Insights

Renewing collective agreements in the context of rising inflation

Overview
Published on: April 25, 2022
Subjects:  Total compensation

Since February 2021, the economy has been impacted by a phenomenon that, while not unfamiliar, has been off our radar screens for over 25 years: rampant inflation.

For context:

  1. A year ago, there was consensus among experts that this situation was temporary and would clear up on its own in the next 12 months; this is no longer the case today. That said, inflation rates could drop back down to around 2.5 % in 20231, according to Desjardins.
  2. There’s a tried-and-true method for controlling inflation: raising interest rates. The trick is to strike the right balance to keep the economy from falling into a recession. 

Even if inflation returns to the level we saw in recent decades in about a year, worker’s buying power will still be impacted.

What are the alternatives for employers who are in the process of bargaining or will begin bargaining in the coming months?

Inflation clauses2 became fairly commonplace in the 1980s. These clauses tie salary scale indexing to inflation3  and are a way to protect employees’ standard of living while maintaining some control over payroll. Here’s an example for an agreement with negotiated 2% salary raises: “if the rate of inflation exceeds 3%, salary ranges will be raised in 2022 by 2% plus the difference between the 2021 inflation rate and 3%, up to a maximum of 1.5%.” The definition of inflation used for the purposes of a collective agreement must be clearly articulated and specify the geographic area (Canada, Quebec, the Montréal metropolitan area, etc.) and products / product groups (all, all excluding energy, etc.) used to calculate inflation. The calculation itself must also be clearly defined. For example, inflation in 2021 can be calculated as the difference between the December 2020 CPI and the December 2021 CPI or the difference between the average of the 12 monthly CPIs for 2020 and the average of the 12 monthly CPIs for 2021.

While the different methods produce similar results in the long term, they may have different impacts in the short term, and the more clearly defined the inflation clause, the easier it is to apply the collective agreement.

On the other hand, if a municipal government negotiates inflation clauses that are not uniformly applied across the organization, this may create other issues. For example, if employee compensation is managed through multiple collective agreements, the indexation of salary ranges may be higher for units that have inflation clauses. However, if these different units are part of the same pay equity program, adjustments could be required to maintain pay equity for units that do not have inflation clauses, particularly if they include predominantly female job classes. A simple way to avoid this issue while preserving internal equity is to ensure that an inflation clause is applied (or not) to all employees for the same years.

Furthermore, the Act to foster the financial health and sustainability of municipal defined benefit pension plans (Bill 15) has also had an impact on the net pay of certain employees in recent years. It is therefore important for municipalities to carefully plan their upcoming collective agreement negotiations so they can continue to attract and retain the talent they need to support their mission.
 

Authors

  • Guillaume Paradis, M.Sc., Consultant
  • Marc Chartrand, M.Sc., CPHR Distinction Fellow, ASC, Senior Consultant

Published in the Bulletin des Gestionnaires en Ressources Humaines des Municipalités du Québec (GRHMQ) - Vol. 22 No 1, APRIL 2022

Sources and notes

1Desjardins Economic Studies, Economic and Financial Outlook, March 18, 2022.
2Also known as a consumer price index (CPI) clause or cost-of-living allowance (COLA) clause.
3Inflation is the change in prices over time and is generally calculated as the variation in the CPI over time, using Statistics Canada data, for example.
 

 

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