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Ontario Finance Minister Dwight Duncan in a 2008 file photo.David Stobbe/Reuters

The Ontario government's attempts to rein in public sector spending were dealt a major setback after an arbitrator ruled it has no authority to impose wage freezes without taking the unpopular step of legislating them.

Finance Minister Dwight Duncan has urged Ontario's one million public sector workers to take a two-year wage freeze to help restore the province's financial health and protect its vital social services.

But an arbitration case has called those restraint measures into question. In a binding ruling released Thursday, arbitrator Norm Jesin awarded 17,000 workers in long-term care homes a 2-per-cent wage increase for this year. Labour leaders say the award could affect the outcome of talks for hundreds of thousands of workers in other sectors, including hospitals, public schools and universities. If other arbitrators respect this judgment, they say, Mr. Duncan could be forced to abandon his restraint measures.

"I think the government is going to have to reconsider the road they're going down," said Sharleen Stewart, SEIU president of Local 1 Canada, which represents the long-term care home workers.

The award sets a standard that other arbitrators will follow, she said, adding that hospital workers are now in arbitration.

The province has also been in a dispute with unions over whether workers in for-profit, long-term-care homes should be included in the wage freeze.

Mark Langer, president of the Ontario Confederation of University Faculty Associations, said if staff of for-profit nursing homes are not part of the wage freeze, it raises questions about including university employees. The government no longer provides the majority of funding for universities, he noted.

Ontario is one of many provinces that are fighting budget shortfalls by imposing restraints on the public sector. Mr. Duncan introduced legislation this year that freezes the wages of non-unionized employees within the government and the broader public sector. British Columbia has imposed a two-year, "net zero" mandate on collective bargaining, and so far just over half of the province's unionized public sector employees have now re-negotiated agreements that were set to expire in 2010.

Mr. Duncan told reporters on Thursday that he plans to continue with his push for a wage freeze.

"This doesn't change anything," he said, referring to the arbitrator's ruling. He reiterated that the government has no plans to legislate freezes for public-sector workers who bargain collectively.

In his ruling, the arbitrator says labour leaders and employers must respond to economic conditions, not a government's fiscal policies, in setting wages.

"I cannot accept that compensation should be frozen because of the budget, particularly as there has been no legislation by the government requiring such a freeze," Mr. Jesin says.

The arbitrator's award reflects the fact that wage settlements have been much more modest over the past year and the government can take some comfort from that, said labour lawyer Steven Barrett.

"The award also confirms that to expect zero increases simply isn't consistent with fairness or reasonableness," he said.

Opposition members said the ruling exposes flaws in the government's efforts to keep a lid on public-sector wage increases.

"In the arbitration world, nobody is buying the government's argument that its budget problems necessarily require freezes on salaries for the hourly-wage workers," New Democrat MPP Peter Kormos told reporters.

With a report from Justine Hunter in Victoria

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