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New EU decision calls into question minimum wage contract term in procurements

Monday October 20th, 2014

Many contracting authorities in the UK are looking to build in living/minimum wage provisions in their contracts, partly as a response to the Public Services (Social Value) Act 2012, which puts an obligation on contracting authorities to consider how to build appropriate socio-economic criteria into their services contracts.  Procurement lawyers have long had a concern that such provisions could fall under scrutiny in the event of a challenge on the basis that such measures could be discriminatory to bidders based outside the Member State. A recent case has confirmed this and David Hansom looks at the issues.

David Hansom

David Hansom

Under Article 26 of the Treaty on the Functioning of the European Union (TFEU), contracting authorities may lay down special conditions relating to the performance of a contract, provided that these are compatible with EU law and are indicated in the contract notice or in the specifications.

In the German case of Bundesdruckerei GmbH v Stadt Dortmund, (Case C‑549/13), a German contracting authority required all bidders to commit to pay staff, or require any sub-contractor to pay, a specified minimum wage. The contractor wished to sub-contract all of the work to sub-contractors based in Poland; however, the sub-contractor was unable to give the undertaking as it was not covered by any collective agreement in Poland and did not reflect conditions in Poland.

The contracting authority refused the contractor’s request that the specified minimum wage did not apply to the sub-contractor and the contractor challenged the lawfulness of the requirement.

The German court referred a question to the General Court of the European Union. It asked whether national law can require that sub-contractors based in another Member State pay a specified minimum wage.

The Court held that the minimum wage requirement was capable of constituting a restriction within the meaning of Article 56 of the TFEU (the prohibition on restrictions on freedom to provide services).

In reaching its judgment, the Court said that a measure under national legislation which sets a minimum wage on contractors or sub-contractors of a tenderer established in another Member State, where minimum rates of pay are lower, constitutes an “additional economic burden that may prohibit, impede or render less attractive the provision of their services in the host member state”.

The Court noted that special conditions, such as those ensuring a specified minimum wage, will not always constitute restrictions. They may in principle be justified by the objective of protecting employees. In this case, though, the fixed minimum wage required to ensure reasonable remuneration for employees in Germany bore no relation to the cost of living in Poland.

This is an interesting judgment which appears at first glance to fly contrary to much of current UK government policy. Clearly, the risk of introducing such requirements will be higher in above threshold, fully regulated contracts with a cross-border interest. In practice, minimum wage provisions in lower value contracts (for example, those to be regulated under the new ‘light touch’ regime in the new Regulations) without cross-border interest may be more justifiable. Authorities will want to watch this space to see how the UK government position may change and subsequent case law.

Words: David Hansom

Twiter: @vwvlawfirm
LinkedIn: David Hansom

Gov Opps’ training partner, PASS (Procurement Advice & Support Service) runs procurement training courses for both the public and private sector, including an Introduction to Public Procurement, Understanding the New EU Procurement Directive and Impact of the EU Directive on UK Regulations. For a full list of events, click HERE.

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