Ministers' Deputies / Rapporteur Groups

GR-AB
Rapporteur Group on Administrative and Budgetary Questions

GR-AB(2006)27  16 October 2006[1]

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Salary adjustment method
Proposal by Switzerland

Comments from the Legal Advisor

Item to be considered by the GR-AB at its meeting on 7 November 2006

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1.         At the meeting of the Rapporteur Group on Administrative and Budgetary Questions (GR-AB) on 26 September 2006, Switzerland's delegation presented a document (DD(2006)524) containing a proposal and a number of questions concerning the remuneration adjustment method discussed in the 171st report of the Co-ordinating Committee on Remuneration (CCR).  In this connection, the Chair of the GR-AB invited the secretariat "to look at the concrete proposals set out in document DD(2006)524 (Switzerland) and provide a written opinion" (GR-AB(2006)CB7, paragraph 3.2.5). He also asked the secretariat "to provide information on what would happen if the Committee of Ministers did not adopt the revised method before the end of the year."

2.         The purpose of this document is to examine the two points referred to above.

I.          Examination of the Swiss delegation's proposals and questions

A.         Contents of document DD(2006)524

3.         The Swiss delegation proposes ending the automatic inclusion of inflation in calculation of the annual salary adjustment. This component of the adjustment would be the subject of a specific decision taken each year by the Committee of Ministers, which would either approve or reject it according to the Organisation's financial and budgetary situation.

4.         A mechanism of this kind would entail the amendment of Articles 5 and 6 of the new Rules on the Remuneration Adjustment Procedure (CM(2006)134, Appendix 1), which provide that the salary adjustment is to be calculated on the basis of the following three parameters:

- the national consumer price index;

- the reference index;

- purchasing power parities.

5.         The remuneration of staff of the Council of Europe would accordingly be adjusted at least in the light of the reference index and purchasing power parities. Whether the national consumer price index was included in the calculation of the adjustment would be the subject of a specific decision by the Committee of Ministers.

6.         From the outset it can be noted that the rules resulting from this mechanism are apparently being proposed not in terms of an exception to the method, but as an integral part of it. This would therefore give a separate method, applicable solely to the Council of Europe, which would depart from the external reference standard constituted by the adjustment method set out in the CCR's 171st report.

B.         The proposal's legal implications

7.         The considerations below are intended to answer the questions raised in document DD(2006)524.

8.         However, it would also be appropriate to estimate the financial and budgetary impact of the proposal and its technical feasibility in the context of the new method proposed by the CCR.

i.          Possibility of amending the terms of the method recommended by the CCR

9.         Since implementation of the Swiss delegation's proposal would entail adapting a number of provisions of the new method, the question should be raised whether the Committee of Ministers is empowered to adopt the method recommended by the CCR while making amendments to it.

10.        In this connection, it should be pointed out (cf. the legal opinion in document GR-AB(2006)10, paragraph 7) that the CCR is called upon to make two kinds of recommendations regarding salaries and allowances:

- firstly, the CCR recommends to the governing bodies of the Co-ordinated Organisations the adoption of a method defining the criteria to be applied for the annual adjustment;

- secondly, on the basis of that method, the CCR recommends the successive adjustments to be made to the salaries and allowances.

11.        As regards recommendations concerning the annual adjustment, despite their non-binding legal value, the executive body can but approve them since they are merely the result of applying the adjustment method approved by the Council/Committee of Ministers of each Co-ordinated Organisation (cf.
GR-AB(2006)10, paragraphs 11 to 17). Of course this does not exclude the application of the affordability clause.

12.        The situation is different in the case of the CCR's recommendations with a view to the adoption of a new adjustment method. This is because, from a strictly legal standpoint, no provision of the Regulations concerning the Co-ordination System (154th report of the CCR, CM(2004)14) requires the executive bodies of the Co-ordinated Organisations, to whom the CCR has addressed a recommendation for a new adjustment method, to adopt that method in the terms proposed by the CCR. In addition, at the examination stage, the recommended method has, by definition, not been applied and hence cannot have engendered rights and obligations. These considerations lead to the conclusion that the Committee of Ministers is empowered to adopt the adjustment method recommended by the CCR while making amendments to the provisions proposed by the latter.

13.        It must nonetheless be borne in mind that, from a political point of view, each amendment made to the recommended method results in a degree of "de-coordination" compared with the other partners in the Co-ordination system, who themselves adopt the same adjustment method. It might therefore be appropriate to consult the other Co-ordinated Organisations concerning the possible introduction of a method departing from the jointly applied standard. 

ii.          A method producing "stable, foreseeable and clearly understood" results

14.        Although an international organisation is free to choose the adjustment method it intends to apply to staff salaries, the method must be based on criteria ensuring that the results are stable, foreseeable and clearly understood. In other words, an adjustment method must be objective and reliable (see
GR-AB(2006)20, paragraphs 9 to 12).

15.        In the case under consideration here the proposed calculation base would include two constant factors (the reference index and purchasing power parities) and a third more variable one (the national consumer price index) which the Committee of Ministers would decide to include or not on a case-by-case basis taking account of the Organisation's financial and budgetary situation.

16.        Doubts can be raised concerning the stable, foreseeable and clear nature of a mechanism of this kind. Since inclusion of the national consumer price index would depend on an annual decision, taken in the light of the budgetary situation at the time, it would be impossible to tell in advance whether this factor would be included in the calculation base for the salary adjustment or not. Without precise rules on this subject, such a method could hardly be considered objective and reliable.

17.        To satisfy the requirements of stability, foreseeability and clarity, precise budgetary and financial criteria would have to be defined in the method itself with a view to determining objectively in which cases the adjustment would or would not be based on the national consumer price index. Mere reference to a difficult budgetary situation or a shortage of budgetary resources would be insufficient grounds for excluding the national consumer price index (concerning the reasons for deciding to introduce a new adjustment method, see paragraphs 31 and 32 below).

18.        This analysis can be illustrated by reference to judgment 1821 of the Administrative Tribunal of the ILO (ILOAT) (in re Allaert and Warmels No. 3), in which the Tribunal noted that the organisation concerned was unable to indicate "the factors or statistics that it considered in lowering the salary adjustment from 1.3 to 0.7 per cent." It accordingly held (consideration 8) that:

"... it [the adjustment method] obviously fails to produce results that are stable, foreseeable and clearly understood. The rule laid down by the Tribunal is simply an extension of the general principle that an organisation may not act arbitrarily and must adopt an objective methodology for salary adjustment."

iii.         Elimination of automatic compensation for inflation from the standpoint of acquired rights and its impact on staff's terms of employment

19.        The second and third questions raised in document DD(2006)524 are linked, since an acquired right can be seen to be impaired where a decision results in a drastic alteration of the terms of employment. Since its judgment 61 (in re Lindsey) the ILOAT has indeed held that a decision impairs an acquired right where it "adversely affects the balance of contractual obligations or infringes the essential terms in consideration of which the official accepted appointment."

20.        In the case under consideration here it is accordingly necessary to verify whether staff can assert an acquired right to automatic consideration of the national consumer price index when calculating the salary adjustment and whether adoption of the proposed mechanism would be likely to drastically alter their terms of employment.

21.        Although, in general, the staff of an international organisation clearly have an acquired right to an adjustment method satisfying the reliability criteria established by case-law, the latter has just as clearly confirmed that this right does not concern either a given method or specific terms of adjustment (see the case-law cited in document GR-AB(2006)20, paragraphs. 9, 10 and 35). An international organisation remains empowered to change its method in accordance with the procedures in force and the principles applicable in the light of established precedents.

22.        The tribunals have clarified this position in a number of respects. For instance, in its judgment 1912 (in re Berthet No. 2 and others) the ILOAT held (consideration 19) that:

"international civil servants do not have an acquired right - any more than national civil servants - to an automatic indexing of their salaries [to the cost of living]. As recalled in judgment 1118 (in re Niesing No. 2 and others), the establishing of regulations for the periodic adjustment of salary is within the discretion of the organisations provided that these regulations do not violate the principles of international civil service law and their application does not bring about an erosion of salary that could be regarded as substantially jeopardising the contractual balance between those organisations and their staff members."

23.        Similarly, the World Bank Administrative Tribunal (WBAT) held as follows in its judgment No. 1 (de Mérode and others) (consideration 112):

"The Tribunal considers in consequence that the Bank is obliged to carry out periodic reviews of salaries, taking into account various relevant factors. The bank is under no duty to adjust salaries automatically to increases in the cost of living and it retains a measure of discretion in this regard. This does not mean that the rises in the cost of living in a period of inflation constitute a factor that can be ignored or disregarded in the exercise of that discretion. On the contrary, the established practice, and statements confirming that practice, have created a legal obligation to make periodic adjustments reflecting changes in the cost of living and other factors. In the opinion of the Tribunal such an obligation is a fundamental element in the Applicants’ conditions of employment which the Bank does not have the right to change unilaterally.”

24.        The WBAT reiterated the same position in its judgment 56 (Pinto; see consideration 40).

25.        The following conclusions can be drawn from the above:

- the automatic nature of a salary adjustment for cost of living (in particular inflation) is not an acquired right;

- conversely, its periodic nature (particularly as regards inflation) does constitute an acquired right for serving staff, since the purpose of a periodic adjustment is to avoid an erosion of salaries drastically altering staff's terms of employment.

26.        It follows that, subject to the conditions set out in this document, the proposed mechanism could validly allow the possibility of deciding from time to time not to include inflation in the calculation of the salary adjustment. However, the mechanism should not result in a multiplication of decisions of this kind, which should remain relatively exceptional.  Mention can be made here of the ILOAT's established precedents on the cumulative effect of individual decisions. In this connection, in its judgment 1514 (in re Aymon No. 2 and others) the tribunal held (consideration 12):

"As first set out in Judgment 986 (in re Ayoub No. 2 and others) and reaffirmed in Judgment 1368, the case law is that international officials may allege breach of an acquired right when there is impairment of an essential and fundamental term of conditions of employment; and that is so even where impairment is gradual and due to an accretion of final decisions which are no longer open to challenge and each of which, taken singly, would not itself have been deemed unlawful. ... A fall in purchasing power below some critical point may indeed be breach of an official's acquired right."

27.        Nonetheless the case-law does not specify the threshold beyond which an erosion of salary results in a breach of acquired rights. Should the proposals under consideration be adopted, there is a risk of appeals being lodged with the aim of obtaining a decision from the Administrative Tribunal on this point.

iv.         Compliance with the general principles of international civil service law

28.        The last question raised in document DD(2006)524 effectively entails asking whether the proposed change of method could have implications in terms of other general legal principles not mentioned here.

29.        It is difficult to give a full, precise answer at such an early stage, since the proposal has merely been sketched out.

30.        However, mention can be made of the ban on arbitrary treatment, which could be violated if a decision to exclude the national consumer price index from the adjustment was not based on predefined, clear, objective criteria (see paragraphs 16 to 18 above).

31.        Similarly, it is possible to cite the ban on abuse of power, which a tribunal considers when examining the reasons which led to reform of an adjustment method. In this connection, in its judgment in the above-mentioned de Mérode case, the WBAT held that (consideration 47):

"The principle of non-retroactivity is not the only limitation upon the power to amend the non-fundamental elements of the conditions of employment. The Bank would abuse its discretion if it were to adopt such changes for reasons alien to the proper functioning of the organization and to its duty to ensure that it has a staff possessing 'the highest standards of efficiency and of technical competence'. Changes must be based on a proper consideration of relevant facts. They must be made in good faith and must not be prompted by improper motives. They must not discriminate in an unjustifiable manner between individuals or groups within the staff. Amendments must be made in a reasonable manner seeking to avoid excessive and unnecessary harm to the staff. In this respect, the care with which a reform has been studied and the conditions attached to a change are to be taken into account by the Tribunal.” 

32.        Special importance therefore attaches to the reasons given for a proposed reform (which are always weighed by the tribunal in the event of an appeal). This is all the more true here in that inflation is an essential factor in the adjustment that cannot be ignored (see the case-law referred to in paragraph 23 above) without jeopardising the very purpose of the adjustment method. Giving reasons is also likely to prove a difficult exercise in a number of other respects:

- should budgetary difficulties be cited as a reason for adopting the proposal, it can be noted that the tribunals have accepted this as a valid reason solely in cases of departure from a method in force, justifiable only where there are exceptional or unforeseen financial difficulties (see GR-AB(2006)20, paragraphs 19 to 23): to the best of our knowledge there is no case-law concerning reliance on budgetary considerations to justify a change of adjustment method;

- similarly, if budgetary difficulties were cited as a reason for the change of method, it can be asked to what extent such difficulties can be relied on outside the context of the affordability clause. In any case, it would be necessary to clarify the links between the proposed mechanism, based on conditions of budgetary feasibility, and the affordability clause;

- lastly, it can be recalled that the mere aim of making savings cannot be a valid reason for a change of method. Indeed in its judgments 1821 (in re Allaert and Warmels No. 3) and 1912 (in re Berthet No. 2 and others) the ILOAT held as follows (considerations 7 and 13 respectively):

"While the necessity of saving money may be one valid factor to be considered in adjusting salaries provided the method adopted is objective, stable and foreseeable (Judgment 1329 (in reBall and Borghini) in 21), the mere desire to save money at the staff's expense is not by itself a valid reason for departing from an established standard of reference: Judgments 1682 in 7 and 990 (in re Cuvillier No. 3) in 6."

II.         The legal situation should a new adjustment method not be adopted by 1 January 2007

33.        Article 1.1 of the adjustment method in force (139th report of the CCR) defines its period of validity as follows:

"These rules shall determine the remuneration adjustment procedure for the four-year period from 1 January 2003 to 31 December 2006. (...)"

34.        It follows from the above provision that as from 1 January 2007 the adjustment method currently in force will be inoperative and devoid of effect.

35.        If there was no method at all as at 1 January 2007 a legal vacuum would result. Such a situation would be unacceptable, since it would mean that there were no criteria for assessing the salary adjustment. As the ILOAT pointed out, an international organisation must adopt a remuneration adjustment method: this "rule laid down by the Tribunal is simply an extension of the general principle that an organisation may not act arbitrarily" (judgment 1821, consideration 8).

36.        If a final method could not be introduced in time for 1 January 2007, it would be essential to provide for provisional application of another method, pending finalisation of the method to be adopted at a later date.

37.        From a legal standpoint, it would be possible to decide to extend application of the current method for a limited period. However, reasons would have to be given for a decision of this kind (see paragraphs 31 and 32 above). This should nonetheless not pose particular difficulties, since this situation would result in preservation of the status quo. Moreover, the rules governing the current adjustment method themselves envisage a similar situation, but in different circumstances, since they provide: "In the absence of any recommendation by the CCR, made by 1 November 2006 at the latest, either to prolong or amend these rules with effect from 1 January 2007, the present method, as applicable in year 2006, shall be prolonged until 31 December 2007."

38.        Provision could also be made for application of an interim method different from the current adjustment method. The feasibility and conditions – especially legal – of a solution of this kind would depend on the rules applicable under this provisional method.