Procurements and the 'living wage'

A new EU decision has called into question minimum wage contract terms in procurements, writes David Hansom.

Many contracting authorities in the UK are looking to build in living/minimum wage provisions in their contracts, partly as a response to the Public Services (Social Value) Act 2012 which creates a duty to consider how to build appropriate socio-economic criteria into services contracts.

Procurement lawyers have long been concerned that such provisions could fall under the scrutiny in the event of a challenge as discriminatory to bidders based outside of the member state. Thanks to a recent case from Germany, some of these fears have been confirmed.

Under Article 26 of the Treaty on the Functioning of the European Union (TFEU), contracting authorities may lay down special conditions relating to the performance of a contract provided that these are compatible with EU law and set out in the contract notice/specifications.

In the German case of Bundesdruckerei GmbH v Stadt Dortmund, (Case C-549/13), a German contracting authority required all bidders to commit to pay staff, or require any sub-contractor to pay, a specified minimum wage. The contractor wished to sub-contract all of the work to sub-contractors based in Poland. The sub-contractor was unable to give the undertaking as it was not covered by any collective agreement in Poland and the wage level did not reflect conditions in Poland.

The contracting authority refused the contractor's request that the specified minimum wage should not apply to the sub-contractor and the contractor challenged the lawfulness of the requirement.

The German court referred a question to the General Court of the European Union. It asked whether national law can require that sub-contractors based in another member state pay a specified minimum wage.

The Court said that a minimum wage requirement was capable of constituting a restriction within the meaning of Article 56 of the TFEU (the prohibition on restrictions on freedom to provide services). In reaching its judgment the Court said that a measure under national legislation which sets a minimum wage on contractors or sub-contractors of a tenderer established in another member state, where 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."

The Court noted that special conditions, such as those ensuring a specified minimum wage will not always constitute restrictions. They may in principle be justified by the objective of protecting employees. In this case though, the fixed minimum wage required to ensure reasonable remuneration for employees in Germany, bore no relation to the cost of living in Poland.

Best practice

This is an interesting judgment which appears at first glance to be contrary to much of current UK government policy. Authorities will want to watch this space to see how the UK government position may change and subsequent case law.

Clearly, the risk of introducing such requirements will be higher in above threshold, fully regulated contracts with a cross border interest. In practice, minimum wage provisions in lower value contracts (for example those to be regulated under the light touch regime in the new Regulations) without cross border interest may be more justifiable.

David Hansom is a partner and head of the public sector group at Veale Wasbrough Vizards. He can be contacted on 020 7665 0808 or This email address is being protected from spambots. You need JavaScript enabled to view it..