26 September 2019 – need2know

The ECJ has ruled that high administrative sanctions based on the principle of cumulation can constitute a violation of the freedom to provide services and thus violate EU law.

Initial situation – Freedom to provide services and posting

The freedom to provide services guaranteed by the European Union gives the entrepreneur the right to provide services temporarily in the other Member States and to make use of his personnel while doing so. In terms of labour law, a posting takes place when a worker, for a limited period of time, performs his work in the territory of a Member State other than the one in whose territory he normally performs his work. He remains subject to the law of his home Member State. To ensure that the possibility of posting does not lead to a “race to the bottom” in terms of pay and employment conditions, certain protection rules exist at European and national level for postings.

After several amendments, Austria finally enshrined these provisions in the Wage and Social Dumping Prevention Act (LSD-BG), but in some respects went beyond what is necessary under EU law. The sanctions under this act are very severe – so severe in fact that Austria recently received scolding from the highest authority, specifically the European Court of Justice (ECJ) in Luxembourg.

The case at hand – Penalties in the millions for missing wage documents and employment permits

It all started with a bang – an exploded boiler plant in the factory of an Austrian paper company. An Austrian company was commissioned to carry out renovation work and used the services of a Croatian company. In autumn 2015, a total of 217 people were employed on the construction site. The majority of these workers were of Croatian, Serbian and Bosnian origin. At that time, the financial police carried out an inspection – and they had reason to complain. Section 7d of the Employment Contract Law Adaptation Act (AVRAG), as amended on 1 May 2011, stipulated that the foreign employer had to keep the wage documents available at the place of work. Today, a very similar provision can be found in Section 22 LSD-BG. However, these complete wage documents could not be presented to the financial police. Similarly, the authority complained about the lack of employment permits under the Foreign Employment Act (AuslBG ) for about 200 employees. However, the companies were not accused of breaching the obligation to pay the minimum wage itself.

In the spring of 2017, the penalty notices of the authority were issued – and these were no laughing matter. The authority imposed a fine of EUR 3,255,000 on the managing director of the Croatian company and fines of EUR 2,604,000 and EUR 2,400,000 on the management board members of the Austrian works company. In the event of uncollectibility, substitute custodial sentences of 1,736 and 1,600 days, i.e. more than four years, were imposed. These high penalties resulted from the principle of cumulation, and from the fact that an amendment to the AVRAG had significantly increased the range of penalties (to at least EUR 1,000 to 10,000 per employee, or EUR 2.000 to 20.000 if more than three employees were concerned).

The regional administrative court had doubts regarding the compatibility of the Austrian provisions with Union law. The strict penal norms for even negligent infringements, which in addition provide for minimum penalties of a considerable amount, cumulate without an upper limit for several infringements and can lead to custodial sentences for non-collectibility, could violate the freedom to provide services under Art. 56 TFEU as well as the fundamental rights. Therefore, the regional administrative court referred several questions to the ECJ for a preliminary ruling.

ECJ-Ruling – the principle of cumulation can violate the freedom to provide services

On 12.9.2019, the ECJ issued its ruling. A norm such as the Austrian one would be suitable to make the exercise of this freedom less attractive. The regulation indeed pursues legitimate objectives – the social protection of employees and the fight against social fraud. However, the severity of the sanction imposed must correspond to the severity of the offence it punishes. The ECJ did not consider this requirement fulfilled in the case at hand. The effective enforcement of the obligation to keep wage documents available and to obtain administrative permits could also be achieved with less stringent means (e.g. fines of a lower amount and without substitute custodial sentences). Therefore, the ECJ ruled that the freedom to provide services precludes national rules such as those disputed in the proceedings.

Outlook – the possible consequences

The LSD-BG now requires repair, as does the AuslBG. Fines that companies from EU member states – or domestic companies as employers of their foreign employees – have paid due to missing wage documents or employment permits could be reclaimed, provided that the statute of limitations has not yet expired. Only time will tell how far the effects of this decision will range otherwise. It should be noted that the ECJ’s argumentation – millions of penalties through the principle of cumulation without an upper limit including substitute custodial sentences can be a disproportionate restriction of a fundamental freedom – can be extended beyond LSD-BG and AuslBG to other Austrian administrative laws, perhaps beyond bureaucratic formalities and approvals to the offence of wage dumping itself, and thus possibly the entire LSD-BG is now in need of justification.

Irrespective of freedom of movement under Union law, this decision illustrates very clearly the unobjective results which the principle of cumulation under administrative criminal law can lead to in individual cases. The abolition of this principle has been on the political agenda for quite some time without much progress. Whether a solution will be found shortly given the increasingly volatile political climate in Austria remains to be seen.

ECJ decision in German

Author:
Philipp Bertsch

Questions? Please contact:
Christian Schneider
Walter Niedermüller
Florian Plattner

Practice Groups:
Labour Law
Public Economic Law

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