A dispute between a Latvian building company and Swedish trade unions has had enormous implications for employee rights across the EU. Rimtis Puisys and Nerijus Zaleckas take a closer look

In January 2004 the European Commission introduced the Services Directive, which compelled member states to eliminate obstacles preventing service providers of other member states from setting up and doing business within their borders.

This proposal was based on the 'country of origin principle', according to which, service providers are only subject to the requirements of their home countries when operating elsewhere in the European Union (EU).

The enlargement of the EU, which took place in May 2004, signalled the emergence of two groups: the so called 'new Europe' and 'old Europe'.

It was argued by the old Europe group that the country of origin principle could only work if there was a minimum level of harmonisation across the EU, or if there were at least comparable rules between the member states.

They also felt that the Services Directive would undermine social protection and lead to higher unemployment levels in their countries because of cheap labour flooding in from new member states.

Furthermore, some claimed that the Services Directive placed the interests of business above the protection of workers and consumers and, as such, comprised a direct threat to the European social model.

Following protests, the Commission and other EU institutions were forced to reconsider the draft of the Services Directive. It was decided that the revised Directive would exclude the country of origin principle.

However, an opportunity then presented itself for the European Court of Justice to give its opinion on the matter. It did so in the Laval/Vaxholm case – the first test for the Services Directive and the country of origin principle.

Laval/Vaxholm

In 2004, Latvian building company Laval un Partneri posted workers to Sweden to work on building sites operated by its Swedish subsidiary, L&P Baltic Bygg, for the purposes of construction of school premises in Vaxholm. Laval was not bound by any collective agreement with the Swedish trade unions.

In June, 2004, Swedish trade unions contacted Baltic Bygg and Laval. Negotiations ensued, during which Swedish trade unions asked Laval to sign a collective agreement for the building sector in respect of the Vaxholm site, and to guarantee that the posted workers would receive an hourly wage of SEK145 (€16). Laval insisted that wages would be SEK109 per hour.

The disagreement led to a blockade of the Vaxholm building site in November, 2004. The result was that Laval was no longer able to carry out its activities in Sweden. The town of Vaxholm requested that the contract between it and Baltic Bygg be terminated and, in March 2005, Baltic Bygg was declared bankrupt.

Just prior to that, in December, 2004, Laval commenced proceedings before the Swedish Labour Court seeking a declaration that the actions of the Swedish trade unions were illegal.

During the proceedings, the Swedish Labour Court made a reference to the European Court asking whether Article 49 of the EC Treaty and Directive 96/71 precluded trade unions from one member state from forcing a foreign company posting workers to Sweden to apply a Swedish collective agreement.

The ECJ's judgment

In its judgment of 18 December, 2007, the European Court of Justice examined the pay requirements imposed on a foreign service provider by a host member state.

It stated that Directive 96/71 relates only to minimum pay levels and therefore cannot be used to justify an obligation on service providers to comply with rates of pay.

The Court added that the rates which the trade unions sought to impose in this case did not constitute minimum wages in the framework of the Swedish system.

The Court also ruled that the Directive does not allow the host member state to make the provision of services in its territory conditional on the observance of terms and conditions of employment which go beyond the mandatory rules for minimum protection.

Any other requirement obliging the service provider to follow higher standards will restrict the freedom to provide services in the EU, it added.

Further, the Court pointed out that if trade unions were to force a business operating in one member state to sign this type of collective agreement for the building sector, it would have the likely effect of making it less attractive for foreign companies to carry out construction work in other member states. This would also constitute a restriction on the freedom to provide services.

The Court concluded that national rules which fail to take into account binding collective agreements in other member states give rise to discrimination against companies from those countries.

The European Court judgment means that a business that has already signed a collective agreement in its country of origin does not have to sign an additional collective agreement in the host state – even if it would create more favourable working conditions for that company's employees.

Companies from countries such as Latvia and Lithuania with relatively low wages and worker protection standards are now free to post their personnel to countries such as Sweden and Denmark, where employees are traditionally provided with more comprehensive rights.

Crucially, such companies can pay their employees significantly lower wages than Swedish or Danish workers receive, despite the fact that they are doing essentially the same job.

On top of that, there is the likelihood that any subsequent moves to boost pay or conditions for migrant workers will be regarded as obstacles to the free movement of services.

It remains to be seen whether the benefits of the stance advocated by the European Court will override the potential negative effects.

Rimtis Puisys is an associate partner and Nerijus Zaleckas an associate at Eversheds Saladzius, the Baltic office of international law firm Eversheds.