Austrian provisions hindering posting of workers violate freedom to provide services

The Court of Justice of the EU (CJEU) has published in its resources the latest judgment of 13 November 2018 in the Slovenian-Austrian case C-33/17 Čepelnik. The CJEU condemned the restrictive Austrian regulations that impeded activities of companies posting workers to Austria.

The Court ruled that the Austrian provisions imposing on an Austrian commissioning party using services of a foreign posting contractor an obligation to suspend payments to such the posting contractor or even to pay a security as a guarantee of a fine which might be imposed on the latter for infringements of labour law, are incompatible with the EU’s freedom to provide services. In the CJEU’s view, such provisions violate EU law because they are disproportionate. They go beyond what is necessary to protect employees, combat social fraud and prevent abuses.

Facts of the case

The case concerned a dispute between Čepelnik d.o.o. (a Slovenian limited liability company) and the individual going by the name of Michael Vavti relating to the payment for construction services.

Čepelnik provided Mr Vavti with the construction services for EUR 12 200. The services concerned a house owned by M. Vavti, in Austria near the border with Slovenia, through the posting of workers. Vavti made an advance payment to Čepelnik of EUR 7 000.

In March 2016 the Austrian Finance Police carried out an inspection at the building site and charged Čepelnik with two administrative offences:

a) Čepelnik’s failure to give correct notice of the commencement of work of two posted workers under the Austrian AVRAG (Law adapting the law on employment contracts) of 1993 (later superseded by the LSD-BG Act).

b) Čepelnik’s failure to make wage documents for four posted workers available in German.

Following the inspection, at the request of the Austrian Finance Police, the competent administrative authority, District Administrative Authority of Völkermarkt ordered Mr Vavti to provide security, intended to secure the payment of any fine that might be ordered in proceedings to be instituted against Čepelnik under the Austrian law. It was set at the outstanding balance amount, that is EUR 5 200. Mr Vavti lodged that security in April 2016. Moreover, in October 2016 Čepelnik was fined EUR 1 000 for the offence in a) above and EUR 8 000 for the offence in b).

Upon completion of the work, Čepelnik billed Mr Vavti EUR 5 000 for outstanding balance. However, Vavti refused to pay, claiming to have already paid the outstanding balance as a security. To sum up, for the services worth EUR 12 200, Čepelnik received only EUR 7 000, was fined EUR 9 000 and had to endure several legal proceedings (the one against M. Vavti is not over yet).

Advocate General’s view

In the light of the facts of the case, Advocate General N. Wahl remarked that the measure in the form of the above-mentioned security (linked with alleged offences against the Austrian law) ‘seems designed to target foreign service providers only’. Moreover, he found that it makes it less attractive for undertakings established abroad to provide, on a temporary basis, their services in Austria. Indeed, it is enough that the Austrian authorities harbour a ‘reasonable suspicion’ that a provider has committed an offence under certain provisions of the AVRAG for him to lose the right to claim from his customer the outstanding balance for the service provided’. Moreover, according to the AG, ‘it may produce certain unfavourable financial consequences, even when no offence has been committed, because the security remains for the whole duration of the procedure for the imposition of the penalty (which can last for several years) in the Austrian administration’s account where — if my understanding is correct — it generates no interest’.

Court of Justice’s considerations and judgment

The Court shared the view of the Advocate General. Firstly, it remarked that it was clear that measures such as the Austrian ones, requiring a commissioning party to suspend the payments owed to a foreign contractor and to pay a security in an amount equivalent to the price still owed for the works where there are reasonable grounds for suspecting an administrative offence by the service provider concerning labour law – both dissuade commissioning parties from the Member State from making use of service providers established in another Member State and dissuade those service providers from offering their services to those commissioning parties.

Then the Court analysed whether the Austrian provisions may be regarded as ‘serving the overriding reasons in the public interest’ – and therefore be permitted. The CJEU recalled that social protection of workers, combating fraud, particularly social security fraud, and preventing abuse may constitute such reasons, especially where they are to ensure the effectiveness of the penalties that might be inflicted on the service provider in case of infringement of the labour law legislation.

However, when it comes to proportionality of the Austrian provisions, the Court found they enable the authorities to require the commissioning party to suspend payments to the service provider and to pay a security amounting to the price still owed for the works, on the basis of ‘reasonable suspicion of an administrative offence’ against the Austrian labour law rules. The provisions may be used even before a competent body discloses fraud or abuse. At the same time, the service provider against whom such reasonable suspicion arose, cannot even put forward his observations before the adoption of those measures.

Moreover, the Court found that the amount of security may actually exceed, perhaps even substantially, the amount that the commissioning party would in principle have to pay on completion of the works.

Therefore, the Court ruled that the above Austrian provisions go beyond what is necessary to attain its goals (are dispoportionate). As such, they violate EU’s freedom to provide services (art. 56 TFEU).