Labour Law – state-owned companies
Wholly or partially state-owned company;
Right to be paid for work;
Budgetary balance principle;
Principle that the burden of public costs must be shared equally;
Principle of appropriateness;
Principle of proportionality
RULING No. 576/15
3 of November of 2015
The Constitutional Court found no unconstitutionality in a norm ordering a cut in the basic monthly pay of staff of companies in which the public sector holds a majority of the capital. The Court considered that the general criterion under which the members of the executive governing bodies and the staff of companies that belong to the universe of business activities engaged in by public-sector entities and the majority of whose capital is state-owned are deemed equivalent to the rest of the country’s public servants for the purposes of determining the regimes applicable to their pay and pay supplements and the award of other monetary benefits, is justified by the constitutionally legitimate idea that because both groups are paid out of public funds (entirely, in the case of public servants; at least partly, in the case of the directors and staff addressed in the Ruling), the former should also be subject to the remuneratory contingencies to which the latter have been successively subjected in recent years. This equivalence regime has been maintained as the legislation has evolved over time, with no significant changes in the list of public sector staff whose pay was affected by this measure, but with some differentiated modelling of the regime governing the ways in which the cuts were applied. The Court said that these measures were necessary to the financial self-sustainability of the Public Business Sector, given that they are cutting the current expenditure of the companies in question, all with a view to both improving their finances and reducing the amounts transferred to them from the State Budget. The fact that in accounting terms the benefit of the deductions from the pay of the staff of public sector entities has been allocated to the budgetary consolidation effort is entirely justified by the supposition that the budgetary savings secured by reducing the operating costs of companies in which the public sector holds a majority or all of the capital would be more substantial and lasting from the point of view of the state’s financial equilibrium if they were achieved by reducing the transfers to the sector. The mechanism with the ability to ensure that the pay cuts imposed on public sector workers have the greatest possible budgetary impact is not necessarily the same in all the affected subsectors. The legislator opted to allocate the savings derived from the pay-related measures to which it subjected the agents of companies in which the public sector holds a majority stake to an increase in those companies’ levels of financial self-sustainability, which is to say that it renounced the possibility of creating an instrument that would add that value to the state’s coffers. The Court took the view that the value judgement underlying this regime is solid enough to be able to serve as the basis for saying that there is a functionally appropriate relationship between the pay cuts and the goal that led to their imposition, and that the norm in question is therefore not in breach of the principle of proportionality.
This abstract ex post facto review case was brought before the Constitutional Court by the Ombudsman, who challenged part of a norm in a 2014 Law establishing the mechanisms for temporary pay cuts and the conditions for their reversal. The segment in question concerns the directors and staff of entities in the universe of business activities engaged in by public sector entities and in which the majority (but not all) of the capital is state-owned. The petitioner argued that the definition of the subjective scope of application of the mechanisms and conditions that is set out in this part of the norm violated the principle of proportionality.
The entities that process the pay of actual public servants (as opposed to the staff and directors of the companies addressed in the present Ruling) encompassed by the cuts are required to transfer these sums to the state purse, except in cases in which the entities’ budgets were already calculated taking the reductions into account.
The Court had already conducted a prior review of some of the segments of norms in the Assembly of the Republic Decree that gave rise to the Law which includes the norm before the Court in the present case, and had not found any unconstitutionality in them. An earlier norm had determined both a cut in 2014 in the salaries of staff paid out of public funds equal to that which had already been applied in 2013, and a cut to be applied in 2015, but this time with a reduction equal to 80% of the cut in the two preceding years. At the time, the Court concluded that that measure was an ongoing part of the budgetary consolidation effort begun with the Economic Adjustment Programme agreed by the Portuguese government and the IMF, the European Commission and the ECB. It considered that, with that specific configuration, it continued to be possible to link the measure to the pursuit of the same public interest as that which had led to the adoption of similar measures in the State Budget Laws (LOEs) for 2010, 2011, 2012, and 2013 – i.e. the interest in cutting public spending and correcting an excessive budget imbalance under a multiyear plan with a defined time limit.
The Court recalled that in that past case it had not found the fact that the measure had affected the monthly pay of public sector workers in 2014 to be unconstitutional, because the measure was still a transitional one designed to achieve budgetary objectives that were essential to a rebalancing of the country’s public finances.
It also considered that in the context of a financial emergency, it is justifiable to differentiate between the position of staff who are paid out of public funds and that of other persons. Under the Law, the staff and the members of the governing bodies of entities in the national, regional and local Public Business Sectors and of companies in which the state holds either a simple majority or a 100% stake are included in the overall universe of public sector workers.
The Ombudsman argued that the segment of the norm under which the benefit of the cuts in basic monthly pay in the universe of public entities in which the state holds the majority but not all of the capital conflicts with the constitutional principle of proportionality included in the principle of a state based on the rule of law, because it does not require the entities that process the salaries to transfer the resulting savings to the state purse. As such, the mechanism instituted by the norm is not entirely suited to the pursuit of the public interest that would serve to legitimate the norm. The partial suppression of the workers’ pay without an obligation to hand the resulting funds over to the state would not in totum serve the ‘reduce public spending’ aspect of the overall budgetary consolidation goal, but would instead make it possible to generate additional dividends or other material advantages for the minority private shareholders.
The Court recalled that, as a general principle that public authority should be limited, the principle of proportionality or that excess is prohibited requires the state/legislator to suit its actions to the goals it is seeking to achieve, and not to configure measures in such a way that they are inappropriate, unnecessary or excessively restrictive in relation to those goals.
The Court said that in the present case, the legislator based itself on the principle that there are mechanisms other than a direct transfer to the state purse that are also capable of allocating the benefit of the pay cuts to the budgetary consolidation effort. The issue directly raised by the review request was whether the measure in question is functionally suited to and capable of helping balance the public finances, or is instead clearly not effective enough to justify the coactive burden it places on the staff it affects.
The State Budget Laws for 2011 and the subsequent years classified the Public Administration pay cuts (in the broad sense of the term) and the steps taken to rationalise the Public Business Sector (SEE) under various different budgetary headings, but all as measures designed to reduce public spending. While the progressive cut in Public Administration pay was seen as a direct component of the drive to reduce the state’s operating expenses, the SEE rationalisation measures were also recorded among the various “other spending-reduction measures”, indirectly helping to reduce public expenditure by cutting the amount of compensatory payments and subsidies transferred to SEE companies by the State Treasury.
The cut in the basic monthly pay of the staff and members of the governing bodies of companies in which the state holds a majority or 100% stake was attributed an ambivalent budgetary status. On the one hand, the measure would directly affect the state’s operational expenditure, which it was expected to help reduce; on the other, by cutting the companies’ operating costs, it would also reduce the need to transfer funds to them from the state (in the form of compensatory payments and subsidies). This dual budgetary effect associated with the cut in the pay of the companies’ agents was then maintained in subsequent Budget Laws.
The budgetary legislator has been making an assumption – that there is a clear link between the financial balance of the Public Business Sector and the effort to consolidate the public finances. This is based on the idea that the greater the economic and financial self-sustainability of the companies in the sector, the smaller the amount of the transfers they will need from the State Budget (not only in the form of operating subsidies and compensatory payments, but also when the state takes responsibility for their liabilities).
In past cases the Court had already recognised a nexus or co-respective relationship between the financial self-sustainability of state-owned companies and the interest in balancing the state’s finances; it had already emphasised that the objective of the reform of the legal regime governing the Public Business Sector was to help control public sector debt, and to subject the core matters regarding all the business organisations directly or indirectly held by public sector entities to a single regime; and it had already found that it was constitutionally permissible to transpose the regimes applicable to public sector staff with regard to the award of expense and travel allowances for trips in Portugal and abroad and the rates of additional pay for night-time and overtime working, to entities in the national, regional and local Public Business Sectors and companies in which the state holds either a simple majority or a 100% stake. The Court noted that although the business entities addressed in the present Ruling are as a rule subject to the private law, they constitute instruments for the pursuit of the public interest and contribute to the indices that measure the state’s financial sustainability. The Court thus considered that this transposition of regimes was justified by the goal of helping to safeguard the state’s financial integrity by reducing the business entities’ operating expenses.
Six Justices dissented from the Ruling, one of them partially. In essence, two main objections were raised in the dissenting opinions. Some disagreed with the position the Court has taken in a number of recent Rulings: that the current need to reduce the budget deficit constitutes a general national interest capable of justifying measures which cut the pay of only those workers who are paid out of public funds (and not of private sector staff, for example), without respecting the principle that the burden of paying for public costs must be shared out fairly among all taxpayers, and without considering each worker’s capacity to contribute to that burden. These Justices took the view that this interpretation conflicts with the applicable dimension of the principle of equality. Others emphasised that the norm which imposes a transitional pay cut on the staff of companies in which the public sector holds a majority does not require the resulting value to be paid into the state purse. In their opinion, this solution does not exclude the possibility that such a company could allocate a proportion of this benefit to its private shareholders in the shape of dividends or other material advantages, thereby, and to that partial extent, failing to achieve the aim of cutting public spending.
Rulings nos. 634/93 (04-11-1993); 1182/96 (20-11-1996); 187/01 (02-05-2001); 396/11 (21-09-2011); 353/12 (05-07-2012); 187/13 (05-04-2013); 413/14 (30-05-2014); 574/14 (14-08-2014); 260/15 (05-05-2015); and 509/15 (13-10-2015)