Public procurement to be linked to observance of collective agreed pay

In December 2001, the German federal government proposed new legislation which would oblige companies seeking to obtain public contracts in construction and local public transport to pay their employees collectively agreed pay rates. While the trade unions welcomed this initiative, the majority of employers' associations sharply criticised the bill - which had its first reading in parliament in January 2002 - claiming that it represented a 'pay diktat' to business.

On 12 December 2001, the federal government adopted a bill on a new 'law on collectively agreed pay in public procurement' (Gesetz zur tariflichen Entlohnung bei öffentlichen Aufträgen) Under this proposed so-called 'Tariftreuegesetz' ('Law on loyalty to collectively agreed standards'), public contracts could be awarded only to those companies which declare that they pay wages in line with those collective agreements which are applicable at local level. The new law would affect all public contracts in the areas of construction and local public transport. The bill passed the first-reading stage in parliament (Bundestag) on 25 January 2002, and is expected to come into force on 1 April 2002.

Background and aims

The basic aim of the proposed new Tariftreuegesetz is to counteract unfair competition arising from the extensive use of low-paid workers. In a supplementary paper to the bill, the government explains in more detail its arguments for statutory regulation of the social aspects of public procurement. It argues that in recent years a massive use of low-paid workers and of often illicit employment in construction has distorted fair competition in the sector and threatened many jobs, especially in those medium-sized construction companies which do meet collectively agreed standards. Following the Europe-wide liberalisation of local public transport, the German government is afraid of a similar development in this sector, leading to extensive price competition based on the costs of working conditions, jobs and quality of public transport services.

According to the government, the state has to set a good example regarding working conditions and fair competition and therefore needs to link the award of public contracts to the observance of collective agreements on pay. In recent years, some German federal states - Bavaria, Berlin (DE9708129N), Saarland and Saxony-Anhalt - have already adopted regional laws regarding public procurement and agreed pay rates in construction (DE0001235F). In June 2001, the Bundesrat- the chamber of parliament representing the federal states' governments - called for a homogeneous regulation of this issue at national level and adopted a first draft of a Tariftreuegesetz. At the same time, the federal government set up a working group with representatives from trade unions and employers' and business associations to discuss the content and legal aspects of a national Tariftreuegesetz. On the basis of the discussions in this working group and the existing regulations at regional level, in December 2001 the cabinet presented the draft of a national law.

Detailed provisions

The proposed new law will apply to all public procurement in construction and local public transport which has a value of at least EUR 50,000 (Article 2 of the bill). Public contracts can be awarded only to companies which have made a written statement in which they commit themselves to paying their employees collectively agreed wages (Article 3). The same applies to subcontracting companies, with the main contractor responsible for checking the observance of collectively agreed pay amongst its subcontractors (Article 4). The public tender notice must include a reference to the relevant locally valid collective agreements (Article 5).

The public sector body awarding the contract has the right to monitor the contracting and subcontracting companies in terms of their adherence to collectively agreed pay rates (Article 6). If a contracting company contravenes collectively agreed pay provisions, it has to pay a fine of 1% of the contract's value (Article 7). If a subcontracting company does not observe the relevant collective agreements the fine must also be paid by the main contractor. In the event of grave breaches of collective agreements, the public sector body can terminate the contract without notice and the company concerned can be excluded from public contracts for a period of up to three years. A register of 'unreliable companies', including all firms excluded from public contracts, will be set up at the Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA).

Positions of social partners

Since German trade unions have been calling for a Tariftreuegesetz for many years, they welcomed the federal government's recent legal initiative as an important instrument to fight 'wage dumping' and to regulate future labour market problems arising from low-pay competition as a result of European Union enlargement. The unions basically support the government's bill but have called for some changes in the detail. For example, they have demanded that the new Tariftreuegesetz should apply to all public contracts with a value of EUR 20,000 (rather than the EUR 50,000 proposed by the government). The unions have also called for public licensing of subcontracting companies in order to have better control of their adherence to collective agreements. Furthermore, they want companies with public contracts to be obliged to accept not only collectively agreed pay but also other collectively agreed employment conditions. Finally, in future the unions see a need to extend the Tariftreuegesetz to further sectors, such as cleaning, security services or waste disposal.

On the employers' side, positions are less homogeneous. The Confederation of German Employers' Associations (Bundesvereinigung der deutschen Arbeitgeberverbände, BDA) and the Confederation of German Industries (Bundesvereinigung der Deutschen Industrie, BDI) sharply reject any law which obliges companies to accept collectively agreed pay rates in order to win public contracts. They claim that the proposed Tariftreuegesetz will set a 'pay diktat', which will contravene both: the constitutional right of an employer not to be a member of an employers' association and thus not to be covered by a collective agreement; and the freedom to provide services within the European internal market. The proposed Tariftreuegesetz would only increase costs and extend bureaucracy while preventing open competition for business, argue BDA and BDI.

One of the national employers' associations for the construction industry, the Hauptverband der Deutschen Bauindustrie (HDB), which primarily represents larger construction companies, mainly supports BDA's and BDI's criticism. However, the Zentralverband des Deutschen Baugewerbes (ZDB), which primarily represents small and medium-sized construction companies, has taken a different view and basically supports the need for a new Tariftreuegesetz.

Commentary

In October 2001, the European Commission published an interpretativeCommunication on the possibilities for integrating social considerations into public procurement (COM (2001) 566 final). In this document, the Commission makes clear its view that the liberalisation of public procurement should not lead to a deterioration of social and labour standards, but that Member States have the opportunity to link the observance of certain standards to the award of public contracts.

In the German construction industry, the creation of a real European labour market has contributed to a far-reaching erosion of collectively agreed standards by strong low-pay competition and an enormous spread of illicit work. Signs of similar developments can already be observed in local public transport. Without legal initiatives such as EU Directive (96/71/EC) concerning the posting of workers in the framework of the provision of services (the 'posted workers' Directive - TN9909201S), there would be rigorous price competition based on labour costs and employees' living and working conditions. The proposed Tariftreuegesetz could therefore be seen as a further instrument to maintain certain social and labour standards which essentially define the notion of a 'European social model'. (Thorsten Schulten, Institute for Economic and Social Research, WSI)