South Africa

Big win for government in wage bill battle

The Constitutional Court has dismissed an appeal brought by public sector unions after the government reneged on aspects of its collective wage agreement reached in 2018.

While the state implemented wage increases for 2018/2019 and 2019/2020, it said that it could not increase the third clause relating to wages in 2020/2021 due to a lack of funding. It is estimated that implementing the final year of the three-year agreement would have cost the fiscus R38 billion.

The Labour Appeal Court had previously found that the cost of the collective agreement could not be covered solely from the minister of Public Service Administration’s budget; that Treasury did not provide a written commitment to guarantee additional funding and no further agreements were made by other departments or agencies in accordance with the regulations.

There were also concerns that the minister did not follow regulations 78 and 79 of the Public Service Regulations which require the department to be able to meet the fiscal requirements and Treasury approval.

It also found the clause to be unlawful for violating sections 213 and 215 of the Constitution which requires fiscal transparency and effective financial management.

Arguments

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The matter was subsequently taken on appeal by the various public sector unions to the Constitutional Court.

The Department of Public Service and Administration (DPSA) and the Minister of Finance argued that organs of state are obliged to act within the confines of the law and that the collective agreement did not comply with the mandatory statutory provisions prescribed by regulations 78 and 79 since the DPSA could not cover the cost of the wage increases from its own budget.

The various unions argued that the Labour Appeal Court failed to consider the doctrine of estoppel, which prevents the state from seeking to escape its contractual obligations.

They further argued that the sanctity of contracts must be upheld and allowing the respondents to escape their obligations would undermine the purpose of and the enforceability of collective agreements. And that if the Labour Appeal Court had applied the pacta sunt servanda (agreements must be honoured) principle, it would have come to a different conclusion.

In addition, no written commitment was made by Treasury, and no written agreements were forthcoming from other departments.

Ruling

In its unanimous ruling, the Constitutional Court found that the regulations 78(2) and 79(c) created jurisdictional facts which must exist prior to the minister’s exercise of power to negotiate and conclude collective agreements on behalf of the state, absent which the minister acts without legal authority.

The Constitutional Court found that these jurisdictional facts were not present and that non-compliance with the requirements of regulations 78 and 79 rendered the resultant collective agreement between the state and the trade unions invalid and unlawful, and thus unenforceable.

The court, therefore, dismissed the applications for leave to appeal with no order as to costs.

The ruling has significant ramifications for South Africa with the wage bill and potential payout seen as a major risk to the country’s fiscus.

Higher‐than‐budgeted compensation increases, and/or a decision by the Constitutional Court to uphold the appeal related to non-implementation of the final leg of the 2018 wage agreement, was named as a major risk to the economy by Treasury in its 2022 national budget.

While honouring the deal would have cost the government R37 billion ($2.4 billion) in the 2021 fiscal year, it would have now been on the hook for R75 billion in back-pay for civil servants, Absa economists, including Peter Worthington and Miyelani Maluleke, said in research note on Monday that cited National Treasury officials.

The Public Servant’s Association, which represents more than 240,000 state workers, said it intends to seek increases equivalent to the consumer inflation rate — which currently stands at 5.7% — plus 2 percentage points, and that it wants a single-year wage deal.

That compares with a budget estimate for the state’s annual salary bill to rise by an average of 1.8% annually over the next three fiscal years. The ruling comes ahead of another round of wage negotiations.

Remuneration costs account for about a third of total government expenditure, and agreeing to demands for continued inflation-beating increases would compromise the medium-term fiscal framework presented by Finance Minister Enoch Godongwana on Feb. 23.

(1/2) Judgment: There was non-compliance with regulations 78 and 79, therefore clause 3.3 of the collective agreement is invalid and unlawful. (NEHAWU and Others v Minister of Public Service and Administration and Others) pic.twitter.com/T1KORKxGSb

— Constitutional Court (@ConCourtSA) February 28, 2022

With further reporting by Bloomberg.

Read: The average take-home pay in South Africa right now

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