The Living Wage and EU procurement law

A short Twitter exchange this morning, ended with the suggestion that I blog on the issue of Procurement and the Living Wage.  It won’t be the first time I have done this, but it’s no problem to do so again. 

Pat Kane @thoughtland tweeted:

I am interested in BoJo London living wage. In 2012, re: EU procurement, law WAS threatened: http://ow.ly/3im5lA  Info on situation now?

The article in question suggested a Westminster Government view in 2012 that the London Living Wage (or at least its application through procurement contracts) might be in contravention of EU Procurement Law.  This is not a novel view, and is essentially repeated in Scotland by the Scottish Government.  Boris Johnson, Ed Miliband and others disagree.  The short answer to the twitter question would have been.  'The situation is the same as was then.  London continues to implement a number of Living Wage contracts and there has been no legal challenge'.

In 2012, the Scottish Government sought the ‘clarification’  of the European Commission on the  possibility of requiring contractors, as part of the public procurement process, to pay their staff a 'living wage', higher than the minimum wage.  It has to be said that, assuming the Scottish Government would like it to be the case that the living wage can be stipulated through public contracts, it was not a very sensible or helpful letter to write. 

The response from the European Commission enabled the Minister Alex Neil to conclude:

“This clarification confirms my understanding that it is not possible to require contractors to pay their employees a living wage as part of a public procurement process.”

First off, we should deal with one common misapprehension. The proposal to include Living Wage provisions within the Procurement Scotland Bill is not about requiring contractors to become Living Wage employers in all of their business activities – nice though that would be.  To say that (for example) SERCO, which isn’t a Living Wage employer, was barred from tendering for, or being awarded, any public contract because it isn’t a Living Wage employer in general, would be illegal under EU law.

The more interesting question is whether public bodies can stipulate as a contract performance clause that the Living Wage should be paid in the delivery of a particular contract.  This is essentially what the amendment to the Procurement Bill we have been supporting seeks to do.

To be fair to the Scottish Government, they did explore this issue to a degree with the EU Commission.  The EC response was that such actions were possible, providing that the payment of the Living Wage was compliant with the Posted Workers Directive, and in particular with interpretation following the judgment in the Ruffert case. What this judgment signifies, in a nutshell, is that in certain circumstances there are restrictions on the setting of wage levels for contracts above national minimums if the likely effect on other EU companies is to introduce “an additional economic burden that may prohibit, impede or render less attractive the provision of their services in the host Member State”.  In this respect the key issue, whether in relation to the Ruffert judgment or the more general clause 56 of the Treaty of the Functioning of the European Union, is whether companies based in other EU members states would be commercially disadvantaged by a Living Wage stipulation and , if that were the case, whether it could be justified in terms of the social provisions within EU Procurement Law.

In the Ruffert case, the action which was ruled illegal was to set a contract condition that the successful bidder should adhere to wage levels set through collective bargaining agreements in a specific part of the construction sector.  This was action was defended by Lower Saxony on three grounds, the key one being that the state measure was justified by the objective of protecting workers.

The European Court of Justice found against Lower Saxony on the grounds that the wage stipulation was not necessary to protect workers citing the fact that the provision was not necessary, was not universally applied (only to public sector construction contracts) and because the rate was higher than provided for by national legislation.

It should be said that trade unions across Europe have plenty of reasons to dislike the Ruffert case but that does not mean that its implications can be ignored and  on the face of it, it appears to pose some difficulties for Living Wage and procurement in Scotland,. But before jumping to that judgment, the following should be considered.

1)    In the Ruffert case the potential for the wage stipulation to be to the detriment of companies based in other member states was effectively agreed by all parties.  That is to say that no one questioned that the effect of the Lower Saxony approach to contracting would be to restrict the ability of companies based in other EU to member states to successfully compete.  In construction, workers are routinely paid at rates considerably higher than the minimum wage. Thus there is the potential for a company to pay posted workers above the legal minimum, but below the industry standards and still absorb other costs (travel, accommodation etc) implicit in posting workers.  As we will see, it is far more difficult to argue that a Living Wage stipulation for contracts such as in social care or cleaning is comparable.  Whilst it was difficult in Ruffert to deny that there was any protectionist element in Lower Saxony’s actions, it would be much easier so to do in respect of a Scottish Living Wage provision.

2)    There was no actual set wage rate identified by Lower Saxony in the Ruffert case.  The wage rate being set by collective sector agreements in part of the construction industry.  This makes it harder to a) judge the potential detriment to a contractor b) to argue that the different wage rate was set by “laws, regulations and/or administrative provisions” as is required by the Posted Workers Directive and c) that the wage rate was necessary for the protection of workers.

The legal opinion we have been provided with, and is a matter of public record, suggests that it is possible to legislate in Scotland in a way that avoids these problems.

Firstly an objective analysis could be undertaken to assess the potential impact on companies based in other member states of introducing a Living Wage contract performance clause.  A possible question might be.  Are there any companies from other EU member states currently delivering any Scottish procurement contracts, employing posted workers and paying less than the Living Wage?  I’m fairly certain the answer is No.  The vast majority of procurement contracts are in the field of health and social care.  Some of the Scottish based companies and voluntary organisations pay between the Minimum wage and Living Wage, and the difference between the two rates is currently £1.14 per hour.  To quote Unison's Dave Watson in his evidence to the Scottish Parliament

“Let us think about this: that directive is a European piece of legislation governing cases in which a company, presumably from a low-wage eastern European economy, posts workers to Scotland to deliver a particular public service contract. One could imagine certain high-level, high-wage areas—for example, the offshore areas where the people Pat Rafferty represents work—where a company might want to bring workers over, accommodate them and so on. Can you really see the same thing happening in a cleaning or hospitality contract, where the difference in wages will be between the national minimum wage and the living wage? Is that profit margin enough to pay for the accommodation of hundreds of Polish, Romanian or Bulgarian cleaners or hospitality workers? Clearly it is not, which is the reason why there have been no challenges.”

Secondly, the Scottish Government can go further in its justification for stipulating a Living Wage than Lower Saxony did in the Ruffert case.  It can argue that the protection it suggests is a question of ‘human dignity’.  Our legal advice says that attaching more weight to the employment protection issues such as describing the Living Wage as a matter of human rights protection makes the courts apparently more willing to accord them greater weight.  Could such a description be justified?  Of course it could.  Firstly, the Living Wage is significantly lower and 'more basic' than the likely wage rates being suggested in the Ruffert case. Also, unlike the UK Minimum Wage which is essentially a negotiated rate set by government based on the balancing of both fairness and commercial considerations, the key processes involved in setting the Living Wage (Minimum Income Standard, participatory budgeting etc) have a meaningful read across to human rights.

Thirdly, the Scottish Government could set the Living Wage rate in (probably) secondary legislation and provide a note on how the future rate would be calculated.  This would do two things.  It would avoid the ‘Ruffert problem’ of the rate not being set by ‘laws regulations and/or administrative provisions’.  It would also provide the potential to quantify any potential detriment to companies bidding from overseas on the basis of posting workers (not that we believe the need would ever arise).

Would one final problem remain?  Would a court rule as sufficient cause for overturning a contract the fact that the Living Wage rate is not universal (i.e. only applied to public sector contracts) and that the rate of pay guaranteed is greater than that provided for in the national legislation? It seems to me that this is unclear.  Firstly it is uncertain whether this would be a defining issue given that the other problems arising from Ruffert could be dealt with and particularly important in this might be the different criteria adopted for setting Minimum Wages and Living Wages  (with the second being more grounded in human dignity considerations). Secondly, and perhaps quite importantly, the Scottish Government does not have the legislative competence to change the level of the National Minimum Wage even if it wanted to.

I am certainly no legal expert.  But what I do know is that significant advances on procurement and social and environmental policy have been achieved precisely because European Governments and other public authorities have taken a proactive approach to exploring the boundaries of EU procurement law- A6.1.2 C-225/98 Nord-Pas-de-Calais Region (Commission v the French Republic) is a frequently quoted example.  It is also the case that there has never been a legal challenge to the use of Living Wage contracts in London.

So, to return to an important point. Not only, would the Scottish Government have a strong case, but it is very hard to imagine the circumstances in which its case would be tested by a commercial company in court. 

It is for these reasons that I am tempted to conclude that there are other considerations, chiefly financial ones, which are at play here. That’s a debate we should be prepared to have openly rather than relying on a single and questionable interpretation of EU law.

 Dave Moxham