Definitive Report - Report No 380, October 2016

Case No 3130 (Croatia) - Complaint date: 17-MAR-15 - Closed

Allegations: The complainant organization alleges that the adoption of the Act on Withdrawal of Right to Salary Increase Based on Years of Service allows the Government to unilaterally suspend rights secured in public service collective agreements in force

1. 373. The complaint is contained in a communication from the Association of Croatian Trade Unions (MATICA) dated 17 March 2015.
2. 374. The Government forwarded its response to the allegations in a communication received on 19 October 2016.
3. 375. Croatia has ratified the Freedom of Association and Protection of the Right to Organise Convention, 1948 (No. 87), and the Right to Organise and Collective Bargaining Convention, 1949 (No. 98).

A. The complainant’s allegations

1. 376. In its communication dated 17 March 2015, the complainant organization, one of the representative trade unions in Croatia, which includes a total of 11 unions in public and civil service, alleges that the Act on Withdrawal of Right to Salary Increase Based on Years of Service (OG 41/2014, hereinafter referred to as: the Act) violates the rights to freedom of association and collective bargaining guaranteed by Conventions Nos 87 and 98.
2. 377. The complainant indicates that the legal employment status of public service employees in Croatia is, with the exception of the Croatian Constitution, international sources of labour law including ratified ILO Conventions, the Labour Act and the Act on Wages in the Public Service, essentially determined by the Basic Collective Agreement for officers and employees in the public service of 12 December 2012 (hereinafter: 2012 BCA) and branch collective agreements as an autonomous source of law in this area. Collective bargaining in Croatia is widespread in the area of public services since the large number of employees enables an effective use of this instrument in order to ensure the balance of interests in the work process. The 2012 BCA was concluded between six representative public service unions and the Government with a period of validity to December 2016. Collective agreements for specific areas of public services (hereinafter: branch collective agreements) have been concluded earlier, for example, the collective agreement for research and institutions of higher education of 22 October 2010 (OG No. 142/2010) valid until 23 October 2014, the collective agreement for secondary school employees of 21 December 2010 (OG No. 7/2011) with a date of validity to 31 December 2014, the collective agreement for elementary school employees of 29 April 2011 (OG No. 66/2011) with an expiry date of 30 April 2015, the collective agreement for the health-care and health insurance sector of 1 December 2013 (OG No. 143/2013) valid until 1 December 2017, etc. The complainant alleges that the Government abruptly cancelled the majority of the aforementioned collective agreements within a short period of time (in the period from December 2013 till February 2014) explaining the cancellation of the same by the significantly changed economic circumstances.
3. 378. The complainant highlights the importance of the right to a percentage increase of salaries based on years of service, a right agreed for employees in public and civil services solely by collective agreements. The 2012 BCA, as well as the 2013 Collective Agreement for state civil servants, establish that the salary of employees in public and civil service consists of the base pay and additional payments. The base pay of employees in public and civil service is calculated as a multiplication of the calculation basis for salaries and the job complexity coefficient of the workplace, increased by 0.5 per cent for every full year of service. Upon the condition of achieving the required years of service, the calculation basis for salary or the job complexity coefficient, and thereby the base pay of employees in public and civil services, is increased for a corresponding percentage. The complainant denounces that the real effect achieved by adopting the Act is not the non-payment of additional payment on salaries for employees in public and civil service, but rather a reduction of their base pay.
4. 379. The complainant organization states that, on 25 March 2014, Parliament adopted the above Act, which deprives public and civil service employees in Croatia of the payment of salary increase based on years of service, a right based on concluded collective agreements or other agreements entered into by the Government. In its view, the Act is a direct attack on the right to collective bargaining in Croatia, which is guaranteed by fundamental ILO Conventions Nos 87 and 98, ratified by Croatia, that are, according to article 140 of the Constitution of the Republic of Croatia, part of the national legal system, having precedence over the law.
5. 380. The complainant quotes the reasons given by the Government, as the proponent of the controversial Act, in a March 2014 draft of the Act (enclosed with the complaint), as follows:
   • At this point of exceptionally unfavourable trends in the economy, retaining the rights arising from currently valid legal regulations would be a pressure on further growth of budget deficit and public debt. The deepening of fiscal imbalances might lead to further decline in credit rating and further increase of costs of government borrowing as well as the overall economic system. That would be a burden for the overall competitiveness of the country as well as debt sustainability. Taking into consideration that the above indicators of economic trends are showing that the economic progress is secured exactly by the proposed measures, the Government of the Republic of Croatia considers it to be justified and required to adopt the proposed Act. Namely, in times of scarcity and economic crisis, the role of the State is especially emphasized. Its obligation is to regulate the level of economic and social rights by various economic policy measures in line with economic possibilities, respectively to boost economic progress, respectively it is required to implement further measures of fiscal austerity with the goal of reducing public debt. In that sense, the necessity of reviewing the costs of work in civil service and public service is arising. In order for the public authority, in changed economic and social circumstances, to efficiently protect the well-being of individuals and the social community itself, at the same time securing the achievement of the aforementioned basic values, it is its constitutional authority and duty to adjust the legal framework to these new circumstances, including the redefining of certain rights. At this moment, in the area of civil and public services, a number of collective agreements, respectively agreements and other contracts are applied, concluded at a time of a better economic situation, growth of salaries and other material rights, but which in times of recession and required austerity measures cannot be observed in full any more. With the goal of securing fiscal stability of costs of employees in civil and public services, the perceived problem of lack of funds for observing agreed material rights can be solved either by temporarily restricting some of these agreed rights or by reducing the number of employees thus reducing total costs of the employed. With the goal of securing fiscal stability of civil and public services systems which would also make it possible to maintain the existing employment level, it is required to reduce total funds for labour costs. Since certain material rights and increases of salaries in civil and public services are agreed by a number of collective agreements, of which some are cancelled and still applied in cancellation period of three months, taking into consideration the fact that material rights of the employed in civil and public services are usually financed from identical public and fiscal revenues, it is required to take special care that the scope and level of their rights remains unified. Since a growth of gross domestic product is not expected till the end of this year either, in civil and all public services it is required to withdraw the right to salary increase which is realized based on the number of years of service. … By withdrawing the right to increase of job complexity coefficient respectively salaries of employees in civil and public services in 2014, and which obligation arises solely from agreed obligations, and not from the law and other regulations, the appropriate part of required savings in State budget will be achieved.
6. 381. According to the complainant, from the point of view of economic justifiability, the Government does not have any relevant reasons for passing the Act. The complainant considers it absurd to claim that economic progress is secured by austerity measures since the very causality of fiscal austerity and economic recovery is not proven in economic theory. On the contrary, according to certain economic standpoints, the aforementioned causality exists solely in the opposite direction, that is, fiscal austerity measures are exacerbating the crisis, and by no means solving it, which is clearly shown by the failure of austerity measures throughout Europe during the past seven years. This standpoint is confirmed by the fact that, notwithstanding numerous withdrawals and reductions in material rights in public and civil services during the past few years, neither the fiscal nor the general economic situation in Croatia improved, despite the fact that the individual price of work in public services during the crisis declined in many cases even more than the cumulative decline in GDP.
7. 382. The complainant adds that one of the key arguments for reducing material rights of employees in public and civil services is the balancing of public finances and stopping further public debt growth. However, the public debt, in accordance with data of the European Commission, instead of further deceleration in 2012 achieved a growth of 3.9 per cent of GDP, and in 2013 a record increase of no less than 9.4 per cent of GDP. In accordance with the aforementioned, it is not possible to claim that solely fiscal austerity will contribute to the improvement of economic or fiscal situation in Croatia. On the contrary, salary cuts and reduction of material rights of workers are additionally reducing the total purchasing power of citizens resulting in reduction of demand, reduction of production and employment and consequentially in decline in GDP. The decline in GDP causes the increase of the deficit and public debt which are expressed as a percentage of GDP. Hence, by any additional cuts in incomes of employees, not only in public and civil services but employees in general, the Government is intensifying the aforementioned negative cycle and is not reducing but increasing further fiscal imbalance. Savings are possible, but it cannot be claimed that austerity measures, withdrawal of rights and reductions of salaries are aimed at economic recovery because that is not confirmed, neither by theory nor by practice.
8. 383. The complainant confirms that the Government has the democratic legitimacy to choose the model of economic development; however, it is not allowed to terminate agreements and thereby violate the basic principles of the functioning of the legal order based on its own questionable interpretation of the economic reality. In its view, the Government’s claim that a number of collective agreements in the area of civil and public services are presently applied, which were concluded at a time of a better economic situation, growth of salaries and other material rights, but which in times of recession and required austerity measures cannot be observed in full any more, is unsustainable and incorrect. The complainant states that the economic situation, in comparison with the time of concluding most of the branch collective agreements at the end of 2010, almost did not change at all but rather stagnated due to lack of efficient economic measures aimed at growth. Furthermore, taking into account that the last branch Collective Agreement for the health-care and health insurance sector containing the right on salary increase based on years of service was concluded at the end of 2013, hence only three months before proposing the Act, the thesis of the Government becomes unsustainable.
9. 384. The complainant also states that, from the legal point of view, the reasons which the Government quotes as the justification for adopting this Act, directly derogating certain provisions of collective agreements, are irrelevant. Collective agreements, even though specific by their legal nature, are first and foremost agreements. When the Government, as one of the contracting parties, is concluding the collective agreements in civil and public services, it does it as an employer and not as government authority. Collective agreements are therefore binding for the Government for the entire time they are in force (including the cancellation period). Collective agreements are binding for all the signers until requirements are met under which it is possible to legally cancel or terminate these agreements. In accordance with the provisions of collective agreements and complying with general regulations of mandatory law, an agreement can be cancelled solely in the case of significant changes of economic circumstances, respectively in the case of subsequent occurrence of extraordinary circumstances which could not have been avoided and which, at the time of concluding the collective agreements, could not have been foreseen. The complainant stresses that, unlike the former practice of illegal withdrawal of rights from collective agreements (after the illegal cancellation of basic collective agreements in the area of public and civil services in 2012, the first Act on withdrawal of rights agreed by collective agreements suspending the payment of the Christmas bonus and vacation allowance in 2012 and 2013, and the prolongation of the validity of the aforementioned Act up to 2014 by Government Regulation), this time the Government, in explaining the Act which is suspending the rights from collective agreements, is not even trying to refer to the fact of significant changes of economic circumstances. Under the pretext of savings, avoiding its contractual obligations and using its position of the stronger contracting party, the Government simply, by force of authority, suspended rights from collective agreements. In the complainant’s view, the Government is showing by such conduct that it is above the law, thus seriously compromising the principle of rule of law and legal safety in Croatia.
10. 385. With reference to Article 8(3) of Convention No. 87 and Article 4 of Convention No. 98, the complainant considers that the Act is in complete contradiction to these Conventions, the universal values of international law enshrined therein, as well as the principles and values that are part of the Croatian legal order. In its view, the Act deprives the right to organize and collective bargaining of all meaning, because it sends the message that the Government when it is a participant in negotiations for the conclusion of collective agreements, does not consider itself to be bound by these negotiations and the signed collective agreements, hence the results of the negotiations can be arbitrarily annulled and employees can be denied their rights regardless of stipulated conditions and procedures. In such circumstances, any union activity is rendered meaningless, and the right to organize and collective bargaining becomes an empty phrase without any content. The complainant believes that the above is confirmed by the ILO Committee of Experts on the Application of Conventions and Recommendations (CEACR) in its 2010 individual observation on the application by Croatia of Convention No. 98, which basically states that the law in general cannot derogate a collective agreement and that unilateral interference by the State in matters regulated by a collective agreement amounts to a violation of the Convention.
11. 386. The complainant therefore considers that collective agreements could be derogated by law only if the following conditions were fulfilled: (i) the Government, as a party to the collective agreement, previously negotiated on the possible amendment to the collective agreement; and (ii) the rights have been suspended to a minimum extent, for a definite period of time, equally to all, and with a reasonable cause for such actions due to a significant disruption of the economic system. In its view, the Government failed to fulfil several of these important conditions prior to the adoption of the Act which withdrew the right to salary increase of civil and public service employees previously agreed upon by the collective agreement.
12. 387. As regards the condition of negotiation before suspension of the rights guaranteed by collective agreements, the complainant states that the right to salary increase was agreed in branch collective agreements for individual public services, and the Government did not even try to open negotiations for amending or suspending it but rather abruptly and unilaterally terminated the branch collective agreements on the grounds of significantly changed economic circumstances. Moreover, while collective agreements were still in force, that is during cancelation periods, the Act was adopted thus narrowing the possibility of negotiation about the aforementioned rights: in addition to the firm position of the Government that the right to salary increase based on years of service shall not be agreed, the payment of the same in the next period was made impossible by the Act. According to the complainant, the Government thereby forced most trade unions to conclude the collective agreement without the provision on the right on salary increase based on years of service. For instance, since the wage increase was agreed in the collective agreement for the health sector concluded a few months before adopting the Act, negotiators for the collective agreement in science and higher education institutions, which ceased to be valid almost one year ago, did not want to agree to delete that provision, with the result that negotiations are still ongoing.
13. 388. The complainant also denounces that the Government failed to abide by the condition of an equal approach towards all. In its view, through the adoption of the Act, the Government denied substantive rights to public service employees, but not to the rest of the public sector owned by the State (namely companies and other entities that are majority-owned by the State). Those legal persons are often beneficiaries of the state budget due to their expenses and losses and hence represent a budgetary cost in the same way as public services, meaning that the withdrawal of material rights in those cases would lead to an increase in budgetary revenues. According to the complainant, the Government thus selectively reduced the rights solely of employees in public and civil services.
14. 389. In the complainant’s view, the Act abolishes material rights of employees in civil and public services secured by the collective agreement, thereby directly violating the principle “pacta sunt servanda”. The complainant therefore considers that the Government, as the employer in the public and civil services, has strengthened its bargaining position through legislation proposed by the Government itself, the adoption of which has been secured by the parliamentary majority, thus de facto imposing its will in collective bargaining. In its view, such conduct is contrary to Conventions Nos 87 and 98, which protect the right to organize and collective bargaining from unauthorized interference by the authorities and prohibit the legal derogation of the rights guaranteed by collective agreements.

B. The Government’s reply

1. 390. In a communication received on 19 October 2016, the Government indicates that the global financial and economic crisis had a belated and strong effect on the Croatian economy, which was reflected in a continuous decrease in economic activity, significant and continuous decrease of gross domestic product (GDP) and directly influenced the closing of workplaces and the sudden increase of the rate of unemployment with a subsequent decrease in the citizens’ standard of living. At the end of 2011, the share of public debt in GDP amounted to 46.7 per cent, 55.5 per cent in 2012, and 86.7 per cent in 2014. Given that the general budget deficit exceeded the limit of 3 per cent and the public debt was at the level of 60 per cent of GDP, in January 2014 a corrective excessive deficit procedure (EDP) was initiated at the level of the European Union. The average unemployment rate increased from 15.9 per cent in 2012 to 17.2 per cent in 2013. In 2014, economic activity remained at a low level, and labour market trends were characterized by stagnation in the (low) number of employed persons.
2. 391. As to the reasons for the passing of the Act on suspension of the right to salary increase based on years of service, the Government reiterates the reasons given in writing by the Government as the proponent of the Act in March 2014, already quoted by the complainant. In addition, the Government states that the relevant salary increase paid only on the basis of the achieved number of years of service is a double increment (paid on the same basis as the salary increment in the amount of 0.5 per cent for each year of service) that could be contrary to the principle of “equal work for equal pay” and in practice constitutes discrimination based on age. Furthermore, the adoption of the Act was part of the overall public policy measures taken by the Government to meet the criteria set by the European Commission in relation to achieving fiscal balance and sustainability. While the said measure partly impinged on social rights, the Government believes that the objective pursued by the legislator was legitimate and that the adoption of the Act fully met the test of proportionality, as it constituted a reasonable and time-limited measure which did not represent an excessive burden for its recipients and was not more restrictive than necessary to achieve the legitimate aim of reducing public debt and maintaining the existing level of employment in the public and state sector.
3. 392. The Government assures that it is aware and continues to recognize the general principle that agreements should be binding on the parties and that this principle should be respected as a basic rule. It believes however that, in exceptional cases, measures taken by governments, as part of a stabilization policy, which determines the limits of collective bargaining of some of the material rights and even salaries, but which are limited by a reasonable time period, are in accordance with Conventions Nos 87 and 98.
4. 393. As regards the allegation that the suspension of a material right only for public service employees but not for the rest of the public sector owned by the State, is contrary to the equality principle, the Government emphasizes that salaries and other material rights of employees in companies and other legal persons owned by the State are not paid by the state budget, and that the Government is thus not a party to their collective agreements. Last but not least, the Government would like to inform that the Act on suspension of the right to salary increase based on years of service is no longer in force, since 1 January 2016.

The Committee’s conclusions

1. 394. The Committee notes that, in the present case, the complainant alleges the adoption of an Act which allows the Government to unilaterally derogate from the public service collective agreements in force. The Committee notes in particular the following allegations of the complainant organization: (i) the employment status of public service employees in Croatia is essentially determined by the Basic Collective Agreement for officers and employees in the public service (BCA) of 12 December 2012, as well as by branch collective agreements for specific areas of the public service; (ii) the Government abruptly cancelled the majority of the aforementioned collective agreements within a short period of time (from December 2013 until February 2014) explaining their cancellation with the significantly changed economic circumstances; (iii) the Act, which deprives public and civil service employees in Croatia of the payment of wage increase based on years of service, a right that had been obtained on the basis of formerly concluded collective agreements, was adopted on 25 March 2014; (iv) the reasons given by the Government when proposing the Act (document enclosed in the complaint) include: exceptionally unfavourable economic trends entail the need to implement further measures of fiscal austerity to reduce public debt and thus the necessity to review the labour costs in the public and civil service; in the public and civil service a number of collective agreements concluded at a time of a better economic situation, can thus no longer be observed in full; the required reduction of labour costs in the public sector can be achieved either through reduction of the number of employees or the temporary restriction of some of the rights agreed by a number of collective agreements, of which some have been cancelled and are still being applied during the cancellation period of three months; since the scope and level of these rights should remain unified, and a growth of gross domestic product is not expected in 2014, it is required to withdraw in the civil and all public services the right to wage increase based on years of service; (v) the above reasons for terminating the collective agreements and adopting the Act are considered unfounded (austerity measures do not lead to economic recovery and resulted in GDP decline in Croatia; the economic situation did not change but rather stagnated) and unfair (last branch agreement containing the right to wage increase was concluded three months before the adoption of the Act; violation of “pacta sunt servanda”) by the complainant; (vi) one of the conditions under which collective agreements may be derogated by law, the condition of prior negotiation on the possible amendment of the collective agreement, was not met since the Government did not even try to open negotiations but rather abruptly and unilaterally terminated the branch collective agreements on the grounds of significantly changed economic circumstances; (vii) the Government only denied substantive rights to public service employees but not to the rest of the public sector owned by the State, which the complainant deems contrary to the condition of equal treatment; (viii) the Act was adopted while the collective agreements were still in force, that is, during the cancellation periods, thus narrowing the possibility of negotiation about wage increase; and (ix) the Act is a direct attack on the right to collective bargaining in Croatia and thus violates the right to freedom of association guaranteed by Conventions Nos 87 and 98.
2. 395. The Committee notes the Government’s indications that: (i) the global financial and economic crisis had a belated and strong effect on the Croatian economy, which was reflected in a continuous decrease in economic activity, significant and continuous decrease of GDP, and directly influenced the closing of workplaces and the sudden increase of the rate of unemployment with a subsequent decrease in the citizens’ standard of living; (ii) further to the reasons for the passing of the Act on suspension of the right to salary increase based on years of service, given in writing by the Government as the proponent of the Act in March 2014, it is worth noting that the relevant salary increase paid only on the basis of the achieved number of years of service is a double increment that could in practice constitute discrimination based on age; (iii) the adoption of the Act was part of the overall public policy measures taken by the Government to meet the criteria set by the European Commission in relation to achieving fiscal balance and sustainability; (iv) the objective pursued by the legislator was legitimate and the adoption of the Act fully met the test of proportionality, as it constituted a reasonable and time-limited measure which did not represent an excessive burden for its recipients; (v) contrary to public service employees, salaries and other material rights of employees in companies owned by the State are not paid by the state budget; and (vi) the Act on suspension of right to salary increase based on years of service is no longer in force, since 1 January 2016. The Government assures that it continues to recognize the general principle that agreements should be binding on the parties but believes that, in exceptional cases, measures taken by governments as part of a stabilization policy, which restrict collective bargaining on some of the material rights or even salaries, but which are limited to a reasonable time period, are in line with Conventions Nos 87 and 98.
3. 396. As regards the alleged abrupt and unilateral cancellation of the branch collective agreements by the Government on the grounds of significant changes of economic circumstances and without prior amendment negotiations with the public service unions, the Committee notes the complainant’s indication that, under the provisions of collective agreements and general regulations of mandatory law, an agreement can be cancelled by one party under certain conditions and in the case of significant changes of economic circumstances (that is, subsequent occurrence of extraordinary circumstances which could not have been avoided and which, at the time of concluding the collective agreements, could not have been foreseen). The Committee notes that, according to the complainant, the national economic situation has not changed since the conclusion of most branch collective agreements at the end of 2010, and observes that one branch agreement containing the right to wage increase was concluded by the Government during the period where the others were being cancelled. While recalling the general principle that agreements should be binding on the parties, and that collective bargaining implies both a give and take process and a reasonable certainty that negotiated commitments will be honoured, at the very least for the duration of the agreement, such agreement being the result of compromises made by both parties on certain issues, and of certain bargaining demands dropped in order to secure other rights which were given more priority by trade unions and their members; if these rights, for which concessions on other points have been made, can be cancelled unilaterally, there could be neither reasonable expectation of industrial relations stability, nor sufficient reliance on negotiated agreements [see Digest of decisions and principles of the Freedom of Association Committee, fifth (revised) edition, 2006, paras 939 and 941], the Committee observes from the outset that the branch collective agreements themselves provided for a procedure for unilateral termination, and, taking due note of the reasons given by the Government for passing the Act on suspension of the right to salary increase based on years of service, considers that it is not its role to express a view on the soundness of economic arguments used by the Government in order to cancel a collective agreement under the procedure stipulated therein, since this competence lies within the remit of national jurisprudence. As to the allegation that the agreements were cancelled without prior amendment negotiations with the public service unions, the Committee considers that, in the absence of the relevant provisions of the branch collective agreements, it is not in a position to pronounce itself whether or not the unilateral cancellation procedure provided in the agreements themselves was followed.
4. 397. In this regard, the Committee understands however that, prior to the cancellation of the branch collective agreements (December 2013–February 2014) and the adoption of the Act in March 2014, the Government and several public and civil service unions negotiated and signed on 4 June 2013 amendments to the Annex of the Agreement on Basis for Wages in the Public Service of 13 May 2009, the validity and applicability of which (including all of its subsequent amendments) is reaffirmed in the 2012 Basic Agreement in the provision stipulating that the basic salary is made of the job complexity coefficient and the basis for calculating salaries, increased by 0.5 per cent for each year of service (article 51). In article II of those June 2013 amendments, the Government undertakes to start negotiations on wage increase in the public and civil service based on years of service, as soon as there is a real GDP growth recorded in three consecutive quarters and the deficit of the state budget is lower than 3 per cent.
5. 398. In view of the above, and recalling that it has previously considered that if, as part of its stabilization policy, a government considers that wage rates cannot be settled freely through collective bargaining, such a restriction should be imposed as an exceptional measure and only to the extent that is necessary, without exceeding a reasonable period, and it should be accompanied by adequate safeguards to protect workers’ living standards [see Digest, op. cit., para. 1024], the Committee, noting the Government’s indication that the Act is no longer in force since 1 January 2016, understands that negotiations concerning wage increase between the Government and public and civil service unions have since begun and welcomes these developments. Reiterating that, in the context of economic stabilization, priority should be given to collective bargaining as a means of determining the employment conditions of public servants, rather than adopting legislation to restrain wages in the public sector [see Digest, op. cit., para. 1040], the Committee trusts that, for the maintenance of the harmonious development of labour relations, the parties will bargain in good faith and make every effort to reach an agreement.

The Committee’s recommendation

1. 399. In the light of its foregoing conclusions, the Committee invites the Governing Body to approve the following recommendation:
   • Noting the Government’s indication that the Act is no longer in force since 1 January 2016 and understanding that negotiations concerning wage increase in the public and civil service have since begun, the Committee welcomes these developments and trusts that, for the maintenance of the harmonious development of labour relations, the parties will bargain in good faith and make every effort to reach an agreement.