By Jonathan Stempel

Jan 18 (Reuters) - A federal appeals court on Friday upheld a controversial Wisconsin law that restricts the power of public-sector unions, the passage of which sparked an unsuccessful effort to recall the state's Republican Governor, Scott Walker.

By a 2-1 vote, the 7th U.S. Circuit Court of Appeals in Chicago found that the 2011 law is constitutional, rejecting claims that it violated the equal protection and First Amendment rights of union members.

It reversed part of a March 2012 ruling by U.S. District Judge William Conley in Madison, Wisconsin.

Seven of Wisconsin's largest public-sector unions, including the Wisconsin Education Association Council, had sued to overturn the law, known as Act 10.

"Wisconsin educators are extremely disappointed with the appeals court ruling," the group's president Mary Bell said in a statement. She called the law "a ploy to eliminate workers' rights to have a voice through their union - political payback for citizens who didn't endorse the governor."

WEAC is reviewing the decision to determine its next steps, Bell said.

The law had been enacted by Wisconsin's Republican-led legislature as part of an effort to close a multibillion-dollar state budget deficit.

It barred public sector workers, known as "general employees," from collective bargaining on issues other than base wages, imposed tough recertification requirements and barred employers from automatically deducting union dues from paychecks.

A select group of "public safety employees" and their unions were not subject to these new requirements.

Writing for the 7th Circuit majority, Circuit Judge Joel Flaum said Conley correctly upheld the statute's limits on collective bargaining.

But the 7th Circuit also reversed Conley's decision to void provisions that provided for annual union recertification votes and which banned the automatic dues deductions.

GOVERNOR CALLS DECISION A TAXPAYER VICTORY

Flaum said Wisconsin had a rational basis to adopt Act 10, even if it may have favored particular political groups.

"As unfortunate as it may be, political favoritism is a frequent aspect of legislative action," he wrote.

Circuit Judge David Hamilton dissented from the part of the decision on dues deductions.

In a statement, Walker called the decision a victory for state taxpayers, saying said Act 10 was needed to help Wisconsin close a $3.6 billion deficit without tax increases, mass layoffs of public sector employees and cuts to programs such as Medicaid.

The Wisconsin governor survived a recall election last June, after the law's passage had sparked nationwide protests and efforts to remove him from office.

The law also forced most state workers to pay more for health insurance and pensions, and curbed pay raises.

Last September, in a Wisconsin state court proceeding, Dane County Circuit Court Judge Juan Colas declared the law unconstitutional because it violated the free speech and equal protection rights of union members. Wisconsin has been appealing that decision.

Flaum was appointed to the bench by President Ronald Reagan. Joining his opinion was Circuit Judge William Bauer, an appointee of President Gerald Ford. Hamilton was appointed to the 7th Circuit by President Barack Obama.

The case is Wisconsin Education Association Council et al v. Walker et al, 7th U.S. Circuit Court of Appeals, Nos. 12-1854, 12-2011 and 12-2058. 

(Additional reporting by Karen Pierog and Nate Raymond)

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