East Lindsey, Posted Workers and ECJ decisions

Professor Keith Ewing, President of IER, argues that politicians need to address the contradictions and stupidity of the Posted Workers’ Directive and recent European Court of Justice decisions. If not, he predicts current expressions of discontent will continue to boil over as the recession deepens.

We do not know yet under what terms and conditions the Italian and Portuguese workers at the East Lindsey Oil Refinery are employed. We do not know if they are being paid in accordance with Italian and Portuguese collective wage agreements; if they are being paid at least the same as British contractors would have been paid; or if they are being paid less. But in a sense it does not matter, for what the current dispute provides is a glimpse into a future where the toxic mix of globalisation and weak labour standards meets economic recession.

Global companies based in Europe are free under EU law to tender for British building and service contracts, and they are free to hire their own direct labour force in their own countries. The workers can then be ‘posted’ to this country under terms and conditions established in the country of origin. These terms and conditions may be less than the contractual terms and conditions operating here. No matter – all the Posted Workers’ Directive of 1996 says is that workers posted here must be paid the minimum terms laid down in British legislation.

That means that workers posted to this country must be paid only the statutory minimum wage, which despite being part of New Labour’s mantra of achievement is extremely low (at less than a half the national male average wage), particularly if it is to be applied to skilled workers. There are no overtime rates, and while the Posted Workers’ Directive requires foreign owned companies to observe our maximum hours laws, these are laws with individual opt outs tailored in, following the British government’s achievement in destroying the Working Time Directive.

In some cases, posted workers must also be paid the rate laid down in collective wage agreements. But this only applies where workers are posted to countries where collective agreements are ‘universally applicable’, within a given sector and geographical area. That is not the case in the United Kingdom where collective agreements typically are negotiated at enterprise level. So under the terms of the Posted Workers’ Directive, collective wage agreements in this country can be undercut by companies based overseas, obliged only to pay the statutory minimum.

The problem has been compounded by four decisions of the European Court of Justice, made since 11 December 2007 (See IER Briefing). These decisions have concluded that the minimum requirements of the Posted Workers’ Directive are also a maximum beyond which Member States cannot go. So

• the government of Luxembourg was told that it could not by legislation require foreign based companies to apply collective agreements which were not universally applicable; and
• the government of Lower Saxony was told that it could not as a condition of the contract require Polish contractors on a prison project to observe the terms of collective agreements which had not been declared universally applicable.

In addition, in the famous Laval judgment, the Swedish building workers’ union was told that it could not by industrial action seek to compel a Latvian company to pay posted workers under the terms of a Swedish collective agreement. The Laval case came a week after the court had issued its equally famous Viking judgment which – with shades of Taff Vale – gave rise to the possibility of trade unions being liable in unlimited damages for taking industrial action in breach of the EC Treaty.

These decisions – driven it seems by neo-liberal ideologues on the European Court of Justice - have created a massive problem, which it is now the responsibility of the political classes to address. But determined to deny their citizens any voice on the future of the Union, the EU and its Member States can hardly complain if their Canute-like opposition to worker protection leads to expressions of discontent, which will continue to boil over as the recession deepens. This is not to concede to protectionism or to oppose free movement, but to insist on fairness.

If we are to avoid serious problems of the kind that we now see in Lincolnshire, the government needs to get its weight behind an ETUC proposal for a protocol with a view to amending the EU Treaty, to make it clear that the constitutional rights of business must not always have priority over the subordinated interests of workers. Secondly, the government needs to initiate effective reform of the Posted Workers’ Directive, so that employers posting workers here are required to observe the terms of appropriate collective agreements as well as minimum terms laid down in statute.

Finally, in these troubled times, the government needs to take a leaf out the books of a Tory government, written to deal with the Depression of the 1930s. One step taken then was to increase the coverage of collective wage agreements, presumably to boost the spending power of workers. Once standing proudly at 85% of the labour force (as continues to be the case throughout much of the EU), the coverage of collective wage agreements in the UK has fallen to only 33% of the workforce, by a long way among the lowest of the original 15 Member States.

At a time when active steps are being taken to increase the money supply, it does not need an economist to contemplate the contradiction of a labour market policy geared to low standards. Nor – in current circumstances - does it need an economist to contemplate the stupidity of labour laws such as the EU’s Posted Workers’ Directive and the accompanying ECJ judgments, which remove more of the remaining fences in the galloping ‘race to the bottom’.

Implications of European Court of Justice Cases on UK labour law

Introduction

1 There have now been four major decisions of the European Court of Justice which have important implications for British labour law. These decisions cut across activity currently permitted in British law, and could operate to constrain other activities which trade unions and others anticipate they may lawfully pursue. The former relates to various forms of collective action to protect jobs and conditions of employment; the latter relate to the ability of trade unions to negotiate living wage agreements in local government and elsewhere, including projects connected with the Olympics.

Legal Provisions

2 The problems arise partly as a result of the EC Treaty, Article 43, which applies to the freedom of establishment. This means that the nationals of one Member State should not be restrained from setting up business in another Member State. Also important is Article 49, which deals with the freedom to provide services. This means that the nationals of one Member State should not be restrained from providing services in another Member State.

3 The other major legal instrument (though it has not been relevant in all four cases) is the Posted Workers’ Directive 96/71/EC. For this purpose, a posted worker means a worker who for a limited period carries out his or her work in the territory of a Member State other than the State in which he or she normally works (article 2). Article 3 of the Directive makes provision for the terms and conditions of employment of posted workers.

4 Workers posted from one Member State to another are entitled to be paid the minimum terms and conditions relating to a number of prescribed matters (such as pay and working time). Minimum conditions for this purpose are those which are laid down by:

• law, regulation or administrative provision, and/or

• collective agreements or arbitration awards which have been declared universally applicable within the meaning of paragraph 8,

5 Thus, not all collective agreements are covered for the purposes of the Directive but only those ‘which have been declared universally applicable`. This is defined by article 3(8) of the Directive to mean collective agreements (i) which must be observed by all undertakings in the geographical area and in the profession or industry concerned; or (ii) collective agreements which are generally applicable to all similar undertakings in the geographical area and in the profession or industry concerned, and/or (iii) collective agreements which have been concluded by the most representative employers' and labour organizations at national level and which are applied throughout the country.

The ECJ Decisions

6 As already indicated, there are four decisions of the European Court of Justice since 11 December 2007 which have a bearing on British domestic law. The cases are concerned in different ways with the free movement of businesses throughout the EU, and the impact on established terms and conditions of employment.

• Case C-438/05, Viking Line v ITF (11 December 2007)

The Court held that although protected by domestic labour law (in that case the Finnish Constitution), industrial action may be unlawful under EU law if it breaches the terms of the EC Treaty, Article 43. The case concerned industrial action by Finnish unions and the ITF against a Finnish company proposing to re-flag in Estonia, where terms of employment were lower than in Finland.

• Case C-341/05, Laval v Svenska Byggnadsarbetareforbundet (18 December 2007)

The Court held that, although protected by Swedish national law, (i) industrial action by Swedish unions, (ii) designed to compel a Latvian contractor to pay Swedish rates determined by a Swedish collective agreement to his Latvian workers employed on Swedish building sites (iii) may be unlawful under EU law if it breaches the terms of the EC Treaty, article 49.

• Case C 346/06, Ruffert v Land Niedersachsen (3 April 2008)

The Court held that a Polish sub- contractor: (i) could not be required by the law of Lower Saxony, (ii) to pay his workers posted from Poland, (iii) the terms of a collective agreement in force, at a site where the work was being carried out. Such a requirement (even though imposed by law) was held to breach the provisions of the Posted Workers’ Directive.

• Case C-319/06, Commission v Luxembourg (19 June 2008)

The Court held that the government of Luxembourg had acted in breach of EC Treaty, Article 49, and the Posted Workers’ Directive, on a number of grounds. The Court effectively held that the Directive was both a floor and a ceiling, and that it was not possible in that case to require by legislation adherence to collective agreements other than those covered by Article 3(8) of the Directive.

Note also the following observation by the Court on another aspect of the decision:

‘it must be pointed out that the Community legislature intended, by means of point © of the first paragraph of Article 3(1) of Directive 96/71, to limit the possibility of the Member States intervening as regards pay to matters relating to minimum rates of pay’. (para 47)

Implications for British Trade Unions

7 These four decisions are important in different ways for trade unions throughout the EU. For British unions, the implications are principally twofold:

• Implications for Collective Action

If industrial action takes place in breach of EC Treaty, Article 43 (Freedom of Establishment), the employer may sue the union (rather than the Member State), and the fact that the union has complied with domestic law is no defence. This is most likely to be a problem in transport sectors, but could apply elsewhere as well (where businesses are moving from one Member State to another, as in Viking)

The issue has already arisen in BALPA v British Airways (2008), where BALPA was threatened with legal action if it proceeded with industrial action relating to the company’s Openskies initiative, which the union feared would lead to job losses. The action had to be abandoned despite being in full compliance with British law.

The company argued that the union’s action violated Article 43 of the EU Treaty. If the industrial action had proceeded the union risked massive legal costs in litigation, as well as the possibility of being sued in damages, with no limit on the amount that could be recovered, leading to the possible bankruptcy of the union. A complaint has been made by BALPA to the ILO:

• Implications for Living Wage Agreements (including the Olympics)

Because of the way in which we do collective bargaining in this country (highly decentralised), the United Kingdom is peculiarly vulnerable to the restrictions imposed by the Ruffert and Luxembourg cases. A contractor from another Member State posting workers to the United Kingdom can be required to comply with collective agreements only if they are ‘universally applicable’, as defined by the Posted Workers’ Directive.

Collective agreements in this country are no longer ‘universally applicable’ in the way that they are in many of the other EU Member States (where as a result collective bargaining density is much higher). This means that it may be difficult under the Posted Workers’ Directive to require contractors from other Member States to do more than pay the national minimum wage, or observe other minimum statutory conditions.

We now have a situation where two-tier arrangements are prescribed by EU law. The effect of Ruffert is that contractors from other Member States could not be required to follow a living wage included in a collective agreement. The decision in Luxembourg – as matters currently stand - would suggest that the living wage could not be imposed as a matter of local authority or Olympic Development Authority policy.

Responding to the Decisions

8 There are certain steps that could be taken at domestic level to ease the pain: we could make the interim injunction procedure more difficult, so that employers have to establish that they have a very strong case before an interim injunction is granted (as proposed by the TUC in its Trade Union Freedom Bill); we could set about implementing the 2005 manifesto commitment to establish sectoral forums, which might allow us in some cases to claim that collective agreements meet the universal applicability criteria of the Posted Workers’ Directive.

9 Ultimately, however, these decisions can only be addressed effectively at European level, where the one-dimensional neo-liberal agenda by which they are informed needs to be neutralised by a nod in the direction of the European social dimension, which is becoming so deeply submerged that it may be beyond recovery. However, the ETUC has proposed a Draft Social Protocol to the EU Treaty which, although it has serious limitations, nevertheless would provide that -

‘Nothing in the Treaties, and in particular neither economic freedoms nor competition rules shall have priority over fundamental social rights and social progress as defined in Article 2. In case of conflict fundamental social rights shall take precedence’.

10 This is an important initiative that will require political support in all Member States. Press reports suggest, however, that this may not be easy to secure. Attempts to link the Protocol to the Lisbon Treaty through the medium of the next Irish referendum, appear to have foundered:

‘Britain sought to ensure that any legally binding protocol attached to the EU treaties that offered guarantees to bolster workers' rights did not enable the European Court of Justice to overrule British labour law. Jack O'Connor, General President of SIPTU, Ireland's largest trade union warned "that action to protect people's rights at work is central to any prospect of endorsement of the Lisbon Treaty’.

(Daily Telegraph, 12 December 2008; See also Irish Times, 12 December 2008).

The purpose of the Protocol, however, is not to advance workers’ rights but to remove a series of judicial attacks on existing rights. The Protocol would simply restore the right of trade unions to do those things which were permitted, even in Britain’s very light touch regulatory framework, but which have now been forbidden by unexpected court decisions.

Professor Keith Ewing
President, IER
January 2009

A New Employment Act - but no new trade union freedoms.

The Employment Act received Royal Assent in November 2008. Despite a number of helpful amendments being tabled by John McDonnell and others, none of the proposals contained in the Trade Union Rights and Freedoms Bill were incorporated into the final Act. One of the amendments was put to the vote but was not supported by the Government. Despite attracting the largest backbench revolt of Gordon Brown's premiership, the amendment was defeated. Read the transcript of the House of Commons debate.

The Institute and the United Campaign prepared a Briefing for MPs and others on why the amendments should be supported. We will continue gathering examples of how the law is used to obstruct the democratic rights of workers.

A fourth amendment aimed at bringing UK laws more in line with the decision of the European Court of Human Rights relating to trade union membership (ASLEF v UK) was not put to the vote.

How to Make Corporations Accountable

Society needs successful businesses, but today business is taking over society. It’s as if an over-indulged child had taken more and more liberties until it is entirely out of control. Everyone wants the child to do well, no boundaries are set, and before you know it the family is under the thumb of a teenager gone wild.

So say the authors of a new IER publication, Dr Dan Plesch and Dr Stephanie Blankenburg of the Centre for International Studies and Diplomacy, School of Oriental and African Studies.

How did today’s corporations become so powerful and unaccountable? In this timely report, coinciding with a financial crisis on both sides of the Atlantic, with companies collapsing under the consequences of earlier profit-driven decisions and the taxpayer being asked to bail them out, the authors place the rise of limited liability at the heart of the current economic problems.

While thousands of workers face losing their livelihoods and homes as a result of the financial meltdown, those at the helm hide behind a complex framework of law at the heart of which lies limited liability, a concept giving them in the “corporate person” all of the power and none of the responsibility.

As the authors note:
While the mantra of ‘no rights without responsibilities’ is used to regulate the behaviour of poor people who benefit from social security payments – from single mothers to the unemployed, from the homeless to the ‘self-inflicted’ sick – ‘The Unaccountable Few’ – shareholders, managers and directors of corporations - enjoy feudal privileges.

Limited Liability and the Corporate Person

The report explains both limited liability and the concept of the “corporate person”. Under the laws of limited liability, if a company fails or causes damage, the shareholders lose the money they invested but are not liable for any loss or damage caused by their actions. Under the concept of the “corporate person”, the company is seen as a separate personality – independent of its founders, investors, directors and managers. This allows those who gain most from profits to avoid any liability for the costs associated with the actions of the “corporate person” – the company!

Tracing the history of limited liability back to its nineteenth century roots, Plesch and Blankenburg reveal that the concept of the company as a person became enshrined in law less through considered policy-making than by judge made laws. Until then, companies risked criminal prosecution for violating or contravening the national interest.

What today is perhaps the most important cornerstone of US corporate law – the doctrine of corporate personality – was simply announced by a Supreme Court Judge as a matter of opinion without discussion or legal validity. Similarly, in the UK the transformation from commercial company to corporate person was finalised through case law rather than legislation by Parliament

They note that even Adam Smith, in The Wealth of Nations, identified the problems of limited liability when he wrote:

total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies, who would, upon no account, hazard their fortunes in any private copartnery

As the authors note, Smith’s concerns were omitted from the praise heaped on him by free-marketeers with no worries about corporate power. The irony is that limited liability now threatens the very economic system it embodies – free-market capitalism.

According to the authors:
The concerns about limited liability raised in the nineteenth century debate remain valid – not only have they not been refuted by argument but they have been confirmed by reality

The harmful impact of limited liability

1. It violates the doctrine of equality for all before the law: Limited liability raises the interests of a particular group – the rich and powerful - above the interests of others. It offers unequal protection for the powerful and their sources of finance on the basis that exemption from the law may help their business to thrive. By granting the “corporate personality” the same status and free speech as the individual, it institutionalises the fictitious notion that individuals and giant corporations are equal before the law and allows corporate wealth and influence to “drown out” the voice of ordinary persons.

2. It promotes speculation and corruption, not economic growth and innovation: Since the 1980’s when the shareholder mentality really took off in the UK and USA, world growth rates have fallen from an annual average of 4.8% in 1969-1980 to 2.9% in 1980-200. In the same period, there has been a slowdown in the growth of labour productivity from an annual 2.5% to 0.8%. On the other hand, according to figures provided by the authors, there has been an unprecedented and explosive increase in speculative financial exchanges and corporate scandals have hardly left the headlines. Such scandals are facilitated by the complex corporate veil which, as the authors note, produce Russian-doll-like limited liability companies with one hiding inside another making it impossible to hold companies accountable for their actions.

3. It enriches few but harms many: As the authors point out, limited liability encourages fraudulent behaviour not only at the scale of ENRON but in small-scale business too, where the losers are not only creditors, but first and foremost the employees. When Farepak collapsed, leaving around 120,000 mostly low income people, without their Christmas savings, three of the owners and directors walked away with at least £882,000 in salary, consultancy fees and bonuses. The fact that the Directors had used the Christmas savings as a “piggybank” for the purchase of an ultimately unsuccessful venture, did not help the savers as the corporate veil and limited liability is entirely legal. As the authors note, Lord Andrew Philips, highlighted the immoral nature of such practices in the House of Lords when he said: “People are ripped off, day in day out by the easy availability of limited liability for off the shelf companies and the protections provided for them, and with no real remedies”.

The result of these harmful practices are highlighted by the authors: “Despite the enormous wealth in society, there is a sense of corruption, increased inequalities and social tension, of declining life expectancy and health in the new “under classes” around the world, of pending environmental disasters, of insecurity, war and terrorism”.

International Regulation

According to Plesch and Blankenburg, legal accountability through statutory regulation has to be introduced if economic stability is to be restored. Appeals to the conscience of the “corporate person” or calls for self governed “corporate social responsibility” are not working. They have had their day and have been ineffective and are clearly, as the authors say, “unfit for purpose”

Moreover, to avoid capital flight, with companies relocating to less regulated economies, regulating for legal accountability has to be agreed at the international level. One solution raised is the introduction of a system of pro-rata liability, under which shareholders would not only risk their investment, but would also be responsible for the debts of the company in proportion to the amount of the company they own.

Carolyn Jones, Director of IER said: IER has been arguing for better regulation of company law and workplace practices for many years. This powerful and very timely report provides contemporary examples of how the current system protects those at the top while devastating the lives of the innocent. The range of policy proposals contained in this report aim not to bail out failing companies, but to bring economic stability based on fairness, justice and equality.

A Conference: Neoliberalism and labour law: Challenging the concepts

These ideas were discussed in more detail at an IER conference in November 2008 – Neoliberalism and labour law: Challenging the concept where an expert platform of speakers including lawyers, academics and trade unionists challenged the legal, political and economic concepts underpinning the failing neoliberal, free market agenda.

Purchase the book, read the press release or download the papers from the conference

Seminar & Conference Papers

Since 2007 IER's seminar and conference papers have been made available via our website. This should make it easier for supporters to keep informed of developments in labour law. This section of the site will be updated regularly. Click here for a full list of papers available.