It is all about the proper functioning of the single market

EU measures to combat social dumping: an overview in the context of posted workers

By Zuzana Jasenovcova and Audrey Morew

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Introduction

Recently, companies and governments alike have been frequently using the term “social dumping” in discussions regarding the cross-border mobility of workers across Europe. As Marianne Thyssen, European Commissioner for Employment, Social Affairs, Skills and Labour Mobility, stated: “There is no definition of the concept of ‘social dumping’ in EC law. The term is generally used to point to unfair competition due to the application of different wages and social protection rules to different categories of workers” (Parliamentary questions, May 27, 2015). The term does not actually denote a single type of fraudulent activity, however, it encompasses a set of employment practices with one unifying theme: to avoid or minimize statutory payments such as wage tax and/or social security, especially in high tax and social security contributions jurisdictions, and very frequently in the context of posting of workers from lower labour cost countries. Such practices lead to unfair competition and hinder free movement of workers and free provision of services– two of the four freedoms set out in the Treaty of Rome establishing the EU forerunner, the European Economic Community in 1957.

In the past years, we have seen concerted efforts by EU governments – both on the national and European levels – to combat social fraud, with a specific focus on the posting of workers. Social dumping is touching upon a number of different areas of employment, hence the need to tackle it on several fronts. In this article, we will focus on some of the measures in the context of the posting of workers taken recently on the European level.

Social security initiatives

Free movement of workers within the EU is simplified by European rules on coordination of the applicable social security rules. Regulation (EC) No 883/2004 and Regulation (EC) No 987/2009 assure that when moving for work within Europe, the migrating workers are covered by the legislation of one country only and that they pay contributions in one country only. In addition —  very importantly — if the citizens claim a benefit, as in a pension, their previous periods of insurance, work or residence in other countries are taken into account, if necessary.

For a worker posted temporarily to work in another EU, EEA country or Switzerland, this means that during the posting he or she remains subject to the social security system in the home (sending) country. As a proof of the continuing coverage by the home country social security system, the designated home country authority issues so-called certificate of coverage, known also as “portable document A1”. The process of requesting the A1 certificate is paper-based in a number of countries and because A1s are issued routinely, often without more thorough checks of the facts of the cases, which leaves the process susceptible to fraud.

The typical situation involving social fraud involves the establishment of a letterbox company in a low labour cost and low social security rate jurisdiction. The letterbox company then hires and “posts” its employees to a high(er) cost country to work temporarily. In line with current rules, the posted employee often retains a much lower salary compared to the salary a local worker in the higher-cost jurisdiction would receive. In addition, in line with the social security coordination rules, such posted employees remains insured under the home country system, often ensuring a significantly lower social security cost compared to what the social security contributions would amount to in the host country. Clearly such practices may lead to fraud and unfair competition and even border on abuse of the posted workers, neither of which are in line with the original intent of EU legislation in question.

Update of European social security coordination rules

The proposed updates to the EU coordination rules include a set of measures helping local governments to identify the root cause of the social fraud when it comes to posted workers. First and foremost, the “fraud” will be defined in the European legislation on coordination of social security systems for the first time. Local authorities will be able to verify the underlying basis of the issued A1 and even suggest a retroactive rectification and/or withdrawal of the issued A1. The new rules would also include clearly defined deadlines for the local authorities for exchange of social security information, helping to timely address potential abuse of the coordination rules within a set framework. Speedy exchange of social security information and documents between the national authorities will further be facilitated by the new EU-wide system for exchange of electronic information.

Electronic Exchange of Social Security Information (EESSI) System

EESSI is an IT system designed to help European national social security authorities to exchange information and portable documents, such as A1 certificates, as required by the EU rules on social security coordination. Per the current standard process, most of the communication is paper-based and the portable documents like A1 certificates are typically still issued in many countries in a paper form. Some countries, such as Denmark, Belgium and Germany, have already embraced electronic communication and the certificates of coverage can be requested and will subsequently be issued electronically for certain types of cross-border work situations, for example, for postings.

EESSI will introduce tools to ensure that the data exchanged is correct and complete, helping institutions to combat fraud and error more effectively. With EESSI, individual cases should be handled more quickly, benefits could be assessed and paid out faster in cross-border situations. Social security institutions across the EU should be using standardized electronic documents translated into their own language, thus easing cumbersome multilingual communication. Social security institutions will exchange structured electronic documents and follow commonly agreed procedures, so that all electronic documents will be routed through EESSI to the correct destination in another member state.

Although a central ESSI system has existed since July 2017, EU countries have until 2019 to connect their national registers to the EESSI system. Importantly, while EESSI will enable message exchange between national social security institutions, the system will not create a database to centrally store such messages and other personal data. The content of the messages will only be available to the relevant institutions, and member states will remain responsible for ensuring a high standard of data protection within their own jurisdictions, as per the applicable EU rules in this respect.

Developments in the area of labor law

Posted Workers Directive

Another layer of complexity is added with the implementation of the Posted Workers Directive 96/71/EC and the Enforcement Directive 2014/67, and most recently the adoption of revision directive of the Posted Workers Directive 96/71/EC on 1 June 2018. The revision of the directive covers different aspects such as the equal remuneration as of day one in the host county, the universal application of collective bargaining agreements beyond the construction sector, and also covers the definition of the concept of long-term posted workers. Furthermore, the directive also envisages stronger cooperation between the member states to enforce stricter controls on posted workers.

Although member states have two years to transpose the revision into their respective national laws, it is already very clear that measures are being taken to implement the controls and subsequent resulting penalties in case of non-compliance.

For example, Austria is rather conservative when it comes to compliance related to cross-border workers, and business travel also falls within a very strict scope of limited activities. The majority of cross-border workers going to Austria will need to undergo formal notification or take certain immigration steps prior to arriving to Austria even for short business visits.

Special attention must be drawn to EU/EAA employees who, in many instances, must formally notify the Austrian Central Co-ordinating Agency Charged with Investigating Illegal Employment (Zentrale Koordinationsstelle für die Kontrolle der illegalen Beschäftigung, ZKO). The notification needs to be available as of day one of travel.

In addition, strict document retention rules apply and documents must be readily available at the place of employment in Austria during the entire posting period and accessible electronically on – site at the time of an on-site inspection. The list of required documents is extensive, but one of the key documents is the proof of employee social security registration, the certificate of coverage or A1 certificate in the EU discussed above.

Following recent reports of widespread social fraud and unequal employment practices among subcontractors, the Austrian financial police announced that they are increasingly enforcing social security laws in connection with foreign employees temporarily working in Austria. Depending on the country, obtaining the A1 certificate of coverage can be a lengthier process; therefore it is key that employers ensure this element is factored in to their business travel and mobility programs, (especially) when posting employees to Austria.

To ensure the document retention measures are followed, the Austrian government has imposed for breaches — and in a number of cases already enforced — significant sanctions that can amount to €50.000 for repeated of-­fences

European Labor Authority

As an additional measure , the establishment of a new EU agency, the “European Labour Authority” (ELA), to oversee cross-border labour disputes and manage the growing number of people who move or are posted within the EU for work, is under way. The agency would receive a budget of €50 million and is planned to be operational in 2019 at the latest, before the current Commission’s term runs out. Its workers should comprise member state representatives and Commission members with voting rights, and decisions will be taken by a simple majority.

The new ELA is aimed at making sure the member states are applying the EU acquis in the area of labour mobility in a uniform and correct way. The ELA will be authorized to organize joint labour law inspections and facilitate dispute mediation, for example, in cases where an A1 certificate withdrawal would be imminent or a major company restructuring would have a cross-border impact. These and other powers granted to ELA aim to address one of the root-causes of social fraud —insufficient checks at the moment of issuing the A1 certificate of coverage for posted workers.

Conclusion

It remains to be seen whether the plethora of elaborate revisions of the EU legislation related to cross-border mobility targeting posted workers, and the establishment of a new pan-Euro­pean labor agency, will result in improving the somewhat tarnished reputation of social security coordination rules as they relate to posted workers, and reaching the ultimate goal of the joint EU ambition in this respect – alleviating shortage of labour in the individual member states via free movement of workers, and hence allowing for proper functioning of the single market.

zuzana.jasenovcova@fragomen.com

Audrey.morew@fragomen.com