Minimum wage special conditions in public procurement tender processes: Regiopost v Stadt Landau (Case C-115/14)

Publication February 2016


Introduction

When can a contracting authority impose minimum wage special conditions on businesses tendering for public contracts? On 17 November 2015, the Court of Justice of the EU (CJEU) delivered its judgment in Regiopost v Stadt Landau1 (Regiopost), a landmark ruling which could have far-reaching implications for UK companies tendering for public contracts elsewhere in the EU. The ruling also promises to give public authorities in certain EU Member States greater latitude to impose such special conditions, but it is likely to be of less relevance to UK contracting authorities.

The Regiopost case follows two similar cases in recent years where the CJEU delivered judgments which generally had the effect of restraining the imposition of national or regional labour standards where there is a cross-border dimension to a tender process.

In this briefing, we consider the Regiopost judgment in light of the existing authorities and we explore the possible implications of the case, in particular for UK contracting authorities and for UK companies tendering for public contracts elsewhere in the EU. The following section contains a summary of the practical consequences of the ruling for UK organisations. Readers seeking a fuller understanding of the law in this area are also referred to the detailed analysis of case and its context, beginning at section 3.

Practical consequences for UK businesses and contracting authorities

What does the Regiopost ruling mean for UK companies tendering for public contracts elsewhere in the EU?

It is essential for bidders in public procurement tender processes to understand the extent to which contracting authorities can build social policy requirements into their tender rules – it should not simply be assumed that authorities are acting in compliance with procurement law. Moreover, the time-limit for challenging such rules is strict (30 days from the date a bidder knows or ought to have known of the breach), which means that it will invariably be too late to challenge such requirements once the winning bidder has been announced.

To make sense of the current state of the law, a useful starting point is to consider whether a bidder proposes to physically perform the contract in the UK or to “post” employees to another EU Member State.

If a UK tenderer proposes to carry out a contract entirely in the UK – or another tenderer proposes to subcontract a public contract entirely to a UK-based entity – there may be good grounds for the UK party refusing to adhere to the employment-related standards in other EU Member States if those standards exceed those in the UK. However, given the UK Government’s intention to significantly increase the UK’s national minimum wage over the lifetime of the current Parliament, it will become increasingly unlikely that such circumstances might arise in practice.

On the contrary, if the UK company (whether as a lead contractor or as a subcontractor) proposes to post workers to another Member State to perform the contract, it now appears to be the case that a foreign contracting authority can require the UK entity to confirm its commitment to applying local employment law standards (provided those standards are based on a “law” or a universally applicable collective agreement). Whilst the rationale underlying the Regiopost judgment is certainly open to criticism, it might be inadvisable to act contrary to its conclusions in the absence of further intervention by the courts.

What does the ruling mean for UK contracting authorities?

Does Regiopost now mean, for example, that a London contracting authority could require tenderers to commit to paying employees a wage above the national minimum wage? Or could a contracting authority take it upon itself to impose on tenderers social conditions which exceed those set down in national legislation?

The answer to both questions is almost certainly no.

In the UK, a uniform minimum wage law applies at national level under the National Minimum Wage Act 1998 (as amended from time to time). In the absence of legislation which allows for the setting of regional minimum wages or of minimum wages applicable only to public contracts, a local authority cannot safely require tenderers to pay workers a wage exceeding that level when performing the contract. There are isolated examples of UK contracting authorities requesting tenderers’ voluntary acceptance of employment standards exceeding those set down in legislation – such voluntarily pacts will continue to be permissible.

Whilst the imposition of industry- or region-specific wage standards might be possible if UK contracting authorities can point to a collective wage agreement which is declared to be of “universal application”, the existence of any UK agreements meeting that definition is questionable given the highly decentralised nature of collective bargaining in this country.

In summary, therefore, if there is a cross-border dimension to the tender process:

  1. The UK contracting authority cannot require a tenderer to pay its workers (or a subcontractor to pay its workers) the UK national minimum where it is proposed that those workers will not be physically located in the UK during contract performance; and
  2. If the tenderer proposes to “post” workers to the UK, those tenderers can be required to give a commitment to pay their workers the UK national minimum wage. However, given the absence of regional laws setting higher regional “living” wages or universally-applicable collective agreements, it would appear to be a high-risk approach to require tenderers in any case to pay workers a wage exceeding the national minimum wage. The case-law does not impinge upon the freedom of contracting authorities to ask tenderers to voluntarily adhere to employment standards exceeding those set down in legislation.

Minimum wage conditions in public procurement tender processes – Regiopost in context

Regiopost is the latest instalment in an already complex web of rules which govern how public procurement law can be used to achieve social policy objectives. In particular, the case draws on:

  1. The principle of free movement of services in the Treaty on the Functioning of the EU (TFEU or Treaty);
  2. Directive 96/71/EC (the Posted Workers’ Directive or PWD);
  3. Directive 2004/18/EC (the 2004 Public Procurement Directive); and
  4. Judgments of the Court of Justice of the EU (CJEU) in recent years, including Rüffert v Land Niedersachsen (Rüffert)2 and Bundesdruckerei v Stadt Dortmund3 (Bundesdruckerei).

Commentary on the above authorities is often politically-charged and perhaps reflects a tension between, on the one hand, the tendency of the Treaty’s principles to promote market liberalisation (e.g. the free movement of services) and, on the other, the reluctance of some public authorities to avoid spending public money on contracts which might be seen to encourage “social dumping”.4

Article 56 TFEU – free movement of services

Article 56 TFEU guarantees protection for the free movement of services between the EU Member States. A national restriction on the freedom of an EU business to provide services into another EU country can constitute a breach of the Treaty if it is directly or indirectly discriminatory. However, a restriction can be justified if it satisfies one of a number of exemptions in the Treaty, including if the restriction is necessary for the protection of workers’ rights.

Posted Workers’ Directive

The PWD provides that workers who are temporarily “posted” from one EU Member State to another by their employers are entitled to enjoy the same minimum employment rights as those available to workers permanently located in the host Member State. The employment rights which can be imposed in respect of posted workers are limited to rules set down by “law, regulation or administrative provision” and collective agreements or arbitration awards which have been declared “universally applicable” (i.e. which are observed by all undertakings in the geographical area and in the profession or industry concerned).

Public Procurement Directives

The 2004 Public Procurement Directive was in force in Germany at the time of the facts giving rise to the Regiopost dispute. Article 26 of the 2004 Public Procurement Directive provided that that authorities awarding public contracts are entitled to set down “special conditions” relating to the performance of the contract, which can include social and environmental conditions, provided those conditions are otherwise compatible with general EU law and are set out in the initial tender documents.

The 2004 Public Procurement Directive has since been replaced by Directive 2014/24/EU (2014 Public Procurement Directive). In the new Directive, Article 70 largely mirrors the language of Article 26 of the 2004 Public Procurement Directive, although it also expressly refers to the possibility of using “employment-related” special conditions.

The Rüffert judgment

The CJEU was asked whether it was compatible with EU law for a German regional law to require public authorities to obtain a written undertaking from bidders tendering for a public services contract, to pay their employees the minimum remuneration specified by a collective wage agreement when performing that contract.

The CJEU first considered the compatibility of the German law with the PWD. It held that the collective wage agreement which the regional law sought to impose on subcontractors could not be imposed in respect of Polish workers “posted” to Germany to carry out the contract at issue, as it was not a “law” or a universally applicable collective agreement. In particular, the Court noted that:

  1. There was a mechanism under German law for collective agreements to be declared universally applicable, but no such declaration had been made in respect of the minimum wage law in question; and
  2. The wage agreement applied only to workers in relation to public contracts, but not in relation to private contracts.

The Court considered that its interpretation of the PWD was confirmed by an analysis of the law on free movement of services (Article 56 TFEU). The Court held that the regional law in principle constituted a restriction on free movement and that it could not be justified by reference to the objective of protecting workers’ rights since there was no evidence to illustrate why workers delivering public contracts were in need of a greater degree of protection than workers carrying out private contracts.

The Bundesdruckerei judgment

In 2014, the CJEU was asked whether it was compatible with EU law for a German regional law to require tenderers to commit to paying workers in relation to a public contract a minimum wage established by German regional law, even in circumstances where a tenderer proposed to rely exclusively on workers located in an EU Member State other than Germany (in this case, Poland).

The Court held that the PWD was not the appropriate frame of reference as there was no intention to “post” Polish workers to Germany. That being the case, the regional law’s compatibility with EU law was analysed from the perspective of the TFEU, in particular the principle of the freedom to provide services.

As in Rüffert, the Court held that the law in principle constituted a restriction on the freedom to provide services because it prevented subcontractors established in another EU Member State deriving a competitive advantage from differences in the respective prevailing rates of pay between two Member States. Crucially, this restriction could not be justified by reference to the objective of protecting workers’ rights, in particular because (as in Rüffert) the measure applied only to workers in relation to public contracts, and there was no information to suggest that workers delivering a public service contract were in need of such enhanced protection.

The Regiopost case

Facts

This case arose in relation to a challenge to yet another regional German law (on this occasion, in Rhineland-Palatinate) which required contractors tendering for public service contracts to commit to paying their staff a minimum hourly wage in relation to work undertaken in the performance of public contracts (the Minimum Wage Law). The Minimum Wage Law did not apply in respect of equivalent private sector contracts and, at the time of the facts giving rise to the case, there was no national minimum hourly wage in Germany.5 It was also a stipulation of the Minimum Wage Law that public authorities should reject tenders from bidders who failed to confirm their intention to comply with the Minimum Wage Law.

Regiopost (an undertaking established in Germany) submitted a tender in response to a postal services contract proposed to be awarded by Stadt Landau. Following its refusal to commit to paying the regional minimum wage, Regiopost was excluded from the tender process, a decision which it challenged before the German Public Procurement Board (the Board). The Board referred two questions to the CJEU, the most pertinent for the purposes of this briefing being whether Article 56 of the TFEU – in conjunction with the PWD – precludes a national provision which makes it mandatory for a contracting authority to award contracts only to tenderers which undertake (and whose subcontractors undertake) in writing to pay their employees who perform the contract a minimum wage fixed by the State for public contracts (but not for private ones), where there is neither a general statutory minimum wage nor a universally binding collective agreement that binds potential contractors and possible subcontractors.

Judgment

The Court noted that special conditions within the meaning of Article 26 are permissible, provided they are “compatible with Community law”. Relying on Recital 34 of the 2004 Public Procurement Directive, the Court held that the appropriate framework for assessing such compatibility was the PWD. In that context, the Court noted that the Regional Minimum Wage Law was indeed a “law” for the purposes of the PWD.6

According to the Court, it was irrelevant that the Minimum Wage Law applied to public contracts but not to private contracts. The logic underlying this appears to be that, as the 2004 Public Procurement Directive only applied to public contracts, and Article 26 of that Directive allowed for special conditions relating to the pursuit of social objectives, it follows that it is permissible for such conditions to relate only to public contracts.7

Therefore, Article 26 of the 2004 Public Procurement Directive, read together with the PWD, allows a contracting authority to require tenderers to comply with a special condition relating to minimum hourly wages, where that special condition is based on a “law” within the meaning of the PWD (and, presumably, also a collective agreement of universal application).

Moreover, the Court said that its interpretation of Article 26 was confirmed by reading that provision in light of the principle of free movement of services, “since [the 2004 Public Procurement Directive] seeks in particular to bring about the freedom to provide services”.

Analysis

The Court’s analysis is problematic for a number of reasons and the judgment appears to sit rather uneasily with Rüffert and Bundesdruckerei.8

However, the effect of Rüffert and Regiopost (taken together) appears to be that it is permissible for social- and employment-related “special conditions” to be imposed on tenderers who propose to physically “post” workers to the location of the contracting authority, provided the conditions sought to be imposed are either a part of the national or regional law in that location, or they reflect the terms of a collective agreement which has been declared universally applicable.

This could have a number of mischievous consequences – for example:

  1. Contracting authorities cannot generally prevent tenderers from proposing to subcontract a part(s) of a public contract.9 This places contracting authorities in an invidious “Catch 22” position – imposing a requirement on tenderers to confirm their adherence to an authority’s special conditions may be compatible with EU law unless a tenderer proposes to subcontract the services in question, a fact which will be difficult to predict at the time tender documents are being drafted. In many situations – particularly in respect services contracts which can easily be performed remotely – it will be virtually impossible for a contracting authority to predict at the time it prepares its tender documents whether a tenderer will in fact propose to perform the contract remotely;10 and
  2. Employees in the same firm carrying out the same work might be paid differently if one is working on a public contract and the other on a private contract.

Further information

Norton Rose Fulbright has extensive experience of advising clients on contentious and non-contentious public procurement law, including in relation to the use of social and environmental conditions in tender processes. We would welcome the opportunity to discuss any of the issues raised by the Regiopost judgment, and their implications for your organisation.


Footnotes

2

Case C-346/06

3

Case C-549/13

4

The European Commission defines social dumping as circumstances “where foreign service providers can undercut local service providers because their labour standards are lower”.

5

A universal minimum wage of €8.50 per hour was introduced in Germany with effect from 1 January 2015.

6

As noted above, the PWD only applies in respect of “laws, regulations or administrative decisions” or collective agreements / arbitration awards which are declared to be of universal application.

7

An argument advanced by Advocate General Mengozzi in his Opinion (9 September 2015).

8

First, it is questionable why the Court decided to analyse Article 26 in light of the PWD in the first instance, rather than the Treaty. The Court noted that the Minimum Wage Law should be analysed for its compatibility with primary EU law (i.e. the founding treaties of the EU) because the 2004 Directive does not exhaustively harmonise EU law in this area (this approach is based on established case law). However, the Court in fact proceeds to do the opposite by considering the measure in light of the PWD, rather than the TFEU (a directive being a secondary law measure).

Second, the Court then argues that its finding is confirmed by the TFEU for the following reasons:

Its interpretation of Article 26 is justified by reference to the principle of free movement of services, because the 2004 Public Procurement Directive gives effect to that principle; and

The finding in Rüffert that the measure in question could not be justified by the objective of protecting workers was not relevant in this case because Rüffert related to a collective agreement applicable in the construction sector which had not been declared universally applicable.

Both of those reasons appear to be somewhat problematic. In relation to the first argument, the case concerned two competing interpretations of Article 26, and therefore it is unusual to conclude that one interpretation is justified by reference to the principle of free movement of services merely because the 2004 Public Procurement Directive gives effect to that principle. In relation to the second argument, it is worth recalling that the Court in Rüffert found first that the measure was incompatible with the PWD as it concerned a collective agreement which had not been declared universally applicable; the Court in that case then used the principle of free movement to confirm its analysis in relation to the PWD. By contrast, the Court in Regiopost seems to have used the first argument in Rüffert (that the measure was incompatible with the PWD) as the basis for its conclusion that Regiopost is distinguishable in relation to the free movement of services point – however, it is difficult to understand how this means that the TFEU confirms the Court’s finding that Article 26 is compatible with EU law. 

Arguably, the Court might have decided that – in the absence of complete harmonisation – it should have looked to the Treaty, as a source of primary law, as the appropriate legal framework. This would presumably have led to an analysis similar to that in Bundesdruckerei, i.e., that the measure constituted a restriction on the principle of the free movement of services which could not be justified by the objective of protecting workers (given that there is no apparent reason for according workers greater rights when performing a public, as opposed to a private, contract).

9

Although the 2014 Public Procurement Directive does allow for an authority to require that certain “critical parts” of a contract be performed by the main contractor.

10

We suspect that authorities might avoid this potential pitfall by qualifying the requirement such that it applies to “posted” workers only.


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