Labour Minister Francine Landry has pulled amendments to the binding arbitration process and has promised to appoint a committee to examine the issue.
The labour minister announced on Friday the Liberal government would remove the contentious section from Bill 24.
"It has become clear through correspondence and meetings from stakeholders from both industry and labour that there are many divergent opinions on the proposed changes to binding arbitration," Landry told the legislature.
"In the interest of co-operation and collaboration, government will establish a joint labour management consultation committee of representatives of both sectors."
She said one of the first issues the committee will tackle is the rising labour costs through binding arbitration at universities and municipalities.
The move was applauded by politicians and unions.
"This is certainly welcome news on the floor of the legislature here today," said Progressive Conservative MLA Trevor Holder.
Green Party Leader David Coon said public and private sector unions should be congratulated for standing up to the provincial government.
"They made their case so clear and so effectively and so beyond reproach the evidence — they had clear arguments, they were relentless and it just showed the errors of the changes they were intending to make to our labour laws around arbitration," Coon said.
"And so the government did the right thing."
Union leaders had denounced the proposed reforms, saying they would give employers, including municipalities and universities, more leverage in contract talks.
Joel Richardson, the vice-president of the Canadian Manufacturers and Exporters Association in New Brunswick, said he supported the decision to rip up the section on binding arbitration.
"I think that overall the employers of New Brunswick were very concerned with this piece of legislation," said Richardson.
"The companies in New Brunswick were also not consulted. So we are very pleased to see the government reverse direction."
Municipalities had asked the provincial government for some of the changes, saying the current system leads to arbitrators granting large wage hikes.
They said they sometimes agree to big hikes themselves out of fear an arbitrator will go even higher.
The City of Moncton said last month when it signed a new contract with firefighters that those employees will have seen a 50-per-cent pay increase over two contracts, increases the city felt it had to grant to avoid the risk of arbitration.
The Cities Association of New Brunswick issued a statement on Friday afternoon, criticizing the Liberal government for backtracking on the binding arbitration changes.
Denis Roussel, the association's executive director, said the escalation of police and fire wages is "increasingly unsustainable" for city governments.
He said these wage hikes are "resulting in an inequitable escalation of municipal protective service wages relative to other public sector workers."
Glenn Sullivan, the president of Atlantic Firefighters Association, applauded the Liberal government's climbdown on the arbitration amendments.
He said the binding arbitration system has "treated us fairly" since it was adopted.
"We had an agreement then that in order to eliminate strikes … it would be replaced by binding arbitration and that system has worked very well since then," he said.
"We feel that it is sort of disingenuous by municipalities [to say] it is an unfair system, that it tips the balance too much in favour of the unions, because it is just not accurate."
Liberals defend change of course
The arbitration changes were included in Bill 24, which contains several legislative reforms related to the Gallant government's strategic program review.
The Liberals received unanimous support from the legislature to remove that specific section from the bill, but to keep the rest of the legislation intact.
Liberal cabinet minister Donald Arseneault said he didn't think Friday's decision showed the government made a mistake.
"I think the process works. Democracy works," he said.
"The legislature is there when we introduce bills. The opposition has the role to play to ask the proper questions. If we think that there is more work can be done on some of these pieces of legislation … why not?"
The two opposition parties were divided on Arseneault's explanation.
Opposition Leader Bruce Fitch said the problems can be blamed on Premier Brian Gallant's decision to appoint a small cabinet and the cabinet ministers are too busy.
"They are overloaded. They are not taking the time to read the bills, to understand the bill, more importantly … I have never seen so many bills repealed or reversed," Fitch said.
Meanwhile, the Green party leader said governments should reverse course when it's evident that a policy isn't acceptable.
"There is no shame in correcting mistakes and doing the right thing on the part of the government," Coon said.
"Where we run into real trouble is when governments dig their heels in and refuse to do that. They did the right thing."