Posted workers: changes for the construction sector

The Department for Business Innovation & Skills (BIS) has been consulting on the implementation of the Posted Workers Enforcement Directive (2014/67/EU) which must be transposed into English law by 18 June 2016. This will have a particular impact on the construction industry.

Summary

The most significant proposal in the Enforcement Directive is a new requirement that member states introduce measures that ensure posted workers in the construction sector can claim back unpaid wages from the next contractor up in the supply chain. This could impact clients in a number of ways:

• First, if the client's immediate contractor (main contractors or trade contractors, as long as the latter are in a direct contractual relationship with the client) fail to pay any such workers employed by them, the client could become liable for any unpaid wages (although it will have a defence of "due diligence" – see below).
• Secondly, the effect of the policy might be that higher tier contractors seek to embed some contingency against sub-contractors failing to pay posted workers even when they (the subcontractors) have been paid. This might result in higher costs for clients.
• There will be additional costs for clients in implementing and recording the due diligence and costs associated with defending any enforcement action.

Background

Posted workers are defined as individuals sent by an employer in one European member state to work temporarily in another member state. Posted workers are distinct from economic migrants because they are already employed in the member state where their direct employer is established but are sent to work for a limited period of time in another member state. Economic migrants are people who exercise their right to move freely between member states to work, etc.

Under the 1996 Posted Workers Directive (96/71/EC), posted workers are already entitled to statutory employment rights in the country to which they are posted which includes rights to maximum work periods and minimum rates of pay.

The Enforcement Directive is a response to concerns that the protections offered in the 1996 Directive are not being fully complied with (for example, in relation to less favourable working conditions).

Focus on construction

The Enforcement Directive introduces a new requirement to enable posted workers in the construction sector (and that sector only) to claim unpaid wages up to the national minimum wage – from the contractor one up in the supply chain from their direct employer. The aim of this is to ensure that posted workers get paid.

Proposals in the consultation

The consultation sets out three options which the Government is considering. Each would require secondary legislation:

1. The first option is to create an individual right for a posted worker to bring a claim in the Employment Tribunal against the contractor up the chain where its employer fails to pay.
2. The second option is for state enforcement of unpaid wages.
3. The third option is the creation of a sanction (financial civil penalty).

Option 1 – tribunal action
The first option is that preferred by the Government, possibly because the extra costs that are estimated would fall to the Government if this is the route taken is the lowest (by some margin) of the three options. If this route is taken, the direct employer would remain responsible for paying the worker so that liability of the contractor up the chain would be the last resort. There would also be a defence available to contractors who could demonstrate "due diligence" when entering into their contract with the worker's direct employer.

There are a number of questions which remain unanswered in the consultation document. It is unclear how easy it will actually be to bring this type of claim against the contractor. For example, can the contractor be joined to proceedings at the outset or will the worker have to exhaust their rights against their current employer first? 

For the individual worker, this route is likely to be unappealing. They will probably not be familiar with the UK legal system and may have returned home to their home country by the time a case is listed for hearing by the Tribunal. The procedural hurdles in bringing a claim will also be unappealing for an individual, as they will have to manoeuvre the early conciliation procedures, tribunal fees and time limit rules. There may also be language barriers as, in many cases, they will not be dealing with the UK legal system in their first language. Bringing a case in the courts of the posted worker's home country is likely to be impracticable due to the need to apply British law.

For contractors, there is a defence available of due diligence, although guidance from the Government is awaited as to what this will entail. A thorough contractor is likely to seek details of the policies and practices which are applied to staff remuneration and details of the wage rates which will be applicable to workers staffed on the contract. Warranty protection would also be advisable in order to ensure that the sub-contractor has not be subject to recent national minimum wage violations or any investigations by HMRC in this regard.

The consultation document also points out that contractors could seek an indemnity from subcontractors for wage liability in order to mitigate their risk in this area. However, it cannot be assumed that the contractor will necessarily have recourse to the indemnity. The contractor will likely encounter the same difficulties with enforcing the indemnities as HMRC may have in pursuing the employer for unpaid wages, particularly in circumstances where the direct employer has become insolvent. It is more likely that contractors will simply increase retentions (the practice of holding back a percentage of the subcontractor's fee for unforeseen liabilities).

Option 2 – enforcement action by HMRC
Under the second option, the Government would create a new HMRC right of action against the contractor to enforce underpayment of the national minimum wage in the event that the direct employer fails to make payment. It is said that the contractor will still have recourse to the defence of due diligence (although, as highlighted above, there is no clarity as yet as to what this due diligence should entail).

Although the consultation notes that this is potentially the route by which the worker would be most likely to receive the money, it would be at some significant cost to the Government to operate this machinery.

The Government has sought views on the most appropriate time for a contractor to be approached by HMRC. This area is fraught with difficulty. Early action involving the contractor could act as an encouragement to sub-contractors to offload their liability for posted workers' wages further up the supply chain. Arguably, HMRC should only engage with the contractor after it has exhausted the investigation and sanction powers it has in relation to the direct employer. The contractor will not have access to all of the relevant payroll records and worker information to assist HMRC with its initial investigations, nor will it have direct access to the posted workers themselves.

Under the current procedure in the UK for enforcing national minimum wage compliance, employers who are found not to have paid the national minimum wage have their names published by BIS (subject to the right to make representations not to be named). This procedure is not referenced at all in the consultation paper, but clearly it would be inappropriate for contractors to fall foul of this regime due to a failure of a direct employer.

Option 3 – financial civil penalty
Thirdly and finally, the route of state enforcement would amount to a new sanction which would be created and applied where a contractor had failed to carry out what is considered to be due diligence in relation to its contract with the employer of the posted worker and where the posted worker is not paid. The penalty could be imposed by Court or be automatic and subject to an appeal. This option is likely to be the least favourable option for all parties. It would be expensive for the state to enforce, and the posted workers would not achieve any benefit as the sanction payment would go straight to the Exchequer.

Response to the consultation

Responses to the consultation had to be lodged by 24 September 2015 and the Government's response to the consultation is anticipated before the end of the year. A copy of the consultation can be accessed on the gov.uk website here.