Pay clauses in public contracts challenged by ESA

In November 2011, the Norwegian government altered its regulations obliging public authorities to establish standards for wages and working conditions for employees in supplier companies engaged in public procurement. The changes to the legal framework came after the Free Trade Agreement’s governing authority (ESA) said it believed Norway’s existing rules were contrary to EEA Agreement Article 36. ESA will now assess whether the changes Norway has made are sufficient.

Background

On 15 November, the Norwegian government modified the regulations that place an obligation on public authorities to establish decent standards for wage and working conditions for employees in supplier companies engaged in public procurements.

The rules implement ILO Convention No. 94 into the Norwegian legal framework.

The Convention was ratified by Norway in 1996. However, it was only after the EU enlargement of 2004 and the large-scale labour and service immigration that followed, that it was seen as necessary for Norway to take measures to ensure compliance with the convention.

In June 2005, the government adopted a binding circular issued by the Ministry of Reform, which stated that all contracts entered into by central authorities would now be covered by the provisions of the Public Procurement Act. More precisely it involves the procurement of goods, services and building and construction work above a stipulated threshold of NOK 1 million (€125,000 as of 23 January 2012) for central authorities.

As a part of the government’s Action Plan 1 to combat social dumping, such pay clauses in public procurements were extended to also cover procurement by local authorities involving contracts above NOK 1.6 million (€209,000) (NO0705019I).

ESA infringement case

The European Free Trade Association (EFTA) Surveillance Authority (ESA) opened a case in July 2009 to look into Norwegian regulations on pay clauses. The decision came as a consequence of a ruling from the European Court of Justice (ECJ) in connection with the Dirk Rüffert case (EU0805029I), on the extent to which the freedom to provide cross-border services, as set out in Article 49 of the EC Treaty, may be restricted through the exercising of other rights.

ESA pleaded that the Norwegian regulation was in breach of Directive 96/71/EC on the posting of workers as well as EEA agreement Article 36 (similar to Article 49 of the EC Treaty).

The decision was followed by a reasoned opinion delivered by ESA in June 2011 (Event No. 574000), giving the Norwegian state two months to take necessary measures to comply with the ESA demands.

With regard to the posting of workers directive, ESA found that the Norwegian regulation did not fulfil the requirements of the directive. The regulation did not itself fix any minimum rates of pay, nor did it make direct reference to specific collective agreements that had been made universally applicable in accordance with Article 3(8) of the directive.

The regulation referred to collective agreements or ‘ordinary’ wage levels, and this was not considered to correspond to the term ‘minimum rates of pay’ as established in the directive. As for Article 36 of the EEA, the regulation was considered to constitute a restriction on the freedom to provide services that could not be justified:

However, Article 5(1) of Regulation No. 112/2008 applies only to public contracts and not to private contracts. As in Rüffert, Norway has not demonstrated why the objective of preventing social dumping, and consequently the protection of workers, is only necessary in respect of public contracts and not private contracts (Event No: 501425)

The Norwegian government argued that since Germany has not ratified ILO Convention No. 94, the ECJ had not in the Rüffert case had the opportunity to examine the obligations that the convention imposes on ILO Member States. ESA did not find this argument very weighty, but stated that implementing legislation required by such agreements must respect the obligations arising from the EEA agreement.

Norwegian response – amendments to the regulation

The Norwegian government has responded to the letter of formal notice from the ESA by amending the regulation in November 2011. However, the main content of the regulation is still intact. The amendments include the following points.

• The regulation now makes it clear that it is the minimum rates of pay from national collective agreements that are to be subject to compliance. This means that only minimum rates established in collective agreements come into play, and not average wage levels. ‘Minimum rates of pay’ does, as before the amendments were made, also cover overtime payments and shift bonuses. This is, however, now explicitly stated in the regulation.

• In sectors that are covered by regulations that declare collective agreements generally applicable, the newly amended regulation makes reference to the pay and working conditions that stem from such extension mechanisms. The previous condition, stipulating what is otherwise normal for the place and profession concerned, is thereby dropped.

• The amended regulation clarifies the types of pay and working conditions that must be applied, for example the minimum rates of pay, working time and compensation for travel, board and lodging.

• The contracting authorities have to make it clear, both in the call for tender and in contract documents, that these conditions are to be complied with.

Through this amendment the government attempts to answer the criticisms raised by ESA, and the amendments aim to make the required conditions easier to meet for tenderers. However, as far as the differing treatment given to public and private contracts is concerned, the Norwegian government does not feel there is a need for further revisions of the regulation.

The final warning issued by ESA in June 2011 allowed Norway a last chance to take corrective measures before ESA decides whether or not to bring the matter before the EFTA Court. ESA will have to consider whether these amendments are sufficient and will probably await the outcome of ongoing work in the EU on the modernisation of public procurement rules.

Nevertheless, the implementation of ILO Convention No. 94 has been an important part of the government’s Action Plan 1 to combat social dumping, and the Minister of Labour, Hanne Bjurstrøm, has announced that she would rather let the EFTA Court have a say than reverse existing policy solely based on the opinion of ESA.

Reactions by social partners

The amendment has been accepted by the Norwegian Confederation of Trade Unions (LO), and is regarded as responding to criticism made by ESA. The employer side, nevertheless, is not so accommodating.

The Head of the Labour Law department in The Confederation of Norwegian Enterprises (NHO), Nina Melsom, believes that the government has not brought the regulation in line with EEA law. She points to the fact that the regulation does not solve the question of which collective agreement should be made applicable in areas where several agreements exist, nor in areas where no collective agreements are in force.

Kristin Alsos, Fafo