Looking closely at the RegioPost case: two new papers on public procurement and labour standards under eu law

I have been working on the implications of the RegioPost Judgment for a while (I can't believe it will soon be a year since the conference we held at the University of Bristol Law School), and finally uploaded two new papers on SSRN where I discuss different aspects of the case and its implications for the enforcement of labour standards through public procurement regulated by the 2014 EU Public Procurement Package.

The first paper is concerned with the regulatory substitution implicit in the inclusion of social and employment-related considerations in public procurement. The second paper is concerned with the competition and State aid implications of the asymmetrical rules on minimum wage requirements that result from RegioPost, Rüffert and Bundesdruckerei. Below are some additional details on each of the papers. I hope that both papers manage to provide complementary views on the many issues that derive from the interaction between EU public procurement law, EU labour law and EU free movement law. Feedback most welcome!

Regulatory Substitution between Labour & Public Procurement Law: EU's Shifting Approach to Enforcing Labour Standards in Public Contracts

In this paper, I reflect about a recent regulatory trend concerning the enforcement of labour standards through contract compliance clauses and other requirements of public contracts tendered under European Union public procurement law. On the back of recent developments in the case law of the European Court of Justice regarding cross-border situations of procurement-based enforcement of labour standards, notably in the re-examination of the Rüffert case in both the Bundesdruckerei and RegioPost cases, I reflect on this phenomenon from the perspective of regulatory substitution. In setting out a basic framework to assess regulatory substitution, I hypothesise that most of the difficulties evidenced by the case law stem from the transfer of labour regulation goals to the public procurement sphere. I then aim to test this hypothesis by means of an analysis of labour policy-oriented mechanisms included in the 2014 revision of the EU public procurement rules. I then go on to critically assess the fitness for purpose of the procurement mechanisms from the perspective of contributing to the enforcement of labour standards. And I ultimately extract some general conclusions that can be of relevance in non-EU jurisdictions where similar trends of regulatory substitution between labour and public procurement law may be emerging.

Sanchez-Graells, Albert, Regulatory Substitution between Labour and Public Procurement Law: The EU's Shifting Approach to Enforcing Labour Standards in Public Contracts (April 25, 2017). Available at SSRN: https://ssrn.com/abstract=2958297.

Competition and State Aid Implications of ‘Public’ Minimum Wage Clauses in EU Public Procurement after the Regiopost Judgment

This chapter assesses the use of public procurement to enforce labour standards from a competition and State aid perspective, and concentrates on the establishment of contract compliance clauses under the rules of Article 26 of Directive 2004/18/EC and Article 70 of Directive 2014/24/EU and in relation with the Posted Workers Directive. In particular, it assesses the case law of the European Court of Justice in Rüffert, Bundesdruckerei and RegioPost from an economic perspective. This highlights the potential negative competitive implications that derive from the asymmetrical rules the case law creates for the cross-border and the inter-regional provision of services to the public sector. It also underlines the risk of (regional) economic protectionism that they create. The chapter then assesses these issues from the perspective the EU public procurement, competition and State aid rules. It concludes that, given the current ineffectiveness of the checks and balances theoretically oriented towards the prevention of these undesirable effects, contracting authorities and policy makers would be well advised to abandon their efforts of setting partial, incomplete and difficult to monitor minimum/living wage requirements for public contracts only.

Sanchez-Graells, Albert, Competition and State Aid Implications of ‘Public’ Minimum Wage Clauses in EU Public Procurement after the Regiopost Judgment (April 25, 2017). Prepared for future publication in A Sanchez-Graells (ed), Smart Public Procurement and Labour Standards—Pushing the Discussion after RegioPost (Bloomsbury-Hart). Available at SSRN: https://ssrn.com/abstract=2958296.

Some thoughts on regulatory substitution, public procurement and labour objectives

I am thrilled to participate in the event 'Socially Sustainable Public Procurement' organized by Dr Richard Craven at the University of Leicester tomorrow. Together with Richard and Dr Eleanor Aspey, I will be reflecting on issues around the use of public procurement for the enforcement of labour standards.

My comments (which I expect to reflect the minoritarian view) will be centered on issues of regulatory substitution and the competition implications that the ECJ's case law in Bundesdruckerei and Regiopost have created. This will help me sharpen the arguments for two papers that are in the making. More details soon. The slides for tomorrow's presentation are here:

Procurement and labour objectives: some thoughts on regulatory substitution and competition implications from Albert Sanchez Graells

CJEU clarifies and minimises Rüffert, and expands scope for minimum wage requirements in public procurement (C-115/14)

In its much awaited Judgment of 17 November 2015 in RegioPost, C-115/14, EU:C:2015:760, the Court of Justice of the European Union (CJEU) has allowed for the imposition of minimum wage requirements as special performance conditions in public procurement covered by the EU rules. 

Interestingly, the CJEU achieves this result despite deviating from the proposal of AG Mengozzi, who also advocated for more scope for minimum wage clauses, but on very different legal grounds (discussed here).  It is also worth stressing that the case is decided on the basis of Art 26 of Directive 20014/18, but the reasoning is equally applicable to the new rules under Art 70 of Directive 2014/24. 

The RegioPost Judgment is particularly significant for its deviation from the restrictive approach to the use of minimum wage requirements in public procurement that was established by Rüffert, C-346/06, EU:C:2008:189 and Bundesdruckerei, C-549/13, EU:C:2014:2235. Thus, it is worth analysing the reasoning of the CJEU in detail, particularly to determine to what extent RegioPost restricts the effects of the previous line of cases in this area.

It is worth reminding that,according to Rhineland-Palatinate's regional legislation (ie at Länder-level, as opposed to Federal-level which did not at the relevant time regulate minimum wage), public contracts could not be awarded to tenderers that did not commit to pay a gross minimum hourly wage of €8,70 to the workers involved in the execution of the contract. This minimum wage requirement was challenged on the basis of several grounds (see here for further background).

In specific legal terms, the main question addressed to the CJEU was to determine 'whether Article 26 of Directive 2004/18 must be interpreted as precluding legislation of a regional entity of a Member State ... which requires tenderers and their subcontractors to undertake, by means of a written declaration to be enclosed with their tender, to pay staff who are called upon to perform the services covered by the public contract in question a minimum wage laid down in that legislation' (C-115/14, para 53).

In order to answer this question, the CJEU engages in a step-by-step approach were, after confirming that the minimum wage requirement creates a special performance condition covered by Art 26 Dir 2004/18 (and now Art 70 Dir 2014/24) and that it is not discriminatory, it determines to what extent such requirement can be assessed under the requirements of EU primary law. 

In that regard, the CJEU is clear in subjecting minimum wage requirements to EU primary law on the basis that the procurement Directive does not lay down exhaustive rules in respect of special conditions relating to the performance of contracts and, therefore, this is not a field that has been exhaustively harmonised at EU level and minimum wage requirements must not only be assessed in the light of the provisions of the Directive, but also in the light of the primary law of the European Union (C-115/14, paras  57-59).

The CJEU then engages in such assessment of compatibility of minimum wage requirements with primary EU law, but does so by reference to Directive 96/71 on the posting of workers (PWD), which had been rejected by AG Mengozzi (here). This is interesting in itself because, in my view, EU primary law does not cover a Directive such as the PWD. However, the analysis that the CJEU carries out does not seem to attach particular relevance to the actual primary or secondary law nature of the PWD [for critical discussion of similar issues, see P Syrpis, 'The relationship between primary and secondary law in the EU' (2015) 52(2) Common Market Law Review 461-487].

It is also interesting because of the route that leads the CJEU to resort to the analysis of the situation under the PWD as a benchmark for the legality of the minimum wage requirement. As the CJEU explains,

60 ... in accordance with recital 34 to Directive 2004/18, in examining whether the national measure ... is compatible with EU law, it is necessary to determine whether, in cross-border situations in which workers from one Member State provide services in another Member State for the purpose of performing a public contract, the minimum conditions laid down in Directive 96/71 are observed in the host member State in respect of posted workers (C-115/14, para 60, emphasis added).

This is also remarkable because the CJEU resorts to the recital of the procurement Directive in order to engage the PWD, rather than directly identifying the applicability of the PWD to the case [cf Casa Fleischhandel v BALM, C-215/88, EU:C:1989:331, para 31].

Once the analysis is framed in terms of the PWD, the CJEU basis its arguments on compliance with Art 3(1) PWD, according to which 'Member States shall ensure that, whatever the law applicable to the employment relationship ... undertakings ... 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, ... (c) the minimum rates of pay'. The CJEU considers that the requirement at issue in RegioPost meets all these conditions. It further clarifies that it is compatible with EU law more generally despite applying only to public contracts and not to private contracts. It does so by stressing that:

62 ... contrary to the Law of the Land Niedersachsen on the award of public contracts at issue in the case that gave rise to the judgment in Rüffert (C-346/06, EU:C:2008:189), a provision such as [Rhineland-Palatinate's regional legislation] itself lays down the minimum rate of pay...

63 That categorisation cannot be called in question on the basis that the national measure in question applies to public contracts and not to private contracts, since the condition as to universal application defined in the first subparagraph of Article 3(8) of Directive 96/71 applies only to the collective agreements or arbitration awards referred to in the second indent of the first subparagraph of Article 3(1) of that directive.

64 Moreover, since the national measure at issue in the main proceedings falls within the scope of Article 26 of Directive 2004/18, which permits, subject to certain conditions, the imposition of a minimum wage in public contracts, that measure cannot be required to extend beyond that specific field by applying generally to all contracts, including private contracts.

65 The limitation of the scope of the national measure to public contracts is the simple consequence of the fact that there are rules of EU law specific to that field, in this case, those laid down in Directive 2004/18.

66 It follows that Article 26 of Directive 2004/18, read in conjunction with Directive 96/71, permits the host Member State to lay down, in the context of the award of a public contract, a mandatory rule for minimum protection referred to in point (c) of the first subparagraph of Article 3(1) of that directive ... which requires undertakings established in other Member States to comply with an obligation in respect of a minimum rate of pay for the benefit of their workers posted to the territory of the host Member State in order to perform that public contract. Such a rule is part of the level of protection which must be guaranteed to those workers (see, to that effect, judgment in Laval un Partneri, C-341/05, EU:C:2007:809, paragraphs 74, 80 and 81).

67 That interpretation of Article 26 of Directive 2004/18 is confirmed, furthermore, by a reading of that provision in the light of Article 56 TFEU, since that directive seeks in particular to bring about the freedom to provide services, which is one of the fundamental freedoms guaranteed by the Treaty (see, by analogy, judgment in Rüffert, C-346/06, EU:C:2008:189, paragraph 36) (C-115/14, paras 62-67, emphasis added).

This is remarkable because, at this stage, the CJEU fills in the requirement for the special performance conditions to be compatible with EU law under Art 26 Dir 2004/18 (Art 70 Dir 2014/24) with reference to the PWD only. It then goes on to assess the need to such measures to also comply with Art 56 TFEU in the following terms:

69 ... according to the case-law of the Court, the imposition, under national legislation, of a minimum wage on tenderers and their subcontractors, if any, established in a Member State other than that of the contracting authority and in which minimum rates of pay are lower constitutes an additional economic burden that may prohibit, impede or render less attractive the provision of their services in the host Member State. Consequently, a measure such as that at issue in the main proceedings is capable of constituting a restriction within the meaning of Article 56 TFEU (see to that effect, inter alia, judgment in Bundesdruckerei, C-549/13, EU:C:2014:2235, paragraph 30).

70 Such a national measure may, in principle, be justified by the objective of protecting workers (see, to that effect, judgment in Bundesdruckerei, C-549/13, EU:C:2014:2235, paragraph 31).

71 However, as the referring court has observed, the question arises whether it follows from ... Rüffert ... that such a justification cannot be accepted on the grounds that the minimum wage ... applies to public contracts only, and not to private contracts.

72 That question calls for a negative answer.

73 It is clear from ... Rüffert ... that although the Court concluded, in the context of the examination of the national measure at issue in the case that gave rise to that judgment in the light of Article 56 TFEU, that that measure could not be justified by the objective of the protection of workers, it based that conclusion on certain characteristics specific to that measure, which clearly distinguish that measure from the national measure at issue in the main proceedings.

74 Thus, ... in Rüffert ... the Court based its conclusion on the finding that what was at issue in the case that gave rise to that judgment was a collective agreement applying solely to the construction sector, which did not cover private contracts and had not been declared universally applicable. Furthermore, the Court observed that the rate of pay set by that collective agreement exceeded the minimum rate of pay applicable to that sector ...

75 The minimum rate of pay imposed by the measure at issue in the main proceedings is laid down in a legislative provision, which, as a mandatory rule for minimum protection, in principle applies generally to the award of any public contract in the Land of Rhineland-Palatinate, irrespective of the sector concerned (C-115/14, paras 69-75, emphasis added).

This effort to distinguish Rüffert is remarkable and the CJEU has fundamentally back-tracked from its restrictive line of case law when it comes to the use of public procurement for social policy purposes. The way it distinguished Rüffert from RegioPost is coated in very technical terms under the PWD, but the key point in my view is that the CJEU is willing to sacrifice important non-discrimination issues and a major excuse for shadow economic protectionism at the altar of a politically-charged move to facilitate the politicised use of public procurement.

Indeed, by minimising the non-discrimination requirements of Rüffert, the CJEU has opened the door to very significant distortions of competition between undertakings engaged in the performance of public contracts and those that provide goods and services in private markets, as well as distortions in employee protection for those hired by undertakings to perform public contracts and those hired to perform private contracts. This is likely to create further litigation in the employment and non-discrimination law arenas where undertakings engage in both private and public contract activity with a single workforce.

The RegioPost judgment is likely to trigger very significant attention in the coming days and weeks. Together with colleagues at the University of Bristol Law School who hold very different views to mine, we will be putting together an event to discuss the implications of RegioPost. stay tuned for more discussion on this important area of EU economic law.

AG Opinion favours minimum pay in public contracts: why the CJEU should not follow (C-115/14)

In his Opinion in RegioPost, C-115/14, EU:C:2015:566 (not yet available in English), Advocate General Mengozzi has submitted that the relevant EU public procurement rules (still Directive 2004/18; Art 26 on conditions for performance of contracts), did not oppose the imposition of requirements to pay minimum hourly rates to workers executing specific public contracts if those requirements stem from domestic (regional) legislation that would be engaged as a result of the posted workers Directive. 

The AG makes significant efforts to distinguish the RegioPost case from previous Judgments of the CJEU in Rüffert (C-346/06, EU:C:2008:189) and Bundesdruckerei (C-549/13, EU:C:2014:2235, see my comments here), and his Opinion creates leeway for the inclusion of minimum wage requirements in the execution of certain types of services contracts (something discussed by Dr Richard Craven in a work-in-progress paper presented at the UACES conference earlier this week). Moreover, the analysis in the AG's Opinion is relevant for the interpretation and enforcement of the new EU public procurement rules (Directive 2014/24; Art 70 on Conditions for performance of contracts). Thus, his RegioPost Opinion deserves some analysis.

In the case at hand, according to Rhineland-Palatinate's regional legislation (ie at Länder-level, as opposed to Federal-level which did not at the relevant time regulate minimum wage), public contracts could not be awarded to tenderers that did not commit to pay a gross minimum hourly wage of €8,70 to the workers involved in the execution of the contract. Remarkably, such commitment had to be made in their own name and on behalf of any existing or potential subcontractors. 

RegioPost was interested in a contract for the provision of postal services, but considered the minimum-wage requirement contrary to EU law and submitted its offer without the necessary declaration committing to pay such minimum hourly wage. Its offer was excluded from the process and each of the lots in which the contract was divided was awarded to a competing tenderer. RegioPost appealed the exclusion/award decision.

The arguments put forward by RegioPost, which the Commission shared, stressed that the incompatibility of the minimum hourly wage requirement with EU law derived both from the fact that this was a special requirement for public contracts not applicable to the execution of private contracts (Rüffert), and that the imposition of such a requirement needed to be assessed in accordance with the posted workers Directive because the provision of postal services would (at least for interested tenderers not based in Germany) require hiring or posting workers (differently from the situation in Bundesdruckerei, where the disappointed tenderer intended to execute the services contract remotely). There is a third, very technical issue, but the CJEU would not need to engage in its assessment if it followed the approach suggested here, so I will not discuss it in any detail.

A 'subjective' legal assessment?

In his Opinion, AG Mengozzi rejects both arguments. Starting with the analytical framework, he rejects that the analysis needs to include the provisions in the posted workers Directive. In his view, in Bundesdruckerei, the CJEU limited the analysis to compatibility with Art 56 TFEU because the circumstances of the case would not have engaged the posted workers Directive. In that regard, AG Mengozzi stresses that RegioPost (being an undertaking based in Germany and that had not indicated its intention to subcontract the execution beyond German territory) would not have executed the contract in a way that engaged the posted workers Directive. Thus, the AG concludes that the posted workers Directive is not relevant and, consequently, the analysis needs to be limited to compatibility with Art 56 TFEU as in Bundesdruckerei (paras 45-60).

In my view, this is a very problematic analytical option. If RegioPost had been an undertaking not based in Germany or that intended to subcontract the execution of the contract to a non-German based company in all or in part, the analysis would have been different. Therefore, the legal analysis depends in this case from the fact that the situation that gives rise to RegioPost's challenge is strictly internal. However, in its analysis of the admissibility of the request for a preliminary ruling, the AG had gone to painstakingly long efforts to set aside this argument in order to justify the competence of the CJEU to rule on this issue (paras 27-44). 

Remarkably, the AG had stressed how 'it cannot be excluded in any way that, following its publication in the Official Journal of the European Union, this tender has been of interest for a number of companies established in Member States other than Germany, but these companies have not finally participated in the award procedure for reasons that could be related to the requirements [concerning the minimum hourly wage at stake]' (para 37, own translation from Spanish). In my view, this should suffice for the CJEU to adopt a view that does not depend on the specific tenderer that challenges the requirement, but on the objective compatibility of the requirement with EU law, particularly in protection of the interests of those potentially excluded cross-border tenderers.

A competence-based legal assessment?

In similar terms, AG Mengozzi rejects the argument that the imposition of the minimum hourly wage only to the execution of public contracts, but not to private contracts, determines its incompatibility with EU law a-la-Rüffert. The AG considers that the inclusion of Art 26 in Directive 2004/18 (and now Art 70 in Dir 2014/24) has overruled Rüffert by allowing for the imposition of special conditions for the execution of public contracts. In his view, this suffices to overcome the Rüffert line of case law and moves the analysis to a pure competence-based issue. In the AG's view, given that German Lander have competence to legislate on minimum wages solely for public contracts (but not general minimum wages), upholding the difference between special conditions for public contracts and those generally applicable to private contracts (as well) would result in the nullification of the Lander's legislative competence (paras 61-89).

This is a very complex and counter-intuitive approach to the issue. Particularly because the AG stresses that 'it is true that Member States with a federal structure, such as the Federal Republic of Germany, cannot claim the internal division of powers between the authorities of regional or local authorities and federal authorities in order to avoid compliance with the obligations imposed on them by EU law. In order to ensure compliance with these obligations, these different authorities are obliged to coordinate the exercise of their respective powers' para 83, own translation from Spanish and reference omitted). And, however, his Opinion goes on to protect the effectiveness of the internal split of competences in a way that, in my opinion, simply goes against those findings.

Moreover, the AG traces a parallelism between social and environmental considerations in public procurement and indicates that the possibility of including environmental considerations that apply solely to public contracts (and not to private contracts) further justifies such a deviation from the Rüffert approach to issues of implicit discrimination. However, the AG is mixing different issues because, as recently argued in a persuasive manner, the inclusion of environmental considerations is assessed in an inverted manner by means of the requirement for those considerations to be linked to the subject-matter of the contact [see the analysis by Dr Rike Krämer in a work-in-progress paper also presented at UACES earlier this week]. Thus, the analytical framework is different, not least because the EU has a significant volume of environment-related competences, whereas its ability to regulate in social matters is extremely limited, if not practically non-existent.

What should the CJEU do?

In my opinion, the CJEU should reject AG Mengozzi's RegioPost Opinion on both aspects. Starting with the second argument, the CJEU should reject the competence-based analysis because it would allow Member States to restrict the effectiveness of EU internal market rules on the basis of their internal split of competences, which has not been accepted by the CJEU in the past. By stressing the important point in Bundesdruckerei that 

imposing ... a fixed minimum wage corresponding to that required in order to ensure reasonable remuneration for employees in the Member State [or region] of the contracting authority in the light of the cost of living in that Member State [or region], but which bears no relation to the cost of living in the Member State in which the services relating to the public contract at issue are performed and for that reason prevents subcontractors established in that Member State from deriving a competitive advantage from the differences between the respective rates of pay ... national legislation goes beyond what is necessary to ensure that the objective of employee protection is attained (C-549/13, at para 34, emphasis added).

This would simply imply using the principle of undistorted competition as a moderating factor aimed at controlling potential excessed resulting from the pursuit of secondary considerations in public procurement and, in particular, using undistorted competition as a limit to the pursuit of social policies that can break-up the internal market and prevent cross-border participation in public tenders [as discussed in full detail in A Sanchez-Graells, 'Truly Competitive Public Procurement as a Europe 2020 Lever: What Role for the Principle of Competition in Moderating Horizontal Policies?' (2016) 22(2) European Public Law forthcoming].

Moreover, on the first aspect, the CJEU should expand its analysis under Bundesdruckerei and include the assessment of the situation where the execution of the contract would necessarily require a non-German based contractor to either post workers or subcontract to a German-based undertaking. In those cases, compliance with the posted workers Directive would be the applicable standard in terms of social protection. Therefore, that would be the analysis to be carried out in order to assess whether the imposition of the minimum hourly wage solely to workers involved in the execution of public works is acceptable. The answer would most likely be that it is not (Rüffert), regardless of the wording of Art 26 of Dir 2004/18 and Art 70 of Dir 2014/24, because both of them require that any such special conditions for the execution of public contracts comply with general EU law.

In short, the CJEU should not follow AG Mengozzi's Opinion on any of these two issues. It should stress the current limits on the inclusion of social considerations in public procurement and define clear boundaries. Granted, this is an area where Member States may want to achieve more leeway (see eg the UK's latest approach to internships, as discussed by Dr Pedro Telles here), but this would require further harmonisation of social legislation on an EU-basis to avoid a new fractioning of the internal market. In the absence of such harmonisation, public procurement remains the wrong regulatory tool to address those issues.