Longer Term Pay Increases


Amidst recent concerns about rising inflation trends, (with CPI of 3.7% in the year to September 2021), the impact of the base effect on price movements remains unclear. However, most forecasts see these trends as temporary due to energy and supply bottleneck issues. It is also worth noting that for those workers across the public and private sectors who have benefited from pay adjustments over the last few years, these delivered real increases in wages, despite the worst effects of the Covid-19 pandemic, as inflation (CPI) from January 2019 to December 2020 was only 1.0% whilst the annual inflation rate for 2020 was negative at -0.3%.


On inflation, the Central Bank expects that with a strong rebound in overall demand following an easing of restrictions in many countries, the normalisation of oil prices following their collapse in spring last year, supply shortages and bottlenecks arise in the short term, thus contributing to a forecast of higher inflation. Emerging price pressures are reflected in the stronger outlook for HICP inflation over the forecast horizon, averaging 1.8% in 2021 and rising to 2% in 2022. A significant portion of the expected inflation is due to base effects and the specific nature of the recovery. Higher HICP inflation over the medium term is not forecast to persist, easing back to 1.7% in 2023.


This inflation prediction is important for policy makers and for employers and trade unions who will be negotiating pay adjustments. The ESRI (QEC Autumn 2021) asks an important question as to whether the pick-up in inflation is expected to become more persistent? At present, the ECB does not see this risk materialising and noted the current increase in inflation was likely to be temporary, due to base effects and energy price increases.


The ESRI predicts an annual inflation rate of 2.3% for 2021 and 2.5% for 2022. It states that “At present, international commentators and central banks are attributing these pressures to pandemic-specific adjustments (such as base effects or temporary market imbalances), however the longer the period of inflation lasts the more likely it is to feed through into wage expectations.”


The Labour Market


The Central Bank expect to see the COVID-adjusted unemployment rate to fall from 21.9% in May 2021 to below 11% in early 2022. “By mid- year, the phase-out of the PUP will enable a convergence with the official ILO-based measure of unemployment at about 7.8 per cent. Thereafter, the ILO unemployment rate is expected to continuously decline over the forecast horizon, averaging 6.6 per cent in 2023. They forecast that Employment is projected to reach pre-pandemic levels in the second half of 2023, amidst strengthening demand for labour.”


As the recovery continues to take hold, the Central Bank anticipate that the extent of transitions into regular employment from both those who are unemployed or who have become detached from the labour force, as well as migration, will be important determinants of the shape and nature of economic growth over the medium-term.


The ESRI predict that the unemployment rate in Q4 of 2021 will be approximately 9.0% with the average unemployment rate overall being 16.3% for 2021 and the average unemployment rate for 2022 is set to be 7.1% due to growth in consumption, exports, and investment.


“Owing to scarring effects in the economy after the pandemic, we believe it is unlikely that the unemployment rate will approach its pre-COVID low of 4.6 per cent until 2023 at the earliest.” – ESRI, QEC Summer 2021.


Public Sector Pay


The 'Building Momentum' public service pay deal runs from 01.01.21 until 31.12.22 and will cost more than €900 million (over three years). Under the deal public servants have received a 1% pay increase from October 2021 or €500, whichever is greater. A further 1% rise, or €500, will follow in October 2022.


A further sum of €237 million, (equivalent to a further 1% award) is allocated to a new sector fund to deal with awards, commitments and claims within particular parts of the public service or be used for a general increase for staff in specific sectors. A €150 million fund is to deal with issues, such as the additional unpaid working hours for staff introduced under the Haddington Road agreement in 2013, which will be examined as part of a review due to commence in March 2021. Overtime and premium payment levels will return to those that applied prior to the cuts introduced in 2013.


Stratis has no confidence that these estimates are accurate and we expect that sector agreements have the potential to re-introduce and drive multiple leapfrogging claims. How Public Sector pay is managed is critical , not just for the state of Public Finances but also in how industrial relations (IR) is managed in the wider economy.


Despite the terms of public service agreements, adherence to normal IR procedures remains patchy at best, the Code of Practice on Essential Services is ignored and key groups continue to leverage an early ballot for industrial action prior to or instead of exhausting procedures. This issue needs attention by Government and also within the LEEF Process which is currently reviewing our IR system

Statutory Sick Pay


Employers are increasingly concerned at the growing volume of employment regulations despite the devastating effects of the pandemic. These will place additional burdens on employers at a time of peak uncertainty. These include the Government announcement that by 2025, employees will be entitled to 10 days of sick pay per year and this is being introduced on a phased basis.


Whilst the enabling legislation has yet to be finalised, statutory sick pay will be paid by an employer at a rate of 70% of an employee's wage subject to a daily maximum of €110. Apart from the costs involved a key concern is the impact of payment of sick pay from Day 1 will have on absence levels and the ability of an employer to manage absence levels, particularly short term intermittent absences.

It is likely that Unions will seek to maintain or enhance existing entitlements and while we await the final legislation employers must start planning for a new approach to managing absences and associated costs of sick pay provision in 2022 onwards. Stratis will issue a separate detailed Guidance Note to Employers once the Bill is published.


The Living Wage


In Ireland The Living Wage is defined as “the average gross salary which will enable full-time employed adults (without dependents) across Ireland afford a socially acceptable minimum standard of living. The “Living Wage” for the Republic of Ireland for 2022 has been calculated at €12.90 per hour. The new rate represents an increase of 60c per hour ( 4.9%.) over the 2020/21 rate (€12.30) which represents the largest single increase in its history to date.


The Living Wage has nothing to do with the national minimum wage which is also to increase in the National Minimum Wage (NMW) to €10.50 arising from Budget 2022. The Living Wage remains a Trade Union Construct that does not take any account of Employer ability to Pay, or whether individuals may be using income to provide ‘spending money’ or to supplement other sources of income during periods of education.


The Government has asked the Low Pay Commission to look at the design of a “living wage” for workers in an Irish context. It is unclear if such a measure was to be introduced if it would be on a statutory or non-statutory basis. Whilst the we understand the political ambition of Government to ensure that lower paid workers can enjoy better terms and conditions, the introduction of a living wage, at a time when many businesses are trying to recover will cost jobs or cause people’s working hours to be reduced.


Private Sector Pay 2022 – Ensuring Short Term Pressures On Inflation Do Not Set New Benchmarks That Will Undermine Competitiveness.


The ‘run rate’ for private sector pay in internationally traded sectors has been at c 2.0-2.5% per annum for the past 2-3 years, with a preference for longer agreements of up to 3 years. A small number of agreements are at higher or levels, based on business performance and market outlook. Most of the agreements had some productivity element. However, even with wage adjustments being commonplace, some employers in parts of the domestic economy continue to struggle to afford any adjustments and even to maintain existing commitments.


Over 2021, for some employers, pay was off the agenda, especially for those reliant on the domestic economy. However for employers in parts of the internationally traded sectors, who may not have been hugely impacted by Covid-19, or for those other employers who had entered into agreements on pay prior to the pandemic, or where negotiations had commenced, most followed through to honour commitments on pay and operate within the 2-2.5% arena. As stated above, this will have delivered real improvements in wages when one considers e.g. inflation (CPI) from January 2019 to December 2020 was only 1.0 % whilst the annual inflation rate for 2020 was negative at -0.3%.

Stratis Advice to Employers


As we now look towards the prospect of brighter times ahead and against the above background, it is now relevant to ask what will be the impact on private sector pay in 2022 as we emerge from the grip of the pandemic? The Stratis advice to employers in the private sector can be summarised as follows:


1. Pay increases will remain off the agenda for some employers reliant on the Irish domestic economy. Labour productivity in the mainly domestic sector has been substantially underperforming others in the internationally trading sectors.

2. Following a period of negative inflation that coincided with the pandemic, any increase in the level of pay settlements cannot be justified by reference to a temporary inflation pressure.

3. Employers should look to ensure they are securing full delivery of commitments under their existing agreements. Organisations should not be held to ransom by restrictive practices and demarcations that are well beyond their sell-by-date.

4. Negotiations should seek to secure cost offsetting measures and employers should avoid paying separately for change.

5. Unions should be challenged on their justification for any claimed pay increases or other proposed changes to remuneration.

6. Trade Unions will always look for opportunities to set precedents that may be used to justify claims in other organisations. Employers should always be mindful of any knock on affects that conceding a claim may cause for other employers in their sector, region or nationally.

7. For some employers, they may need to continue with temporary measures in response to urgent needs and refuse to entertain any claims. In doing so it may be prudent to gauge when the business may be amenable to agree to a future time for review, but without commitment. For others a position of inability to pay may be a more credible response to any claim, especially where Covid-19 or where the impact of Brexit has had a significant business impact. This could involve the sharing of detailed financial information to support that assessment with independent verification. Others may be willing to agree a short pay deal or a lump sum payment in lieu for 12 months in view of ongoing uncertainty.

8. Some employers, who have already entered multi-year pay agreements may come under pressure to revisit the pay terms. This should be resisted and the overall period needs to be examined to factor in the impact of recent periods of negative inflation.

9. If the employer has not been hugely impacted by Covid-19 and / or Brexit, for 2022 they should look to conclude deals in the range of c 2.0-2.5% pa, based on the circumstances of the enterprise and where this is justified on productivity grounds and the nature of cost offsetting measures secured.

10. For those employers, who are willing to conclude agreements on pay, the indications are that a term of 1-3 years remain attractive for employers, subject to overall price whilst duration will vary according to circumstance. It is important that short term inflation pressures do not set the context for determining the parameters of an agreement which will embed long term costs. However, if these temporary inflation concerns were to persist, it may be necessary to consider an interim or shorter term agreement pending further clarity of central bank policy in tackling inflation across the euro zone.

11. There may be merit, depending on the existing provisions of collective agreements, to allow for ‘adjudication’ of any implementation issues that might arise during the agreement term.


12. Employers should ensure that key clauses e.g. concerning the preclusion of cost increasing claims for the duration of the agreement and co-operation with normal ongoing change are reflected in any final proposal.


Restructuring Will Remain In Prospect


In our engagement with clients we have encouraged organisations to differentiate between the negative temporary short-term impact caused by the Covid-19 Pandemic and any ongoing negative impact caused by the resultant downturn in economic activity . With market conditions likely to remain weak for many employers they will need to strike a balance between issues of affordability in relation to pay as they assess the impact of trading uncertainties for their business and capacity to sustain jobs. A new reality for business is the intention of public policy not to subsidise low-productivity employment where demand has permanently shifted but rather to provide supports to enable workers to move between sectors. However, the reality for many has been postponed and over the final months of 2021 and early 2022, we will see some employers in the worst hit sectors take decisions to resize their businesses. As a result, redundancies will follow as some business supports are unwound.


Active Communication is Key


Throughout the Covid-19 crisis, employers have had to deploy active communications with employees to keep them informed of work and business developments. There has never been a more compelling time for employees to be kept fully up to date with what is happening and why. The organisation must also ensure that its processes are effective to allow it to understand the concerns of staff. Even amidst the growing optimism, that the end of the pandemic is in sight, in the current uncertain environment, effective communications will be vital and employers should act with caution and only enter into agreements which are in the best interests of the organisation where the timing is right.


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.


To download this article in PDF format click here.

Brendan McGinty

Managing Partner

Stratis Consulting

‘Strategic Employment Relations’

E: brendan.mcginty@stratis.ie

T: +353 (0) 1 2166302

M: +353 (0) 87 2433038

W: www.stratis.ie Twitter: @Stratisconsult LinkedIn: Follow us here


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.



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