Temporary pay-cutting mechanisms and conditions under which they are reversed
Economic and financial crisis;
European Union Law;
Stability and Growth Pact;
Principle of the protection of trust (legal certainty).
RULING No. 574/14
14 of August of 2014
1. Norms that provided for pay cuts in 2016-2018 for all staff paid out of public funds were unconstitutional.
Maintaining existing pay cuts into 2016-2018 would be constitutionally unacceptable, all the more so in that the norms did not determine the amount of the future reductions. Maintaining pay cuts for another three years, at levels that could be as much as 80% of those that had already been in place since 2011, would go beyond the permissible limits on the additional sacrifice that can be demanded of workers paid out of public funds. It would be in breach of the principle of equality, because nothing comparable would affect other types of income.
2. Norms that impose pay cuts in 2014-2015 for staff paid out of public funds are not unconstitutional.
In the present circumstances the public interest inherent in fulfilling the Portuguese State’s international commitments implies a certain erosion of the principle of the protection of trust (legal certainty). In this case there was an absence of sufficiently clear elements that would have underpinned a finding that these pay-cut measures are unconstitutional in the light of this principle, even though they run counter to the expectations of a group of people who had been repeatedly affected by similar cuts in the past. Nor were there constitutional grounds for criticism based on the principle of equality. Legal equality is always a proportional one, so gauging the existence or otherwise of inequality must take proportionality into account. The legislator’s freedom to resort to reducing the pay and pensions of persons who receive them from public funds, with the goal of achieving budgetary balance even within the framework of a serious economic/financial crisis, cannot be without limits. However, given the exceptional nature of the current situation, and notwithstanding the unequal treatment of which they are the object, the additional sacrifice imposed on such staff still does not make that treatment arbitrary; and the fact is that cutting their pay does immediately and automatically reduce public spending.
Even though in 2015 the country will already be free of the level of constraints on its budgetary choices that marked the years between 2011 and 2014, the continued existence of a procedure that is designed to reduce budgetary excess and follows on from the actual international financial assistance period, continues to configure an exceptional framework that is capable of justifying the imposition of pay cuts and making one consider that they do not violate the principle of equality.
The President of the Republic asked the Constitutional Court to conduct a prior review of the constitutionality of a Decree in which the Assembly of the Republic approved a regime establishing temporary pay-cut mechanisms and the conditions under which they would be reversed within a maximum of four years.
The Decree included various such mechanisms: a pay cut in 2014 for staff paid out of public funds (similar to the one that had already been created in the State Budget Law for 2011 – LOE2011); a pay cut in 2015 worth 80% of the 2014 equivalent; and the inclusion in the law of provisions under which similar cuts would apply in the subsequent years up until 2018. Together, these measures added a further five years to past cuts, thus bringing the total consecutive number of years with such cuts to eight (2011-2018). Unlike 2014 and 2015, the Decree did not specify the amount of the reductions that would apply in each of the years between 2016 and 2018.
The Court recalled the essential requisites it has used in its jurisprudence to determine when the Constitution protects the principle of trust (legal certainty), which include the existence of relevant legitimate expectations. It said that in the present case it was credible to think that the fact that the successive pay-cut measures imposed since 2011 had been systematically presented as transitional – i.e. that they would be reversed – had generated such expectations – that their remuneratory situation would improve with time – on the part of workers paid out of public funds.
This expectation that the situation would improve was legitimated by the fact that the Portuguese State had already fulfilled the terms of the Financial Assistance Programme for Portugal (FAP), as well as by the improvement in the economic and financial situation reflected in various indicators, in the government forecasts included in the Budgetary Strategy Document 2014-2018 (DEO), and in the reduction in the Corporate Income Tax (IRC) paid by large enterprises.
The Court acknowledged that admitting the expectations that the pay situation will improve are legitimate cannot eliminate the constraints derived from the state’s international commitments – particularly those arising out of the Treaty on the Functioning of the European Union (TFEU) and the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (known in Portuguese as the ‘Budget Treaty’). The effects of the FAP will still be felt in 2015, given that it sets Portugal’s budget deficit for that year at 2.5% of GDP, as will the effect of the excessive deficit procedure. The logical consequence of these circumstances, which increase the relevance of the underlying public interest, is that the pay cuts provided for in 2015 remain within the limits of that which can be said to be expectable and therefore permitted by the principle of the protection of trust (legal certainty).
Turning to 2016-2018, however, a variety of indicators and above all the government forecasts set out in the DEO reflect an economic scenario in which there will be an improvement in the economic and financial situation, and this can be expected to have an effect on the situation of workers who are paid out of public funds. One can take the stance that this improvement should include more than just a mechanism under which it would still be possible for there to be no reversal of the previous pay cuts between 2016 and 2018.
The Court pointed to its own case law, in which it has taken the view that the pay-cutting measures adopted since 2011 were designed to safeguard a public interest that should be considered to prevail over other factors, and that this was the decisive reason why the Court rejected the argument that the situation involved a constitutionally unacceptable lack of protection of trust (certainty). These are basically conjunctural financial-policy measures chosen by the country’s legislative organ – itself legitimated by the principle of democracy seen as representation of the people – and also rooted in the need to respect the international commitments the Portuguese State made when it signed the FAP.
However, once the country reaches 2016, the FAP is over and the present excessive deficit procedure has been finalised, there would have to be other grounds in order to again conclude that the pay-cut measures were not unconstitutional because they were justified for very important public-interest reasons weighty enough to prevail over expectations of a return to a framework of stability in the law.
Portugal’s participation in the European Union (EU) and the Eurozone obliges it to fulfil a range of demanding requisites in the budgetary field. One of the main obligations of Member States is to avoid excessive budget deficits, and the Union has the competence to monitor each Member State’s budgetary situation and the amount of its public debt.
Norms contained in the EU’s founding law have been implemented by means of derivative-law rules – particularly regulations, especially those in the Stability and Growth Pact. The Court emphasised that the ‘Budget Treaty’ is not part of EU Law, and is only applicable to the extent that it is compatible with the founding Treaties and the legal provisions they contain. From a Portuguese Constitutional Law point of view, the ‘Budget Treaty’ does not enjoy the status the Constitution affords to the Treaties governing the European Union and the norms issued by EU institutions in the exercise of their competences. The latter are applicable in Portuguese Law, subject to respect for the fundamental principles of a democratic state based on the rule of law. The ‘Budget Treaty’, on the other hand, is a source of Public International Law of the type that is governed by the constitutional norm according to which norms contained in duly ratified or approved international conventions have effect in domestic law once they have officially been published in Portugal and only for as long as they are binding on the Portuguese State.
Portugal is subject to an excessive deficit procedure under which various European Council recommendations have been approved. Setting aside doubts as to how binding such recommendations are, in any case they do not require Portugal to take specific concrete measures to control public spending and reduce the deficit. They instead limit themselves to listing the objectives which must obligatorily be achieved under EU norms that are indeed binding – those included in the founding law of the EU and the derivative law referred to above. The binding nature of European Union Law in this domain does not apply to the means by which the individual Member States actually achieve the goals imposed on them.
This signifies that the fact that one must accept that the norms which the national legislator has adopted in the past and will adopt in the future in pursuit of the aforementioned objectives must comply with European Union rules, has no consequences from the point of view of the application of national constitutional rules. In a multilevel constitutional system in which various legal systems interact with one another, domestic Portuguese legislative norms must necessarily comply with the Constitution and it falls to the country’s Constitutional Court to administer justice in constitutional-law matters. European Union Law itself requires the Union to respect the national identities of the different Member States, as reflected in each one’s fundamental political and constitutional structures.
The constitutional principles of equality, proportionality and the protection of trust (legal certainty), which have served as parameters by which the Constitutional Court gauges the constitutionality of national norms regarding the issues linked to those before it in the present case, form part of the central core of the state based on the rule of law and are included in the common European legal heritage, which is also binding on the European Union.
As set out in the norms before the Court, the pay cuts imposed on workers paid out of public funds since 2011 could have remained in effect until 2018 – i.e. for eight consecutive years. There was no guarantee whatsoever that this would not be the case.
The Court said that if this were to happen, it would be within a context in which the consequences of the overall remuneratory treatment of such workers – once again hit by pay cuts – would be much more negative than just the results of these cuts. The latter would again come on top of the permanent effects of the increase in their working hours (which has effectively cut hourly rates of pay), the increase in their contributions to ADSE (Directorate-General for the Social Protection of Public Servants), the freeze on promotions and advancements in the career structure, and the programmes for reducing staff numbers and for limiting the intake of new recruits, with both the latter potentially increasing the effective number of hours worked by existing/remaining staff.
The norms did not establish any percentage by which pay would be cut in 2016-2018; this would instead be dependent on “budgetary availability” (for another three years). On top of this, the DEO sets the goal of conditioning the reversal of the pay cut measure “to the reduction in the overall wage bill by means of a quantity effect” – i.e. by cutting the number of public servants. The Court was of the opinion that when seen in the light of the principle of equality, these reasons were not capable of justifying continued cuts in the pay of staff who are paid from public funds, and their pay alone, for another three years. Given the constitutional requirement that public costs must be shared out equally, it is not constitutionally permissible for the strategy for balancing the public finances to be based on cutting spending by continuing to sacrifice those workers in particular.
As such, the Court found that the norms applicable to 2016-2018 would be unconstitutional.
Three Justices dissented (one partially) from the decision not to find the norms that cut the pay of workers paid out of public funds in 2014 and 2015 unconstitutional; five Justices dissented from the decision in which the Court pronounced the unconstitutionality of the norms that cut the pay of such workers in 2016-2018; and one Justice attached a concurring opinion to the Ruling.
Rulings nos. 353/12 (05-07-2012); 187/13 (05-04-2013); and 413/14 (30-05-2014).