Power and Profit without Responsibilities

Last year you have published a briefing on the effects of labour intermediaries and subcontracting on third country nationals. What is subcontracting and why is it so attractive for companies?

According to research from the European Trade Union Confederation (ETUC), subcontracting is a business model that allows to separate power and profit from risk and responsibility to lower labour costs. A company can decide to outsource all or parts of its production to contractors. In turn, those contractors can also decide to outsource a part or the whole activity assigned to them to further subcontractors. This outsourcing process can go on further, ending in very long subcontracting chains.

But what is the purpose of those long and complex subcontracting chains? Often the lead company and the main contractor(s) agree on the terms and conditions regarding the service provision or the production of goods, while, thanks to long and complex subcontracting chains, the risks and the responsibilities of the employer are forwarded to subcontractors further down the line. In order to comply with the demands imposed by the lead company, those sub-subcontractors often do not honour labour regulation.

Who are those subcontractors involved in subcontracting chains?

In many case studies, we discovered that some subcontractors are just “tank companies”, i.e. companies that supply low-cost workforce, do not pay social contribution and are used to relieve the lead company of value-added tax through false invoices. Sometimes, the subcontracting chains are extended by the presence of “letter-box companies” that do not perform any activities and are just used to make these chains opaquer.

What are the negative effects of subcontracting and are there any initiatives to regulate this practice?

According to our research, in many cases subcontracting has a very negative impact on working conditions for third country nationals as well as EU citizens. It creates unstable employment conditions because employees can easily be dismissed and it worsens working conditions and exposes workers to higher health and safety risks.

Employees with contract from tank companies and letter-box-companies face additional challenges due to the rather short lifetime of such companies: after a couple of years these companies disappear and their capital is transferred abroad (often to a fiscal paradise). Benefiting from the corporate veil, their managers are usually not responsible for labour law violations committed and they can freely create a new company. Workers pass from the old to the new company losing their seniority or other benefits, and this process is repeated constantly in a never-ending cycle.

Moreover, subcontracting fragments labour communities and hampers worker organisation, as workers involved in the subcontracting chain have different employers, different collective agreements, and sometimes different national legislation.

For these reasons, multiple trade unions, at national and European level, and several members of national parliaments and the European Parliament demand to regulate subcontracting in order to prevent its negative effects on workers and trade unions’ activities.

Why is the issue of subcontracting especially problematic for third country nationals?

Third-country nationals often rely on labour intermediaries for assistance when trying to obtain a work permit in EU Member States because the procedures can be onerous. These intermediaries are often subcontractors based in an EU Member State and involved in long and opaque subcontracting chains. Third-country nationals recruited by those subcontractors or labour intermediaries and sent by them to work in companies in another EU Member State, so-called “posted third country nationals” are especially vulnerable. Such posted third-country nationals working in the EU are doubly dependent on their subcontracting agency because they have permission to reside in the EU member state only as long as they are posted by their agency. Therefore, also the EU Commission stated that “posted third-country national workers are generally more exposed to abusive practices, such as fraudulent posting, labour rights violations, precarious working conditions or irregular payment or non-payment of social contributions”. Often, they accept remuneration below what they are entitled to, but which is still much higher than what they can obtain in their country of origin.

What can be done to protect third country nationals labour and social rights?

Subcontracting chains allow companies to blur the distinction as to who is the actual employer and therefore who is responsible for the corresponding obligations and responsibilities towards the employees. First of all, it is necessary to clarify who is the real employer of the workers concerned. As noted by the Court of Justice in the AFMB-case, the substantive or actual employer (i.e. the entity that exerts the power of control and direction over workers) should prevail over the formal employer. In other words, the construction company that employs a posted construction worker has the real authority over the worker, bears the wage cost, and has the actual power to select or dismiss the worker, and not the subcontractor who is only named as the employer in the worker’s employment contract. Otherwise, the power of control and direction would be separated from the employer’s obligations to protect workers. Moreover, if an entity who is only formally included in the employment contract can be considered the real employer, labour law would cease to be mandatory and become subject to the employer’s whim. In fact, in many circumstances labour legislation and collective agreements depend on who the employer is. For example, some rules apply only to employers operating in specific sectors, having a precise number of employees or a certain turnover, or being constituted in particular legal forms.

Do you have further recommendations on how to address the issues related to subcontracting and strengthen the rights of third country workers and other employees in subcontracting chains?

In order to address the main problem generated by subcontracting - the separation of power and profit from risks and responsibilities - direct employment should be promoted by defining that the employer is the entity that exerts power of direction and control over workers. In addition, the possibility to outsource employment should be limited and the length of the subcontracting chain should be shortened. Finally, it would benefit workers’ rights if joint and separate liability for all companies involved in the subcontracting chain were to be introduced.

Another problem to address is unequal treatment of workers involved in the subcontracting chains. Therefore, clauses aimed at applying the same terms and conditions of employment across the subcontracting chain (e.g. supporting the application of national collective agreements throughout the entire chain) should be strengthened.  To increase work stability social clauses currently present in public procurement legislation to protect workers when a new subcontractor takes over the work or service provided, need to be reinforced.

And last but not least, trade unions and worker representatives along the entire subcontracting chain should be supported. This would foster workers’ rights on information and consultation and increase the transparency of the subcontracting chains. It would further help the participation of workers’ representatives in the entire due diligence processes, as prescribed by the EU Directive on corporate sustainability due diligence (CSDDD) to strengthen workers’ rights along the entire subcontracting chain.