An arbitrator has ordered Verizon Communications Inc. (VZ) to rehire 2,300 people in New York state who were laid off in December, striking a blow against the phone company's cost-cutting efforts and racheting up the tension already surrounding Verizon's talks on a new labor contract.

Verizon had argued that the layoffs were justified because of a weak economy and toughening competition in the phone business from rival companies and new technologies.

But in a decision received Friday by the company and the Communications Workers of America (search), arbitrator Shyam Das ruled that those trends did not amount to discrete "external events," as Verizon's union contract specifies, that could justify the layoffs.

Verizon must reinstate the workers and give them back pay, minus the severance payments and unemployment benefits they received. Plus, employees who were forced to transfer as part of Verizon's action in December can return to their original locations.

"I've been in this business now since 1966 — 37 years — and I would say it's the greatest victory in my lifetime," said Larry Mancino, a Communications Workers of America vice president who represents the Northeast.

"The impact it's going to have on our members' lives is unbelievable. These people were living with very little hope of getting their jobs back."

Another 1,100 employees in Pennsylvania, New Jersey and Massachusetts have filed similar complaints with other arbitrators.

Verizon spokesman Peter Thonis said the company would comply with the arbitrator's ruling in New York but would wait to see how the cases in the other states play out.

"We're obviously disappointed with the arbitrator's decision," Thonis said. "We believe we followed the language of the contract."

The decision will loom large over talks already underway between New York-based Verizon, the CWA and the International Brotherhood of Electrical Workers (search) on a new contract for 75,000 of Verizon's nearly 230,000 employees. The existing three-year contract expires Aug. 2.

Verizon management has been aggressively and publicly arguing that the union needs to make concessions in job-security language, to enable Verizon to better compete in the turbulent telecommunications industry. Such a concession, Verizon argues, would save jobs in the long run.

The union has countered that such a demand "would rip the heart out of our contract."

Now it appears the arbitrator's decision could make it harder for both sides to compromise.

Thonis said the ruling "doesn't change the need for us to face the challenges facing our business." But union officials said the ruling shows just how valuable the existing job-security language is to their members.

"I think my life will be in jeopardy if I ever give up that language," Mancino said. "Now an arbitrator has given meaning to the language. I don't think there's any way we'd ever give it up."

Mancino said rehiring the laid-off employees would cost Verizon $100 million. Thonis said the cost was "not even a third of that," but he would not disclose the number because he said it was not material to Verizon's bottom line.