The Public Works Contracts and the New Sectoral Employment Order
07 Nov 2017
The Minister for State at the Department of Business, Enterprise and Innovation signed into law the Sectoral Employment Order for the Construction Industry ("the SEO") on 19 October 20171.
In our view, there is a good argument to the effect that contractors are entitled under the Public Works Contracts to recoup from their employers the increases in rates of pay mandated by the SEO.
The old Registered Employment Agreement ("REA") system set out in the Industrial Relations Act, 1946, was held to be unconstitutional by the Supreme Court in 2013 20132.
In essence the Court found that the REA system was an emanation of the legislative role being carried out inappropriately by an unelected Labour Court and other interested parties.
In order to replace the old system the Government brought in a new Sectoral Employment Order system under the Industrial Relations (Amendment) Act, 2015.
There is some doubt as to whether the new Sectoral Employment Order system is constitutional. There remains an argument that the new system still, in effect, permits an unelected Labour Court to draft what is a form of legislation contrary to the Constitution.
This may explain the delay in establishing the SEO for the Construction Industry, as the Labour Court and the Minister were likely to be more sensitive to ensuring that the SEO had the support of a large number of affected industry participants.
Effect of the SEO
The effect of the SEO is that relevant construction industry employees are now entitled, as a minimum, to the pay and benefits set out in the SEO.
It is a matter of contract as to whether or not a contractor will be entitled to recoup from its employer the additional costs that the contractor will incur in performing a contract as a result of the SEO.
Private Sector Contracts
The situation that prevails under the RIAI contracts is straightforward: contractors will, under clauses 4 and 36 of the RIAI, be able to recoup the additional costs from their employers once the SEO was introduced after the Designated Date stated in the Appendix to the Contract.
Bespoke, amended, versions of the RIAI will have to be assessed on a contract-by-contract basis.
In our experience, however, most bespoke versions of the contract will pass to the Contractor the risk of such increases.
The Public Works Contracts
Part 1M of the Contract Schedule will specify which of the price variation options – PV1 or PV2 – is incorporated (or is intended to be incorporated, in the case of not-yet-formed contracts) into an instance of the Public Works Contracts.
If the Letter of Acceptance has not yet been issued, the Contractor should seek to agree with the Employer that the Contractor's tendered price for executing and completing the Works will be adjusted to cater for the effect of the SEO, and to incorporate that agreement into the Letter of Acceptance as a post-tender clarification.
Where the Contract has already been formed, the terms of the relevant option will govern how the Contractor's additional costs are to be catered for by the parties.
PV1 is the default price variation option.
Clause PV1.1.2 governs increases to workers' wages and expenses. In order for the Contractor to recoup any increase in wages from the Employer pursuant to this clause, the increase must satisfy all of the requirements (i) to (iv) listed in clause PV1.1.2:
(i) it is made to the standard normal and overtime hourly wage rates or expenses payable to workers according to the Labour Court's Registered Employment Agreement dated 15 March 1967 as varied from time to time under Section 28 of the Industrial Relations Act 1946;
(ii) it becomes payable after the Base Date in accordance with that agreement;
(iii) it is in respect of General Round Increases conforming to the guidelines of the Social Partnership Agreements between the government, employer organisations and trade unions relating to such increases, or, in the absence of a Social Partnership Agreement and guidelines, increases in accordance with the guidelines on General Round Increases issued by the Department of Finance; and
(iv) the workers in respect of whom an increase is being claimed have received in Ireland for the relevant work at least the increased standard wage rates and expenses.
Among other problems with the clause, there are no generally-applicable Social Partnership Agreements currently in place between the Government, employer organisations and trade unions, and we have not been able to locate any "guidelines on General Round Increases issued by the Department of Finance".
In short, and because of these problems, PV1.1.2 is inoperable.
PV1.1.4 is intended to address cost increases arising from a change in Law. It says that:
The Contract Sum shall be adjusted by the amount of any increase or decrease in the Contractor’s cost of performing its obligations under the Contract as a result of a change in Law made after the Designated Date (being the date 10 days before the last day for receipt of tenders) that:
(i) changes [whether by alteration, addition or removal] VAT, customs or excise duties, requirements for a licence to import or export any commodity or Pay-Related Social Insurance;
(ii) is not identified in the Works Requirements; and
(iii) has not resulted in an adjustment in the Contract Sum under another part of this clause PV1 or the Contract.
Pay-Related Social Insurance ("PRSI") has two broad forms: employer's PRSI, and employee's PRSI. Both forms are calculated as a percentage of the employee's pay and, as such, a change in the rate of an employee's pay will change PRSI – it will alter, and add to, the PRSI payable by the Contractor and the Contractor's employee.
The SEO qualifies as a Law under the Contract and once, therefore, the SEO has not been identified in the Works Requirements, and 19 October 2017 falls after the Designated Date, the increase in employees' rates of pay implemented by the SEO will trigger clause PV1.1.4.
Importantly, the introductory words of PV1.1.4 do not directly link the amount of the change in PRSI to the resulting adjustment in the Contract Sum.
Instead, the amount of the adjustment is required to be "the amount of any increase…in the Contractor's cost of performing its obligations under the Contract as a result of [the relevant change in Law]".
While PV1.1.4 is not intentionally designed to cater for a change in employees' wages, the SEO is a change of Law that changes PRSI and effect should be given to the unambiguous words of the Contract.
When one considers that the clause of the Public Works Contracts that is intentionally designed to deal with wage increases is inoperable (and has been for some time), and that the Government is the party that has ultimately exposed the Contractor to the increased costs realised by the SEO, it seems to us that there is a good argument for the Contractor to be entitled to an adjustment to the Contract Sum to reflect those increased costs.
Clause PV2 is used less frequently than PV1.
The provisions of clause PV2.4 are effectively the same as clause PV1.1.4 and, as such, the same argument as is set out above will apply.
There is an argument to the effect that a Contractor is not required to submit a claim in order to obtain an adjustment in the Contract Sum required by PV1 or PV2.
However, in order best to protect its entitlements, the Contractor should submit notices of claim to the Employer's Representative in accordance with clause 10.3 of the Contract.
The first such notice should ideally be submitted within 20 working days after the Contractor became aware, or should have become aware, of something that could result in an entitlement to an adjustment to the Contract Sum.
The SEO was signed into law on 19 October 2017. As such, a Contractor should submit a notice of claim by 17 November 2017 in order to maximise its chances of obtaining an adjustment to the Contract Sum on foot of the SEO.
Should you have any questions or would like to discuss the above, please contact your usual Maples and Calder contact.
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