Can a "living wage" requirement comply with the Public Procurement rules? Bundesdruckerei GmbH v Stadt Dortmund

9 minute read
06 November 2014

The Bundesdruckerei v Stadt Dortmund case is the latest of a number of public procurement decisions by the Court of Justice of the European Union (CJEU) which have examined attempts by contracting authorities to include social considerations in the mix when awarding public contracts. This latest case concerns a requirement that the successful contractor pay a minimum wage to its personnel.

Factual background

Bundesdruckerei GmbH v Stadt Dortmund (C‑549/13) was heard by the CJEU in September 2014.

The decision provides guidance on the legality, under Article 56 of the Treaty on the Functioning of the European Union (TFEU), of contracting authorities incorporating conditions in public contracts which require contractors to pay a minimum wage (or a "living wage") to their employees (and a requirement for any subcontractors engaged to do the same).

Article 56 of the TFEU prohibits any restrictions on the freedom to provide services within the EU when a business established in one member state provides services to a person or organisation in another member state.

In May 2013, the defendant (the local authority of the City of Dortmund in Germany) issued a call for tenders for a public services contract for the digitalisation of documents and the conversion of data.

In purported exercise of its right under Article 26 of the Public Sector Directive (2004/18/EC), the defendant imposed a special condition on tenders which required that a prospective contractor must agree to pay its employees a standard hourly minimum wage of €8.62. Any subcontractors engaged by the contractor were to be obliged to do the same. This special condition sought to comply with a law of the State of North Rhine-Westphalia which required that public services workers must receive a set minimum wage.

The claimant (Bundesdruckerei) was proposing, if awarded the contract, to subcontract the services to a subcontractor operating in Poland. The claimant requested that its bid be made exempt from the minimum wage requirement in the special condition. This request was rejected by the defendant.

Proceedings challenging the special condition were issued. The claimant claimed that the condition breached Article 56 by imposing an unjustified restriction on its freedom to provide services within the EU. It was asserted that the special condition would be an additional economic burden which would prevent or dis-incentivise cross-border supplies of services.

The CJEU's decision

The CJEU upheld the complaint. It held that the special condition was not compatible with "Community law" as it infringed Article 56 of the TFEU. View the full judgment here.

The rationale of the decision was that a contracting authority imposing a minimum wage on a subcontractor established in another member state, in which minimum wage levels are lower, may be a restriction on the freedom to provide services for the purposes of Article 56.

The CJEU set out four fundamental reasons why the special condition could not be justified:

  1. Including minimum wage clauses in public contracts infringed Article 56 in circumstances where the relevant EU member state does not provide such protection for equivalent private sector contracts.
  2. The special condition would be applying a German requirement for an enhanced minimum wage upon another member state whose minimum wage rates are lower. This was seen as disproportionate.
  3. The rationale for the special condition was to ensure a reasonable living wage for a German worker. This wage was based on the cost of German living standards. The CJEU held that this bore no relation to the living expenses of a Polish worker. The special condition was deemed to deprive Polish subcontractors of the competitive advantage of a lower cost base.
  4. Despite the defendant's assertion that the special condition could be justified on the grounds that it preserved the stability of the social security system, the CJEU was not swayed. The court noted that if the subcontractor's employees did find themselves having to resort to social security then they would claim from the Polish welfare system and not the German.

The CJEU's decision suggests that when a tenderer intends to carry out a contract for a public authority in one Member State using only workers employed by a subcontractor in another member state, Article 56 would operate to preclude the contracting authority from requiring the subcontractor to pay its local workers a minimum wage fixed by legislation.

Effect on local authorities & the "living wage"

This ruling appears to follow a similar vein of decisions deriving from cases such as Ruffert v Land Niedersachsen (C-346/06) and Commission v Luxembourg (C-319/06). These cases suggest that the CJEU's current inclination is to protect the freedom to provide services across borders as a matter of priority.

Measures such as the special condition in Bundesdruckerei are considered to operate as barriers to cross-border trade, and should only be tolerated to the extent that they are considered "appropriate" and going no further than strictly required.

Therefore, following Bundesdruckerei, many local authorities are likely to be left wondering whether they can lawfully include "living wage" requirements in tenders for public contracts. In light of the ruling and on the basis of recent case law, it appears unlikely in the majority of cases that "living wage" clauses would be considered as justifiable under the TFEU.

However, it is worth noting that a definitive "living wage" clause is yet to be subject to a challenge and this view largely depends on the interpretation subscribed to - and there is more than one.

On a narrow interpretation of Bundesdruckerei, one can conceivably argue that the decision is applicable only in circumstances where the relevant services are to be provided entirely from another EU member state. Additionally, local authorities may be able to differentiate their contracts from the facts of Bundesdruckerei: arguments for distinguishing factors could include instances where the subject-matter of the contract is unlikely to generate cross-border interest.

Conversely, applying a wider interpretation and accounting for the CJEU's apparent mindset, one can easily adopt a contrary view. It appears likely that the CJEU will construe any requirement for a minimum or "living wage", which may reasonably be assessed as limiting the potential for cross-border supply of services, to be incompatible with Article 56.

As outlined above, cases such as Ruffert suggest that the default position is that the protection of the ability to provide cross-border services must prevail - even at the expense of an individual member state's social aims. For this reason, it seems likely that the CJEU would consider a "living wage" clause included in any procurement which might generate cross-border interest as contrary to Article 56.

Ruffert is particularly relevant to the living wage debate. In Ruffert, the CJEU set out its position that it was willing to declare any protection greater than that provided for in the Posted Workers Directive (namely, the minimum wage in that member state) as an unjustified restriction of a contractor's freedom under Article 56. The effect is that any measures which were not "universally applicable" would be unjustifiable.

Therefore, a local authority wishing to require a contractor to pay those engaged on a contract a "living wage" needs to bear in mind that such a measure could carry the risk of challenge. A decision on whether to adopt such a requirement will of course be dictated by the authority's appetite to run such a risk. Ultimately, the level of actual risk could come down to whether the contract in question is likely to be the subject of cross-border interest - which the authority will need to decide.

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