The law on whether or not it is permissible to impose “living wage” rather than “minimum wage” provisions on contractors performing public contracts has long been an area of controversy (see Practice note, PCR 2006: Sustainable procurement; Workforce matters).
The Chancellor announced in his 2015 Budget Speech that there would be new measures to improve compliance with the national minimum wage and, that there would be a new “national living wage” from April 2016, which essentially proposes increasing the statutory minimum wage. Nevertheless, this has not taken the heat out of the debate, particularly for contracts in London and the South East where living costs are significantly higher.
The different wage rates referred to in UK public contracts
The new national living wage will be phased in from April 2016 and applies to workers aged 25 and above. It starts at £7.20 an hour and is intended to rise to £9 an hour by 2020.
However, for some time some contracting authorities have required their contractors to pay their workers the “UK Living Wage”, a voluntary benchmark based on the cost of living calculated by the Living Wage Foundation, a campaign group. Two rates apply; for the UK and for London. The current rates are:
- UK Living Wage, £8.25 an hour.
- London Living Wage, £9.40 an hour
When contrasted with the current national minimum wage of £6.70 an hour for those aged 21 and over, the additional cost of compliance is significant.
So far, there have been no published cases challenging this practice in the UK. However, there is nervousness about whether such requirements are lawful.
Guidance on requiring contractors to pay the UK Living Wage
Indeed, the matter has recently been considered in Statutory Guidance (Addressing Fair Work Practices) issued by the Scottish Government and taking effect on procurement exercises that commence on or after 1 November 2015.
It provides at paragraph 18:
“18. In respect of how to apply the Living Wage in procurement processes the Scottish Government has obtained clarification from the European Commission. This confirms that contracting authorities are unable to make payment of the Living Wage a mandatory requirement as part of a competitive procurement process where the Living Wage is greater than any minimum wage set by or in accordance with law. In the UK, this is the National Minimum Wage. It is also important to take account of developing case law decisions on this matter. There have been a number of rulings of the Court of Justice of the European Union, including the most recent ruling at the time of the preparation of his guidance; Bundesdruckerei v Stadt Dortmund (C549/13), which reinforces this position. It is, therefore, not possible to reserve any element of the overall tender score specifically to the payment of the Living Wage.”
Shortly after that Statutory Guidance was issued, we had a new case that upheld a “living wage” condition in Germany (Case C‑115/14, RegioPost GmbH & Co KG v Stadt Landau, judgment of 17 November 2015).
It is therefore timely to look at the two previous legal decisions on “living wage” clauses and to try and determine to what extent the new RegioPost decision has changed the law and the extent to which it is now possible to use these in public procurement contracts in the light of this “developing case law”.
In outline, the facts of Dirk Rüffert, are that a German contractor bid to undertake construction work on a German prison using a Polish sub-contractor. According to the law of the relevant German State only those bidders that signed an undertaking to pay the same wage as laid down in the relevant collective agreement at the place where the works were undertaken would be permitted to work on the contract. The purpose of the local law was that it: “counteracts distortions of competition which arise in the field of construction and local public transport services resulting from the use of cheap labour”. In subsequent claims arising out of the contract, it was argued that the contractor had breached an obligation to ensure that a minimum rate of pay was paid to all those working on the contract (including the Polish sub-contractors).
The Court considered that such an obligation would ordinarily breach the basic Treaty right of the freedom to provide services (then Article 49 EEC now Article 56 TFEU). The Treaty provision was designed to prevent any impediment to market access for non-national workers. If contractors have to pay higher wages imposed by a contracting authority then they will potentially loose the competitive advantage which is enjoyed by reason of the lower wages in their home country.
However, such a restriction could be lawful if it met the terms of the Posted Workers Directive, Directive 96/71/EC (PWD). The PWD provides an exception to this basic Treaty freedom and is designed to prevent “social dumping”. It provides that where workers are “posted” to another Member State, they should during the period of the “posting”, be given similar legal protection on minimum wage rates to national workers; providing certain conditions are met. (For more information, see Practice note, Posted Workers Directive).
Article 3(1), as relevant, states that:
“Member States shall ensure that, whatever the law applicable to the employment relationship … undertakings … [shall] guarantee workers posted to their territory the terms and conditions of employment covering the following matters which, in the Member State where the work is carried out, are laid down: by law, regulation or administrative provision, and/or by collective agreements or arbitration awards which have been declared universally applicable …:
… (c) the minimum rates of pay.”
The particular fair wage obligation imposed in Dirk Rüffert was held not to fall within the scope of the PWD and was therefore unlawful because it breached the free movement principles within the Treaty. This was because the actual legal provision (a local legislative measure referring to a collective agreement) was not of universal effect. On the facts of the case, the legal obligation to pay the minimum wage only related to part of the construction sector falling within the geographical area covered by the agreement. The collective agreement in question was not universally applicable and the legislation solely applied to public contracts and not to private sector contracts (see paragraphs 29 and 39 of the judgment).
In contrast, for example, a provision in a British public procurement contract relating to the payment of the statutory minimum wage would meet the requirements within Article 3(1) PWD because it is a national legal provision covering all sectors (public and private) and all areas of work (not only construction). Those advising on the legality of “living wage” clauses solely on the basis of the Dirk Rüffert case would probably point out that a purely contractual obligation to pay a higher “living wage” would probably not have that necessary legal underpinning to meet the PWD because it would not be universal nor apply to private sector contracts. Voluntary agreements would however fall outside of the ratio of the Dirk Rüffert case.
Bundesdruckerei v Stadt Dortmund (Case C- 549/13))
The facts of the Bundesdruckerei involved a service contract performed for a German local authority. The contract required the digitalisation of documents and the conversion of data for the urban-planning service of the council. A bidder wished to use its wholly owned subsidiary in Poland to perform the services as a sub-contractor. Again the local authority wished to impose a minimum wage condition on all its contractors by requiring them to sign an undertaking to that effect and submit it with their tender. On the facts here, however, the PWD could not apply because no workers were “posted” to Germany as the services would be performed in Poland.
Interestingly the legal environment had changed because the relevant procurement directive was different to that in Dirk Rüffert. Changes had been made, partially, in order to reflect the developing social concerns of the EU, rather than the purely economic concerns back in 2003 when the facts of Dirk Rüffert had arisen. The Court in Bundesdruckerei therefore not only considered the PWD in the context of the free movement principles of the Treaty, but also Article 26 of the relevant procurement Directive at the time (2004/18/EC) namely:
“Contracting authorities may lay down special conditions relating to the performance of a contract, provided that these are compatible with Community law and are indicated in the contract notice or in the specifications. The conditions governing the performance of a contract may, in particular, concern social and environmental considerations.”
The court noted that any special contractual condition relating to “social” considerations (here the legal obligation to pay the minimum wage to those Polish workers delivering the contract in Poland) had to be “compatible with Community Law”. The free movement principles applied but the “exception” provided by the PWD did not, in that no workers were “posted” to Germany.
The Court then considered whether there were any other circumstances warranting a contractual provision that seemed to breach the free movement principles in the Treaty. The Court rejected the German government’s arguments that the provisions should be permitted to prevent “social dumping”. It noted that the provisions that Stadt Dortmund sought to impose were only applicable to those performing public contracts not workers generally in the private sector (at paragraph 32 referencing the earlier decision in Dirk Rüffert, at paragraphs 38 to 40 of that case). The Court then said that in any event the measures were “disproportionate” in that they applied to employees carrying out a public contract in a different Member State to that which the contracting authority belonged.
In summary, the case suggests that a minimum wage contractual provision is legally permissible as a “special condition relating the performance of the contract” provided it is properly transparent and “compatible with Community Law”. Compatibility meant the Treaty obligations or the limited exception provided in the PWD.
RegioPost GmbH & Co KG v Stadt Landau, Judgment of 17 November 2015, Case C‑115/14
The recent case of RegioPost is noteworthy because the facts are superficially similar to the earlier two decisions outlined above but, unlike the finding in those earlier judgments, here the Court found the particular regional minimum wage provision to be lawful. Lawyers will no doubt have different views as to whether or not a significant breakthrough has been made and the law has changed or whether the facts here were sufficiently different to justify a different decision.
In RegioPost the facts related to a contract for postal services to be performed in the municipality of Stadt Landau. In common with the earlier decisions, the regional legislative provision in question made it mandatory for a contracting authority to award contracts only to those undertakings which undertook in writing (and whose subcontractors also undertook in writing) at the time of submitting the tender, to pay their employees a minimum wage fixed by the regional legislation for the performance of public contracts. At the time there was no national collective agreement setting a minimum wage for undertakings in the postal services sector nor were those undertakings subject to the national legal obligation to pay the general (national) minimum wage, therefore the obligation in question related solely to regional legislation.
In RegioPost the procurement exercise was governed by Directive 2004/18/EU, and therefore Article 26 (“Conditions for the performance of contracts”) was obviously relevant as it had been in the earlier case of Bundesdruckerei. The fair wage provision in both cases had received the necessary transparency by publicity in the OJEU Notice and the specification, and therefore the key issue for the Court was to determine whether or not it was “compatible with Community Law”. Compatibility required a consideration of the free movement principles in Article 56(1) TFEU (formerly Article 49 EEC) and the PWD. As the services were being performed in Stadt Landau, the PWD was especially relevant because any sub-contracted workers would need to be “posted”.
Interestingly however, unlike the previous more restrictive ruling in Bundesdruckerei, detailed attention was also paid to Article 27 (“Obligations relating to taxes, environmental protection, employment protection provisions and working conditions”) and the context provided for Article 26 Dir 2004/18/EU by three recitals (2, 33 and 34) in the preamble to that Directive. Recital 2 links the Directive to the freedom to provide services and Recitals 33 and 34 provide:
“(33) Contract performance conditions are compatible with this Directive provided that they are not directly or indirectly discriminatory and are indicated in the contract notice or in the contract documents. They may, in particular, be intended to favour on-site vocational training, the employment of people experiencing particular difficulty in achieving integration, the fight against unemployment or the protection of the environment. …
(34) The laws, regulations and collective agreements, at both national and Community level, which are in force in the areas of employment conditions and safety at work apply during performance of a public contract, providing that such rules, and their application, comply with Community law. In cross-border situations, where workers from one Member State provide services in another Member State for the purpose of performing a public contract, Directive [96/71] lays down the minimum conditions which must be observed by the host country in respect of such posted workers. If national law contains provisions to this effect, non-compliance with those obligations may be considered to be grave misconduct or an offence concerning the professional conduct of the economic operator concerned, liable to lead to the exclusion of that economic operator from the procedure for the award of a public contract.”
The CJEU first had to consider the question of “admissibility”, that is, whether or not the free movement principles in Article 56(1) TFEU were indeed relevant. This is because the absence of the necessary cross border element was raised (inter alia) by the German government (see paragraphs 44-52 of the judgment). It claimed that all the elements of the dispute were confined within a single Member State. The CJEU said that: “… the value of the contract at issue in the main proceedings clearly exceeding the relevant threshold for the application of Directive 2004/18, that contract must be regarded as having a certain cross-border interest” ( at paragraph 51 of the judgment). It then noted that a national minimum wage provision (of similar effect to that in the regional legislation in question) would be lawful, quoting recital 33 to Directive 2004/18 (at paragraph 56).
The Court then distinguished Dirk Rüffert on the detail of the relevant regional legislation considered in both cases. Unlike Dirk Rüffert, the law in Stadt Landau (the LTTG) specifically laid down the amount of the minimum wage and there was no national legislation that imposed a lower national minimum wage for the postal services sector. It also said that the need for universal application across both the public sector and the private sector related only to “collective agreements or arbitration awards” under the PWD. In this context it noted that Art 26 of Dir 2004/18 only related to public contracts and therefore of necessity “that measure cannot be required to extend beyond that specific field by applying generally to all contracts, including private contracts” (paragraphs 64, 65).
Having found that the regional law itself was permissible, it then had to determine whether or not it was possible to exclude bidders that failed to declare that they would meet those regional obligations. Here the Court looked at recital 34 and determined that because non-compliance was considered gross misconduct or an offence concerning the professional conduct of the economic operator that is liable to lead to the exclusion of that economic operator from the procedure for the award of a public contract, seeking a declaration and excluding those that failed to provide it was permissible (see paragraph 85 of the judgment).
Is a “Living Wage” provision legally permissible?
The answer must be yes, but subject to conditions. Lawyers will no doubt disagree over the exact nature of those conditions. In order to assist them in their deliberations they may wish to consider the following broad principles that I take from the case law:
- Voluntary arrangements between contractors and authorities that are non-contractual should not, generally speaking, trigger the need for compliance with the procurement directives.
- When awarding an above-threshold contract it is lawful to require a declaration that tenderers will comply with the national minimum wage/national living wage in relation to services or works that are delivered to the authority in its area, because this is regarded as a necessary measure to protect all workers.
- In requiring this declaration an authority will need to comply with regulation 70 of the Public Contracts Regulations 2015 (PCR 2015) (Conditions for performance of contracts). It exactly transposes Article 70 of Directive 2014/24/EU that has replaced the former Article 26 of Directive 2004/18. Regulation 70 provides:
“70.—(1) Contracting authorities may lay down special conditions relating to the performance of a contract, provided that they are –
(a) linked to the subject-matter of the contract within the meaning of regulation 67(5), and
(b) indicated in the call for competition or in the procurement documents.
(2) Those conditions may include economic, innovation-related, environmental, social or employment-related considerations.”
- In the case of a purely local minimum wage (also known as a “local living wage”) the authority may have to present an argument that:
- there is no need to meet the Treaty obligations. However, in the light of the finding in RegioPost, regarding the likelihood of cross border interest for above threshold contracts (see above), any argument that the free movement principles in the Treaty are not applicable may be difficult to establish. However, the cross border element was a matter directly raised by the referring court in that case (see paragraph 61) and Germany has land borders with other countries (such as Poland) that regularly “post” workers, therefore the PWD may be presumed to be relevant.
- that its particular provision meets the requirements of the PWD. If it does meet the PWD, it will be compatible with the free movement principles in Article 56 TFEU. In practice, meeting the PWD may require local/regional legislation (see the wording of Article 3 PWD above).
- If a challenge is made to a local living wage provision, such as the voluntary UK Living Wage or the London Living Wage, the authority is likely to find difficulty in arguing that it is lawful to the extent that the amount is greater than the statutory national minimum wage/national living wage (see paragraphs 62 and 74 of RegioPost) or where it is restricted to a specific sector (see paragraphs 74 and 75 of RegioPost) but the fact that it only applied to the public sector (rather than the private sector as well) should no longer pose the same degree of difficulty that the ruling in Dirk Rüffert appeared to present (see paragraphs 71 and 72 of RegioPost).
- Irrespective of whether any of the above legal analysis is controversial, I would hope that any lawyer would agree that it is prudent to provide fully transparent details about any local living wage provision in both the OJEU Notice and the other procurement documents rather than rely on any vague statement. Not only will this be necessary for regulation 70 and regulation 53 of the PCR 2015 but it should assist in putting forward the “delay defence” based on regulation 92 (General time limits for starting proceedings) (see Practice note, Remedies in public procurement law; Starting proceedings).
Local living wage provisions have long been a feature in the UK as authorities try to ensure that workers enjoy appropriate terms and conditions and any savings are due to efficiencies rather than just cutting wages. It should not be forgotten that section 17 of the Local Government Act 1988 has not been repealed and section 17(5)(a) regards questions relating to: “the terms and conditions of employment by contractors of their workers or the composition of, the arrangements for the promotion, transfer or training of or the other opportunities afforded to, their workforces” as a non-commercial matter. This particular provision was modified to allow questions relating to the public sector equality duty (section 149 of the Equality Act 2010) or the Public Services (Social Value) Act 2012 (by respectively section 17(10) and (11) of the LGA 1988) but never repealed. Perhaps it is time to press for full repeal now.
Alternatively, a change in the law could be sought to allow regional legislation on the living wage, perhaps along with other devolution arrangements to local authorities. In the absence of legislation, however, any provisions based purely on local policy for local living wages will be problematic and the RegioPost case does not seem to have resolved this problem.