More majority voting on EU social policy? Assessing the Commission proposal

Ane Aranguiz, PhD Candidate, University of Antwerp

On 16 April 2019 the Commission launched the discussion on how to render decision-making process at EU level more efficient in the social field by activating the passerelle clauses and moving from unanimity to qualified majority voting (QMV) and from special to ordinary legislative procedure without undergoing an unwieldly process of Treaty reforms – although a unanimous vote of Member States is still necessary to approve this change.

The passerelle clauses are part of a number of ‘flexibility mechanisms’ introduced by the Lisbon Treaty that allow to simplify the decision-making process thereby enabling a more efficient exercise of EU competences where special legislative procedure and unanimity are maintained. The Lisbon Treaty provides for a general passerelle clause enshrined in Article 48(7) TEU that is applicable to all policy areas -with the exception of military or defence-related decisions-, as well as specific passerelle clauses that apply only in certain policy areas, namely, Article 32(3) TEU on Common Foreign and Security Policy, Article 82(3) TFEU on judicial cooperation in civil matters, Article 153(2) TFEU on social policy,  Article 192(2) TFEU on environmental policy and Article 312(2) TFEU on the Multiannual Financial Framework.

Background

This Communication is the last of a series of four aiming at reviewing the passerelle clauses provided for the EU Treaties as envisioned by President Juncker in his 2018 State of the Union address. In September 2018, the Commission presented the first proposal on common foreign and security policy, followed by a communication in January 2019 on taxation. In April 2019, the Commission presented the last two proposals first on energy and climate and later on social policy. (None of these proposals has been followed up by the Member States yet).

In social policy, most areas where the EU has competence to act are already subject to QMV and ordinary legislative procedure, which has allowed for an expansion of the social acquis at the EU level over the years. Yet, a reduced but significant number of areas of social policy still require unanimity among EU Member States and a special legislative procedure. These areas include measures relating to the protection against dismissal, social representation and defence of workers’ and employer’s interests, conditions of employment for third-country legal residents, non-discrimination (based on gender, racial or ethnic origin, religion or belief, disability, age, and sexual orientation) and social security and social protection for workers outside cross-border situations.

The specific passerelle clause under Article 153(2) would allow for the transition of the first three areas, whereas the general passerelle could further be applied to the latter two. Differences remain between the general and specific passerelle clauses regarding the procedural requirements for their activation. In order to activate the general clause, the European Council has to take the initiative and indicate the precise envisaged change in the decision-making procedure and notify national parliaments, which have up to six months to object to the proposal. After that, the European Council may, by unanimity and once consent by the European Parliament has been obtained, adopt the decision authorising the Council to act by QMV or enabling the adoption of the corresponding measures by ordinary legislative procedure. This procedure allows also for the half-way activation of the clause where they move from unanimity to QMV while maintaining the special legislative procedure. The activation of the specific passerelle clause, differently, is ‘only’ subject to unanimous agreement in the Council on the basis of a proposal by the Commission and after consultation with the Parliament.

According to the Commission, other than the fact that these policy areas might have major implications on the financial equilibrium of the national welfare systems, a limitation specifically provided for in Article 153(4)TFEU, there is seemingly no logical reasons that explain why these fields remain subject to unanimity and special legislative procedure. Consequently, in December 2018 the Commission presented its roadmap for the proposal for more efficient law-making in social policy and opened the feedback period that collected 27 opinions from different stakeholders.

The Communication

The Communication opens the debate on the enhanced use of QMV and ordinary legislative procedure with the aim of rendering the decision-making process more timely, flexible and efficient.

The Communication emphasizes that while the activation of the passerelle clause would change the decision-making method, it would not alter the overall EU legal framework and earmarked that EU measures are still subject to the principles of subsidiarity and proportionality, the limitations under the social policy title Article 153 TFEU regarding, inter alia, defining fundamental principles of social security or the specifically excluded areas of the right to association, the right to strike and the right to impose lockouts.

Further in the Communication, the Commission discusses the possibility of activating the passerelle clause in the five areas where unanimity and special legislative procedure is still required. Yet, the Commission concludes that only in two out of the five areas the activation of the would passerelle clause have an added value. Firstly, the Commission argues in favour of the use of the passerelle clause in the field of non-discrimination to facilitate equal protection against discrimination that guarantees an effective redress mechanism for all. Particularly, the Commission states that while there is certain level of protection for gender and racial discrimination in employment, equal treatment on the grounds of belief, disability, age and sexual orientation remains protected only in employment and occupation. The Commission considers necessary to address the inconsistent and incoherent EU legal framework where some individuals are better protected than others. (Note that a Commission proposal in this field from 2008 has not yet been agreed).

The Commission also sees suitable to activate the general passerelle clause with regard to social security and social protection of workers for the adoption of recommendations in the near future. The Commission here recalls the recently politically agreed recommendation on access to social protection for workers and the self-employed which is still pending for final adoption, and considers that a more effective decision-making process is desired to support the process of modernisation and convergence of national social protection systems.

Nevertheless, as for the other three fields where unanimity and special legislative procedure is required, namely, protection against dismissals, employment conditions of third-country nationals and the representation and collective defence of the interests of workers and employers, the Commission does not see fit to activate the passerelle clause due to either the limitations envisioned in the Treaty, the sufficiency of the existing legislation or the strong links and diversity between national social protection systems.

Commentary

The proposal put forward by the Commission should be given a cautious welcome. From a positive standpoint, the fact that most of social policy fields where the EU has competence require QMV and unanimity is required only in few domains leads to an uneven a fragmented development of the social acquis. Moving from unanimity to QMV in those limited areas allows for a swiftly and effective policy response in all areas of EU law and prevents one single Member State from vetoing social initiatives while still requiring a high degree of consensus. Secondly, transitioning to an ordinary legislative procedure allows for highlighting the role of the European Parliaments as a co-decision making. While the special legislative procedure relegates the role of the European Parliament to the subordinated position of a mere consultant, in ordinary legislative procedures the European Parliament becomes an equal to the Council and allows for a more democratic decision-making process where the direct beneficiaries are being represented. The activation of passerelle clauses in the social field would therefore not only avoid blockage by a single Member State, but also give the European Parliament a real co-legislator role. Considering the obstacles faced in the adoption of social policy legal instruments due to the lack of consensus in the Council, an active involvement of the usually more socially progressive European Parliament, is likely to free the decision-making process in social matters to a certain extent.

Yet, there are a number of points of concern. To begin with, the activation of the passerelle clause is only envisioned for two out of the five social policy areas that still require unanimity and the special legislative procedure. Moreover, these are the exact same two that cannot rely on the special passerelle clause under Article 153(2) but must be based on the general provision under Article 48(7) which, in turn, requires a much stricter procedural formula. On top of this, one of the two fields, namely social security and social protection of workers, is only contemplated with regard to the adoption of recommendations, thus disregarding the possibility to adopt binding instruments. This is particularly striking when considering the challenges faced recently by the Commission in the formulation of a measure for access to social protection of workers and self-employed, where the Commission inclined for a proposal for a recommendation due to the lack of political support to adopt a binding instrument by Member States.

The activation of the passerelle clause is clearly a positive development, yet, the fact that this is such a limited activation is highly regrettable. Continued fragmentation on social policy may moreover lead to the use of enhanced cooperation, where Member States might separately agree on social policy instruments for higher protection of their citizens. Yet, this will unquestionably result in a two-speed Europe between those Members within and out the enhanced cooperation framework.

The dynamism of the Commission in the context of the European Pillar of Social Rights provides the perfect platform to keep adapting, updating and adopting new social legislation at the EU level thus aligning EU law with the social priorities identified by Juncker’s Commission. If, and this is a big if, the discussion opened by the Commission leads to activating the passerelle clause (even if only limitedly), it will in all likelihood lead to new proposals by the Commission tackling non-discrimination in a more comprehensive manner that could be adopted in a more efficient manner. However, this will fundamentally depend on whether or not the next Commission resumes the enthusiastic social activism of the Juncker delegation.

Yet, if the Pillar is indeed the last chance for social Europe that many have claimed, this initiative represents a missed opportunity to render effectiveness in the decision-making process in social policy by closing the door to facilitating measures tackling clear gaps on the current EU legislation, most clearly with regard to protection against dismissals. It is equally regrettable the choice to limit the use of the passerelle clause to adopt a binding unified response to the inadequacies of our current social protection systems. In times of increased Euroscepticism and rising non-standard forms of employment, providing a response to concrete needs of citizens remains an imperative for future-proving the EU, therefore, it is in the best interest of the same to remove any obstructions of the use of Union competences that allow to move closer to an actual social market economy. At the very least, this initiative embodies the intention to partially unclog the ‘way’ when there is certain degree of ‘will’.

Barnard & Peers: chapter 20

Photo credit: The Independent

The European Labour Authority: a Brand New EU Agency in Bratislava

Bartłomiej Bednarowicz, PhD Researcher at the Faculty of Law of the University of Antwerp

Background

On Thursday, the Council decided that Bratislava will host the headquarters of a brand new EU agency: the European Labour Authority (ELA). The idea for the ELA was spelt out by President Juncker already in September 2017 in his annual State of the Union address. Juncker viewed ELA’s main mission to ensure EU labour mobility in a simple and effective manner and to strengthen fairness and trust in the internal market. Interestingly, the proposal to establish the ELA rolled out of the European Pillar of Social Rights (EPSR) and was presented as a part of the Social Fairness Package, together with a proposal for a Directive on transparent and predictable working conditions in the EU (adopted by the Council on the very same day as the Regulation establishing the ELA; see discussion of the Directive here), a proposal for a Council Recommendation for access to social protection for workers and the self-employed and a Commission Communication on the monitoring on the implementation of the EPSR.

In a speedy manner, in March 2018 the Commission put forward a legislative proposal to establish the European Labour Agency and on Valentine’s Day in 2019, the Commission, the European Parliament and the Council reached a provisional agreement and changed the name from Agency to Authority. Finally, in June 2019, the Council adopted the proposal for a Regulation and selected Slovakia to host the Authority. The ELA is to start its operations in October 2019 already in Brussels and is expected to reach its full operational capacity in Bratislava by 2024. [Update: the Regulation was published in the EU Official Journal in July 2019]

Competences

Pursuant to the Regulation establishing the ELA, the main objective of the Authority is to assist the Member States and the Commission in their effective application and enforcement of EU law related to labour mobility across the EU and the coordination of social security systems. The ELA has the mandate to act only within the scope of selected EU acts in the framework of: posting of workers, free movement of workers, social security coordination, social aspects of road transport and cooperation between the Member States to tackle undeclared work. This catalogue remains closed but can be extended on a basis of any future acts that confer tasks on the Authority. More importantly, to maintain its mandate, the ELA is to neither affect any rights or obligations of individuals or employers that are granted by either EU or national laws, nor the mandate of national authorities responsible for enforcement in these fields.

Furthermore, in order to attain its primary objective, the ELA has been fitted with some additional tasks. Firstly, it is to facilitate access to information on rights and obligations regarding labour mobility across the EU as well as to relevant services. Secondly, it is to promote and enhance cooperation between the Member States in the enforcement of relevant EU law across the Union, including facilitating concerted and joint inspections. Thirdly, it is to mediate and help to look for a solution in cases of cross-border disputes between the Member States. Finally, it is to support cooperation in tackling undeclared work.

Organisation and the seat selection

The European Labour Authority will have a permanent structure comprising of a Management Board (including representatives of the Member States, Commission, European Parliament and social partners), an Executive Director and a Stakeholder Group with purely advisory functions (including representatives of the Commission and social partners). On top of that, the Authority aims at being made up of around 140 staff members, some of them seconded from the Member States. In addition, there will be one national liaison officer seconded from each Member State who will facilitate the cooperation and exchange of information between the Authority and her Member State. The Executive Director, on the other hand, will be appointed for a five-year term by the Management Board from a list of candidates proposed by the Commission, following an open and transparent selection procedure including a hearing before the European Parliament. Finally, the Commission is willing to secure approximately €50 million for the Authority’s annual budget.

As for its seat, 4 Member States competed in the selection process: Slovakia, Cyprus, Bulgaria and Latvia. The Council, in a rather transparent way, steered the selection process and published on its website all the offers prepared by the governments. Then, the European Commission assessed the offers based on the geographical balance, accessibility of the location, availability of the proposed premises and overall city’s readiness to accommodate the needs of international staff. At the Council meeting convoked on 13 June 2019, 23 Member States voted in favour of the Regulation establishing the Authority with its seat in Bratislava, 3 voted against (Austria, Hungary and Sweden) and 2 abstained (Czechia and Poland). Admittedly, it will be the very first EU agency to be located in Slovakia that advertised itself with a rather dull slogan ‘ELA in Slovakia, a good idea’. At least, the ELA’s staff will enjoy the state-of-the-art L12 building at the ‘Eurovea City’ in Bratislava and a stunning view on the Danube river.

Comments

An idea for a (pan)-European labour inspectorate has been considered for a long time as simply ‘the wishful thinking’ of some social partners, especially workers organisations. It also has never really attracted a lot of attention, as the Commission feared scoring an own goal due to a lack of the Member States’ support to set up such an agency in the first place. However, the Juncker Commission has finally put the social rights back at the EU agenda and proposed a rather breakthrough initiative in a dazzling form of the European Pillar of Social Rights. The Commission has already delivered quite plenty on the Pillar and mainstreamed many fruitful debates surrounding the social aspects of employment that under the years of austerity and flexicurity have been put aside. The Authority indeed emanates from the EPSR and aligns well with the accompanying proposals presented by the Commission within a broad framework of European Union cross-border employment and the Social Fairness Package.

The potential of the Authority cannot be surely underestimated. Its main advantages can be summarised in three aspects. Firstly, in the field of legal issues of international employment, it will provide the national authorities with some valid operational and technical support, mostly to exchange information, develop some best practices, carry out inspections and also to settle any disputes. Bridging the information and cooperation gap between the Member States is indeed a noble objective and quite a desired one as well. In practice, it is often the case that national authorities are unable to facilitate dialogue with each other and exchange information due to the complex and lengthy internal procedures and the language barrier. Having national liaison officers from all Member States designated to be at the ELA’s disposal will definitely plug that gap and speed things up. Moreover, some national authorities might not have even dreamed of an ability of concerted and joint inspections, which is now a powerful tool in the ELA’s arsenal, subject however, to reaching an agreement between the Authority and the concerned Member State(s).

Secondly, what the enforcement of EU employment and social security law often lacked at national level, were synergies with the already existing EU agencies that would allow to rely on their expertise in areas such as health and safety at work, the management of an undertaking that is being restructured, skills forecasting or tackling undeclared work. Therefore, it is the ELA’s task to facilitate it all to untap the available potential and to strengthen the enforcement levels.

Finally, the Authority will simplify cooperation by integrating a number of existing committees and networks amongst the Member States which will hopefully lead to eliminating fragmentation in that area.

On the other hand, the Authority will definitely not serve as a panacea for all the flaws in the system. The role it will play mostly depends on how active the ELA with its Executive Director decides to be. There is a considerable room to be claimed by the Authority with some space for manoeuvre, but there are some open-ended questions as well. Sceptics and pragmatics may wonder how willing some of the national authorities will be to cooperate within the ELA’s network and agree to, for example, conduct inspections on their territory, which can expose the flaws of their own systems on an EU scale. It is also unsure whether the Member States known for a rather lenient approach towards social security laws will deem it in their best interest to assist ELA with the fight against fraud and abuse on their territories, as no such obligation arises. For them, it could mean the end of their competitive advantage of providing a legal framework for cheaper labour through foxy constructions such as letterbox companies.

Examples from the field of social security coordination and the experience with the Administrative Commission, a body comprising of government representatives, capable of reviewing cases of social fraud between the Member States, do not necessarily instil optimism. The number of successful outcomes of such cases is rather scarce and some national authorities are giving up on the Administrative Commission and often try to take matters in their own hands. Essentially, they reach out on their behalf to the institutions in the other Member States mostly without any tangible end-effects. Moreover, the Authority’s tasks might overlap with those of the Administrative Commission, which was a major point of discussion during the negotiations about the ELA. The exact tasks division, despite indicated as ‘without prejudice’, might prove to be more problematic to delineate and can lead to duplication and competence battles. It is also doubtful how effective the Authority can really be and police the EU labour mobility market consisting of approximately 17 million EU-movers with rather modest resources of 140 staff.

To conclude, as for now, the Authority has baby teeth. It will be up to its adopted strategy, action plans and frankly, leadership to make sure that it will eventually get real teeth. The ELA has definitely promising potential but it remains to be seen how it will be utilised and how big of a dossier can it claim and handle. The expectations are high so we should all give the European Labour Authority a big leap of faith and wait for its very first results.

Barnard & Peers: chapter 20

Photo credit: www.landererova12.sk

From Austerity Back to Legitimacy? The European Pillar of Social Rights: A Policy Brief

How Juncker can make ‘The European Pillar of Social Rights’ deliver a powerful message that the EU is an area of dignity, autonomy and social justice

Claire Kilpatrick (EUI), Elise Muir (Veni Fellow, Maastricht) and Sacha Garben (College of Europe, Bruges)

Since the financial crisis began and the EU's response to it included wider austerity in a number of countries, there have been doubts among many citizens that the EU is still committed to prosperity and rising living and working standards. The recently announced ‘European Pillar of Social Rights’ is an attempt to address this concern. In our view, the Pillar must include binding and high-profile pledges - on minimum wage and minimum income - in order to address citizens' concerns and for the EU to move on from austerity back to legitimacy.

The ‘European Pillar of Social Rights’ is a Commission policy initiative launched in March 2016. Our analysis reflects on the policy process and proposals to date. It explains why a High-Level Conference on the Pillar held in late January 2017 is the most important staging-post to date. We make proposals for orienting the Pillar initiative towards delivering dignity, autonomy and social justice in the EU and evaluate the constitutional implications, especially in terms of EU competence, of the commitments to introduce EU measures on minimum pay and income, and to restrict the Pillar to the euro-area states. The Pillar initiative seems likely to feed into the Commission White Paper on the Future of Europe launched in March 2017 which will be followed by a series of reflection papers of which the first mentioned is developing the social dimension of Europe. Accordingly it is an important new policy juncture for Social Europe which deserves analysis and input.

The Pillar is an open process with impressive civil society and EU institutional participation.

The High Level Conference organised by the Commission on 23 January 2017 on the European Pillar of Social Rights showed it attracts as much attention as it is mysterious. Numerous stakeholders alongside at least ten Commissioners, including President Juncker and Vice-President Dombrovskis, representatives of various EU institutions including President Tajani of the European Parliament and government ministers converged on Brussels to voice their opinions on the European Pillar of Social Rights.

The many interventions left little doubt that the precise legal shape and policy content of the Juncker Pillar remains undetermined and thus open for discussion. Hence, rather than reading the Pillar consultation document with its draft list of ‘principles’ as a quasi-finalised text with just its legal status and scope to be determined, the Pillar consultation is best seen as providing a vehicle for a wide range of proposals on resetting Social Europe.

Seen as such a process, the Pillar consultation has been a success. Over 16,000 individuals and organisations filled in the questionnaire issued as part of the Consultation and around 200 written contributions were submitted to the Commission. In Autumn 2016, national consultation events were held across the EU Member States. The very substantial NGO and union presence at the High-Level Consultation testifies to civil society engagement and investment in the Pillar consultation. Amongst these, the Social Policy Platform deserves to be highlighted. By bringing together since 1995 over 30 different social NGOs, including Age Platform Europe, PICUM (Platform for International Cooperation on Undocumented Migrants), EAPN (European Anti-Poverty Network), Housing Europe, ILGA-Europe, European Youth Forum and the European Disability Forum, it had an added legitimacy and voice in the process. It disseminated well-defined proposals for the Pillar. In light of Juncker’s announcement in his closing speech, it produced the most resonant proposal of a minimum income directive and a proposal on minimum pay via the European Semester.

The frames of discussion failed to give EU social rights and values their central place in the Pillar.

The European Pillar of Social Rights initiative comes after a decade which has altered perceptions of the EU as a benign or mildly positive force for social justice in Europe.  Sovereign debt and EMU governance are one important reason for this shift. Another relates to concerns triggered by free movement after the 2004 and 2007 enlargements. Political developments make it vital for the EU to use the Pillar to reassert the pursuit of social justice as a central part of its mission. Yet the urgency and importance of recentring the EU’s social justice roles and responsibilities was not fully acknowledged by many actors at the High-Level Consultation. There is a risk of doing too little.

Getting the frames of analysis right is crucial to guide the Pillar and the decisions and actions on its implementation. The frames or narratives which were very present during the High-Level Consultation were:

Social Europe was desirable provided EMU debt and deficit limits were respected;

Social Europe, the EMU and the internal market can or do happily co-exist;

Social Investment is the guiding frame for the Pillar of Social Rights and is not incompatible with social rights as human rights;

Adapting to new technologies and work platforms is the main priority for Social Europe.

In our view, these frames should not be those guiding the Pillar process or its implementation. Instead it is vital to make it explicit that the driving force for legal and policy change is the desire to protect the dignity and autonomy of individuals as well as social justice.

Dignity recognises the equal and intrinsic worth of every human being while autonomy requires political institutions not to deprive individuals of valuable options in areas of fundamental importance in their lives. In the absence of such an explicit message in the Pillar, or if the message is blurred by economic arguments in support for change, or made subject to economic conditions, or wishing away hard choices between the economic and the social, or attributing Social Europe’s malaise to new technologies and platforms, the message and its delivery will be imperilled. 

Protection of individuals and their dignity and autonomy has a firm EU law basis bolstered by national constitutional and international human rights law. Dignity is the foundational principle of the EU Charter of Fundamental Rights and many of the rights it contains are specifications of those foundational commitments. Hence ,for example, the Charter ‘recognises and respects the right to social and housing assistance so as to ensure a decent existence for all those who lack sufficient resources’ (Article 34(3)) and ‘the right to working conditions which respect his or her health, safety and dignity’ (Article 31). Most closely related to the value of autonomy in Social Europe are the EU Charter commitments to the right to engage in work and pursue a freely chosen occupation as well as the freedoms of association (Article 15), expression, information and consultation (Articles 11 and 27), to collectively bargain and take collective action (Article 28).

Beyond the EU Charter and human and constitutional rights’ commitments, the EU’s social justice and progress objectives feature prominently in the Treaties: in the TFEU’s preamble as the resolve to ensure the ‘social progress of their States by common action to eliminate the barriers which divide Europe’. Article 3 TEU conceptualises the EU as ‘a social market economy’ aiming at full employment and social progress, and provides that it ‘shall combat social exclusion and discrimination, and shall promote social justice and protection’. These objectives shall furthermore be mainstreamed across all EU policies, in accordance with Article 9 TFEU, which provides that ‘in defining and implementing its policies and activities, the Union shall take into account requirements linked to the promotion of a high level of employment, the guarantee of adequate social protection, the fight against social exclusion’.

A European Pillar of Social Rights must be founded on these values and be concerned with their promotion and guarantee in a changed EU membership and EMU context.

The EU constitutional implications of a Eurozone pillar and minimum income and pay guarantees

The Commission President made a twofold announcement: an initial focus of the Pillar on the Eurozone and a dual guarantee for minimum pay and income.

We strongly endorse the proposals to focus on minimum pay and income for those living and working in Europe. These proposals not only address the preoccupation that the EU has threatened these protection floors, they also enshrine the values of dignity and autonomy in the EU. Yet to properly realise those values requires minimum pay and income instruments to apply to all EU Member States, not simply Euro area states. Sovereign debt arrangements applied to three non-euro area states and concerns that enlargement threatens the social floor are not confined to euro area states either. Minimum pay and minimum income are social guarantees of a fundamental nature that should apply across the EU. Indeed the social acquis, other than the brief opt-out by the UK between Maastricht and Amsterdam, has always applied to all those living and working in Europe and should continue to do so.

Moreover, to make them tangible, these EU minimum income and pay guarantees must be enshrined in visible and effective instruments. In both cases, our preference would be for legally binding Directives which should be complemented with soft law commitments in the European Semester and programme commitments in sovereign debt loan states.

This raises questions of EU competence to adopt such legally binding measures.

For minimum income, we agree with the Social Policy Platform that Article 153(1)(h) TFEU which allows for binding measures to be adopted using the ordinary legislative procedure for the integration of persons excluded from the labour market is appropriate.

It is widely assumed that it is impossible for the EU to adopt a minimum pay directive because Article 153(5) TFEU states that the social policy legal base ‘shall not apply to pay’. However, the Commission may have in mind a creative literal reading of the combination between Article 153(5) and Article 352 TFEU (the ‘residual powers’ clause of the Treaties). Article 153(5) TFEU could be read as excluding only the adoption of a minimum pay directive under the Social Policy Title of the Treaty without excluding other possible legal bases.

Article 352 TFEU would then be examined as a potential legal basis for a minimum pay directive. Article 352 can be used ‘where the Treaties have not provided the necessary powers’ but cannot be used to harmonise Member States’ laws or regulations ‘where the Treaties exclude such harmonisation’. However, this harmonisation exclusion could be read as applying only in those cases where the Treaties clearly in terms outlaws harmonisation such as in the areas of vocational training (Article 166 TFEU) and culture (Article 167 TFEU) (each allowing legislative measures to be adopted ‘excluding any harmonisation of the laws and regulations of the Member States’). It therefore would not apply to Article 153(5) TFEU. Following this interpretation, a minimum pay directive could be adopted if it achieved the unanimous Member State support required under Article 352 TFEU. It remains to be seen if such a line of reasoning would be accepted by the EU legislator.

The question could be raised whether the internal market legal basis of Article 115 TFEU could be used for the adoption of a minimum pay directive (Article 114 TFEU cannot be used, since Article 114(2) TFEU prevents reliance on Article 114(1) to protect the rights and interests of employed persons). There is an argument that such a measure, even if it would retain certain differences in minimum pay levels among EU Member States, would help reduce distortions in competition. Not only would it facilitate the application of the Posting of Workers Directive in the area of cross-border service provision, having a certain minimum pay level in all Member States could more generally help limit competition on wages. Whether the expected reduction in distorted competition would be sufficient to fulfil the conditions for use of the internal market legal basis is an open question, and would depend in part on at what (relative) level the wage would be set and whether this significantly decreases current differences in pay among the Member States.

However, even if this would be accepted as possible in legal terms, there are several reasons why Article 115 TFEU would not be the advisable course of action. If the directive is about achieving genuinely social objectives, the use of an internal market legal basis is unwise, as the Court is then more likely to interpret the measure in a market-friendly way in case of a conflict between ‘the social’ and ‘the market’ (which is arguably what happened in the case of the Posting of Workers Directive, as well as the Collective Redundancies Directive).  And as Article 115 TFEU requires unanimity as much as Article 352 TFEU, there is little strategic advantage in using it either.

Subsidiarity concerns will evidently be addressed by setting pay and income levels appropriate to each state. EU respect for the Council of Europe and commitment to social rights can be underlined by using that body’s European Social Charter commitments and elaboration of the right to a fair remuneration (Article 4(1)) and to social assistance (Article 13) as base-lines.

The former provision requires States ‘to recognise the right of workers to a remuneration such as will give them a decent standard of living’, and the European Committee of Social Rights has ruled that the lowest net wage must be above a minimum threshold, set at 50% of the net average wage, while state conformity will be assumed above 60% of the net average wage. The latter provision deems assistance appropriate where the monthly amount paid to a person living alone is not manifestly below the poverty threshold (50% of median equivalised income as established by Eurostat).

If it is decided necessary for transitional or political reasons to proceed with the nineteen euro area states or some other subset of EU Member States, this opens a further set of questions about the legal basis of measures for minimum pay and income as the legal bases indicated are for all Member States. Although the Lisbon Treaty added a new legal basis, Article 136 TFEU, for measures addressed only to euro area states, we do not consider this a suitable basis for minimum income and pay legislative proposals for two reasons. The first is that, although used (questionably) to create measures providing for EMU sanctions for euro area states (see C. Kilpatrick, ‘The New Economic Component of EMU: A Lawful and Effective Design?’ EUI Working Paper, ADEMU Horizon 2020 Project Series, 2016), its centre of gravity lies in strengthening coordination and surveillance under the European Semester. The second is that legislative proposals for minimum pay and income, based on dignity, autonomy and social justice, should not be grounded in a macro- economic competence.

What then are the alternatives for legislative measures on minimum pay and income covering only some EU Member States? One possibility is enhanced co-operation, a process whereby some Member States adopt EU law without unwilling Member States (see Article 20 TEU and Articles 326-334 TFEU). This can be used only as a last resort where the Council has established that the objective sought cannot be achieved within a reasonable period by the EU as a whole and hence could provide an alternative avenue for minimum income and pay proposals should EU-wide agreement prove unattainable.

Another possibility is ‘going outside’ the Treaties via an international agreement on these matters between only the participating euro area states or those states and other willing participants. The former was the model used in the sovereign debt crisis to set up the European Stability Mechanism in 2012 and its predecessor, the European Financial Stability Fund in 2010. The latter was the path chosen for the Fiscal Compact Treaty of 2012. However, such parallel integration however raises important legitimacy concerns: see S. Garben, ‘Restating the Problem of Competence Creep, Tackling Harmonization by Stealth and Reinstating the Legislator’, in: S. Garben and I. Govaere (eds.), The Division of Competences in the EU Legal Order: Reflections on the Past, the Present and the Future (2017, Hart Publishing).

This is not to deny Mr Juncker’s welcome recognition that the constraints imposed in the context of EU macro-economic governance justify special attention to socializing the European Semester. It is also certainly the case that EU legislative commitments can usefully be complemented by action in the European Semester. We make proposals to do so in the next section. 

Beyond the Juncker announcement: the Pillar needs to strengthen, broaden the social acquis and socialize the European Semester

At the time of the 60th anniversary of the Treaty of Rome, it may be recalled that the TFEU enables the adoption of EU legislation on a fairly broad set of social questions. For instance, Article 153 TFEU allows for the adoption of legislation on workers’ health and safety, working conditions or information and consultation of workers. A whole body of social legislation has been adopted at EU level and begs for modernisation. As mentioned in this note already, the Charter of Fundamental Rights of the European Union - that has the same legal value as EU primary law since the entry into force of the Lisbon Treaty - also contains a set of provisions on solidarity that have so far been little used.

Curiously, the ability for the EU to intervene through legally binding instruments had been subject to little attention during the High Level Conference. One could hence fear that the Commission will shy away from making hard law proposals. We would thus like to underline the importance of anchoring the Pillar in EU social policy and giving expression to the social provisions contained in the Charter. This is necessary to ensure that the Pillar indeed enhances the protection of the dignity and autonomy of individuals across Europe.

We have already made suggestions elsewhere to broaden and consolidate the EU social acquis (see S. Garben, C. Kilpatrick and E. Muir, Towards a European Pillar of Social Rights: Upgrading the Social Acquis, College of Europe Policy Brief #1.17). We suggested the adoption of (1) a Directive for the Protection of Dependent Workers, ensuring the application of the existing EU social and labour law measures to all dependent workers (2) a Protection against Precarious Work Directive, (3) a Directive for the Enforcement of Workers’ Rights.  We also called for (4) a Declaration safeguarding the integrity of the social acquis as an EU floor for worker protection.

A further re-centring of EU competences in the social field could lead to the re-adoption of Directives such as the Collective Redundancies Directive and the Directive on the Transfer of Undertakings on social legal bases. Indeed, these Directives remain abnormally grounded in EU internal market competences. It would be naïve to ignore the possibility of tensions between the economic and the social dimensions of these instruments, as illustrated by the recent AGET case before the CJEU (freedom of establishment v. domestic rules protecting against collective redundancies). The social nature of these legislative instruments ought thus to be consolidated. The assertion of such an autonomous mandate for social rights would allow to better articulate economic and social concerns in cases of tensions.

In the meanwhile, existing tools of economic governance could be re-adjusted to make more space for genuine social priorities. In that sense, the social platform wisely suggested to use the infrastructures of the European Semester to counter the current trend pushing Member States to readjust wages downwards. The Commission could indeed support the introduction of references to adequate minimum wages in the Annual Growth Survey as well as in the Country Specific Recommendations and keep track of the development of wage levels. This would give more bite to the employment policy prong of the European Semester.

To that effect, it is important that Country Specific Recommendations continue to be adopted on the dual legal bases of Articles 121(2) (economic policy) and 148(4) TFUE (employment policy). Key players at European level are thus not only those in charge of economic and financial affairs but also those responsible for employment and social policy who are more likely to ensure that due attention is paid to employment and social concerns indeed. Mark Dawson has usefully observed that the involvement of the latest category of actors could be further enhanced in the Macroeconomic Imbalance Procedure (MIP; see M. Dawson, ‘The European Semester: Displacing Social Policy in the New ‘New Governance’’ in C. Kilpatrick (ed.) The Displacement of Social Europe (forthcoming). On file with the author).

Indeed, to the extent that this procedure does result in suggesting - if not imposing – changes in domestic social and employment policies as part of the Country Specific Recommendations, the decision-making process leading to their adoption shall be adjusted. This should allow for a stronger involvement of actors specialised in the field such as the Council configuration on Employment, Social Policy, Health and Consumer Affairs. For instance, see the Report from the Council Employment Committee and Social Protection Committee on ‘Assessment of the 2016 Country-specific Recommendations (CSRs) and the implementation of the 2015 CSRs’ on labour market aspects (p 10) and on social protection and inclusion (p 21).

Now, the Juncker Commission may be considering reserving, or enhancing, the emphasis on minimum pay (and income) in recommendations specific to Euro area members. Although we would regret a focus on Eurozone members only, if this approach was adopted it would be all the more so important to refer to Article 148 TFEU (employment policy) as a legal base besides Articles 136 (Eurozone) and 121(2) TFEU (economic policy) in order to ensure adequate representation of social players and interests.

Conclusion

The most concrete elements of information received during the Conference are unquestionably the announcements made by Commission President Juncker. Let us be clear, sending a message that the EU guarantees (directly or indirectly) minimum income and wages would be most welcome; and giving flesh to such guarantees through tools available in the context of EU economic governance is understandable. This however should be framed with appropriate conceptual and legal tools placing individual protection at the core of the process and, to that effect, it ought to be backed up with a solid effort to modernise the EU social acquis.

In that sense, it is to be hoped – as hinted at by President Juncker himself - that the initiative for the European Pillar of Social Rights will live up to the standards of the ambitious social agenda called for by Commission President Delors in the late 1990s. It may be recalled that this had resulted in the Proclamation by 11 out of the 12 Member states of the Community Charter of Fundamental Social Rights and came with a strong impulse for the adoption of new legislation (point 28 of that Charter). In the new EMU and enlargement context, the legislative focus should be on providing an updated and more comprehensive EU floor of social rights and should be accompanied by proposals to socialise the European Semester both in its process and its substance.

Barnard & Peers: chapter 20

Photo credit: Euranet Plus Inside

The new Viking/Laval? AG Wahl argues that requirement for prior authorisation of collective redundancies breaches Article 49 TFEU

Menelaos Markakis⃰

⃰ DPhil Candidate, University of Oxford. Academy of Athens and Modern Law Review scholar.

The Advocate-General’s recent opinion in CJEU Case C-201/15 AGET Iraklis is both interesting intellectually and significant politically. AGET Iraklis, which is a subsidiary of LafargeHolcim, is active in the fields of manufacturing, distribution and marketing of cement and has three plants in Greece. As the construction sector took a heavy blow from the economic crisis, AGET Iraklis’ sales plummeted and the company sought to reorganise its business. Under Greek law, a company seeking to carry out collective redundancies has to consult with the workers’ representatives prior to taking action. It was disputed during the hearing whether the company had indeed done so. More importantly, the Minister of Labour is given the power to extend the deadline for such consultations or to refuse to authorise some or all of the projected redundancies. It was the exercise of the latter power by the Greek Minister of Labour which gave rise to the dispute in the main proceedings (Greek Council of State (Fourth Chamber) Decision no 1254/2015).

The company sought to argue that the impugned national rule was not compatible with Council Directive 98/59/EC on the approximation of the laws of the Member States relating to collective redundancies and Articles 49 (freedom of establishment) and 63 (free movement of capital) of the TFEU. The Greek Council of State, which is in many ways the supreme administrative court of the land, asked the CJEU whether the contested rule contravened the aforementioned rules and in case the answer to the preceding question was in the affirmative, whether it could perhaps be justified ‘if there [were] serious social reasons, such as an acute economic crisis and very high unemployment’.

The Advocate General opinion

AG Wahl delivered his opinion on the case on 9 June 2016. He argued that the impugned national rule was ‘wholly unconnected’ to Directive 98/59, insofar as that directive ‘[did] not govern the employer’s freedom (or lack thereof) to effect collective redundancies’. As such, Directive 98/59 did not preclude, said he, the enactment of the contested provision (paras 23-34 of the opinion).

As regards EU primary law, AG Wahl opted to examine the contested national rule from the standpoint of the freedom of establishment (paras 35-45). He argued that a requirement for prior authorisation of collective dismissals constituted a restriction on freedom of establishment (para 47). ‘Indeed, in the main proceedings the rule at issue limits an employing undertaking’s freedom to make collective redundancies since, unless the rule is complied with, those redundancies will be invalid. Such a rule thus directly interferes with the internal organisation of undertakings and with the management of their staff, possibly exposing undertakings to the risk of operating at a loss.’ He further argued that Article 49 TFEU should be interpreted in the light of Article 16 of the EU Charter of Fundamental Rights (freedom to conduct a business) and that the impugned national rule restricted the exercise of the latter freedom (paras 49-50).

The Greek Government sought to argue that the contested rule was justified on the ground of the protection of workers, which is an overriding requirement in the public interest. The impugned law provides that applications to carry out collective dismissals are to be considered on the basis of the following criteria: ‘the conditions in the labour market’; ‘the situation of the undertaking’; and ‘the interests of the national economy’. Authorisation is a condition for the validity of the redundancy measures.

AG Wahl argued (para 66) that the interests of the national economy ‘involve[d] a purely economic objective which [could not] justify restricting the freedom of establishment (nor the freedom to conduct a business)’. As regards the conditions in the labour market and the situation of the undertaking, these criteria were, said the Advocate General, ‘neither appropriate for achieving the objective of protecting workers, nor limited to what [was] strictly necessary in order to achieve that objective’ (para 67).

As regards the conditions in the labour market, AG Wahl noted that, in the event of an administrative refusal to authorise the planned redundancies, the workers would fare even worse, since ‘that undertaking would have a clear incentive to commence proceedings for its dissolution and winding-up, after which it would no longer be bound by Directive 98/59 … and, presumably, would not have the funding required to remunerate the workers concerned in the event that the rule at issue were to continue to apply to such a situation’ (para 68). ‘That would, incidentally, also endanger the jobs of those workers who have not been made redundant.’ As such, AG Wahl expressed his ‘doubts’ as to whether ‘the rule at issue might contribute, in any meaningful way, to lowering the unemployment rate’. In any event, this criterion was not suitable, said he, for achieving the objective pursued, as ‘it [did] not remedy the problems which [had] made the employment situation of the workers concerned uncertain’ and essentially ‘amount[ed] to denying the employers’ right to terminate an employment relationship on the ground that it [was] generally not desirable to have more unemployed persons’ (para 69).

As regards the possibility to rely on the situation of the undertaking for the purposes of blocking collective dismissals, AG Wahl noted that the contention that the authorities of a Member State might be better suited than the management of that undertaking to determine what is most appropriate in its situation struck him as ‘nothing less than remarkable’ (para 70). ‘At any rate, I do not find it appropriate to protect workers by letting an authority overrule the business decisions ultimately taken by the employing undertaking.’ He added that:

Moreover, as argued by the Company, the statutory criteria are unclear and afford excessively broad discretion to the administration, to the detriment of the legal certainty of the employers. This, in fact, appears to frustrate from the outset any possible attempts at reaching a friendly settlement between the employers and the workers by doing away with the need for negotiations – as witnessed in the matter under consideration. An alternative might have consisted in listing the types of dismissals considered to be unjustified, as in the case of the list which appears in paragraph 3 of the section of the Appendix to the Social Charter relating to Article 24 thereof (para 71).

Furthermore, the Greek Government failed to show, said the Advocate General, that the impugned measure complied with the principle of proportionality, nor did it provide in his opinion specific evidence substantiating the arguments raised (para 72). He added that:

Indeed, by restricting the employer’s ability to dismiss the workers collectively, the rule at issue merely gives the impression of being protective of workers. To begin with, that protection is only temporary until the employer becomes insolvent. Even more importantly, workers are best protected by an economic environment which fosters stable employment. Historically speaking, the idea of artificially maintaining employment relationships, in spite of unsound general economic foundations, has been tested and has utterly failed in certain political systems of yesteryear. That provides confirmation that, in laying down an effective yet flexible protective procedure, Directive 98/59 affords genuine protection for workers, whereas a system of prior authorisation such as that at issue, which tellingly falls outside its scope, does not (para 73).

As such, the Advocate General concluded that the impugned rule was not suitable for the attainment of the objective pursued and that, in any event, it went beyond what was necessary to achieve that purpose (para 76). Moreover, ‘the presence of an acute economic crisis accompanied by unusual and extremely high unemployment rates’ was said to be incapable of justifying the impugned restriction (para 77). This was, said the AG, because ‘[t]hose circumstances, although clearly very serious, [could not] justify restricting the freedoms of establishment and to conduct a business when the statutory criteria [could not] do so on their own’; ‘an acute economic crisis and very high unemployment rates amount[ed] in themselves – at least in part – to purely economic factors’; ‘the socio-economic effects resulting from collective redundancies [were] felt in a given local context and social environment, not at the national level’; and ‘there [was] no reason to believe that a severe economic crisis would not affect businesses just as much as workers’ (paras 78-79). The AG further noted that ‘as the Commission state[d], in times of crisis, it [was] just as important to reduce all the factors which deter[red] new undertakings from investing, as economic efficiency [might] help stimulate job creation and economic growth’ (para 80). ‘That, I presume, is the reason why Greece, as a condition for the financial assistance provided by the European Stability Mechanism, accepted to “undertake rigorous reviews and modernisation of collective bargaining, industrial action and, in line with the relevant EU directive and best practice, collective dismissals, along the timetable and the approach agreed with the Institutions. On the basis of these reviews, labour market policies should be aligned with international and European best practices, and should not involve a return to past policy settings which are not compatible with the goals of promoting sustainable and inclusive growth”.’

Commentary

The AGET Iraklis case arose from the Greek crisis and gave rise to the first Article 267 TFEU preliminary reference from the Greek Council of State to the CJEU in this context. Although the impugned rule was not used as a ‘vehicle’ for indirectly challenging the bailout terms agreed between Greece and its creditors, the case could nevertheless be said to form part of a group of cases brought before the CJEU concerning the legality of national economic policy measures that were enacted in response to the economic crisis. These include the Romanian MoU cases (Cases C-434/11, C-462/11, C-134/12, and C-369/12); the Portuguese MoU cases (Cases C-128/12, C-264/12 and C-665/13); a couple of Greek cases concerning a Council decision adopted within the framework of the excessive deficit procedure (Cases T-541/10 and T-215/11); and a number of cases arising from the Cypriot banking crisis (Case T-327/13; opinion in Joined Cases C-8/15 P, C-9/15 P and C-10/15 P; opinion in Joined Cases C-105/15 P to C-109/15 P; see comments by René Smits).

There is no doubt that the impugned national rule in AGET Iraklis might hinder or render less attractive the exercise of the freedom of establishment, which includes the right of departure from a Member State. It might further constitute a restriction on the freedom to conduct a business which is enshrined in Article 16 of the EU Charter. The application of the Charter is triggered insofar as Greece could be said to derogate from the freedom of establishment. The relationship between the freedom to conduct a business and workers’ rights is clearly complex (see the report by the European Union Agency for Fundamental Rights, Freedom to Conduct a Business: Exploring the Dimensions of a Fundamental Right (pages 9-10), and exigencies of space preclude detailed analysis of this. However, it should be noted in this connection that Article 16 of the Charter can be and indeed is used by corporations to challenge various regulatory requirements which are seen to stand in their way, as evidenced by the factual background to the recent Lidl judgment (in which the argument was unsuccessful).

The Court rulings in Viking Line and Laval set the pace for the relationship between fundamental economic freedoms, on the one hand, and collective labour rights, on the other. Depending on what the Court’s ruling will be, AGET Iraklis might as well soon form part of this group of cases and could also be said to be linked to the Court’s ruling in Alemo-Herron. The reader might perhaps be struck by the tone of the AG opinion, but the reality is that the AG undertakes a careful and balanced analysis of the relevant substantive issues. This is perforce conjecture, but the Court might as well follow the AG opinion, albeit with slightly different wording.

Taking a step back from the pressing legal questions facing the Court in the AGET case, it is clear that the applicant in the main proceedings was caught between a rock and a hard place. Construction activity had come to a grinding halt, but AGET Iraklis failed to obtain the requisite ministerial authorisation and therefore could not carry out collective dismissals, which were a vital part of its restructuring plan. It could only lay off its workers at a pace which would not be caught by the national rules on collective dismissals, but the lay-offs in one of its plants were reportedly found by lower courts to be invalid. On the other hand, the workers that would have been affected by the actions of the company would have been left without a job in a country where the unemployment rate was, according to the order of reference, 27.3% in 2013. The rate for 2014 was 26.5% (note 25 of the opinion), which was clearly not much better either.

It is important to note that the AG opinion leaves some scope for a more ‘balanced’ rule which would not undermine the effectiveness of prior consultations (para 71 of the opinion).[i] What is nevertheless noteworthy is that the AG concluded his opinion with reference to the bailout terms agreed between Greece and its creditors. Had the Court been asked to rule on the validity of these terms from the standpoint of EU law, it would have probably declined jurisdiction, as it did in the Romanian and Portuguese MoU cases. It remains to be seen whether ‘two-pack’ legislation will have an impact in this respect. Be that as it may, the point of controversy in AGET Iraklis might soon become moot, as the relevant issue will be negotiated between Greece and its creditors in the second review of the ongoing ESM programme in the fall of 2016.

Further reading:

On the legality of national economic measures on the economic crisis: see e.g., Federico Fabbrini, Economic Governance in Europe: Comparative Paradoxes and Constitutional Challenges (OUP 2016) ch 2; Alicia Hinarejos, The Euro Area Crisis in Constitutional Perspective (OUP 2015) ch 8; Anastasia Karatzia (presenter) and Theodore Konstantinidis, ‘Who Is Responsible? The Issue of Liability in the Context of EU Macroeconomic Adjustment Programmes and Austerity Measures’ (FIDE Doctoral Conference, Budapest, 18 May 2016).

On economic freedoms and labour rights, see particularly, from the copious literature, Mark Freedland and Jeremias Prassl (eds), Viking, Laval and Beyond (Hart Publishing 2015).

For detailed discussion of the legal quality of the bailout terms and the scope of application of the EU Charter, see Catherine Barnard, ‘The Charter, the Court – and the Crisis’ (2013) University of Cambridge Faculty of Law Legal Studies Research Paper 18/2013; Paul Craig, ‘The Eurogroup, Political Power and Accountability’ (Governing Finances in Europe: Shifting Regimes and Shifting Powers conference, Uppsala, 27-28 May 2016); Alicia Hinarejos (above) 131-36; Claire Kilpatrick, ‘Are the Bailouts Immune to EU Social Challenge Because They Are Not EU Law?’ (2014) 10 EuConst 393; Koen Lenaerts, ‘Exploring the Limits of the EU Charter of Fundamental Rights’ (2012) 8 EuConst 375; Steve Peers, ‘Towards a New Form of EU Law? The Use of EU Institutions outside the EU Legal Framework’ (2013) 9 EuConst 37, 51-53; Napoleon Xanthoulis, ‘The Participation of Union Institutions in the European Stability Mechanism: Between International Law Competences and EU Treaties Restrictions’ (Jean Monnet Doctoral Workshop, City University of London, 23-24 June 2016).

Photo credit: www.theregister.co.uk

Barnard & Peers: chapter 20

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[i]

Capping bankers' bonuses: a step too far for the EU?

Steve Peers

Bankers are never going to win a popularity contest. The collapse of international financial markets which started in 2008 and has led to austerity across Europe has been widely blamed on lax regulation of banks and irresponsible behaviour by bankers. It has led to a huge overhaul of EU banking regulation, including the transfer of banking supervision to the European Central Bank, new rules on bank bail-outs, and provision for criminal law sanctions against bankers involved in market abuse (discussed here). EU law has gone further still, and adopted rules which cap the amount of bonuses paid to bankers.

The United Kingdom, home to the biggest financial services industry in the EU, has had reservations about some of these new laws. It has opted out of some of them (the market abuse rules, the banking supervision rules and aspects of the bank bail-out rules), and has challenged others in the CJEU. Earlier this year, its challenge to the ban on ‘short-selling’ failed in the Court (see discussion here), and today’s Advocate-General’s opinion suggests that its challenge to the restrictions on bankers’ bonuses should fail too.

These restrictions are found in the EU’s revised rules on capital requirements and the authorisation to take up banking services, which are set out in a parallel Regulation and Directive adopted in 2013. In effect, they require that bankers’ bonuses cannot usually be more than the amount of their ordinary annual salary. By way of exception, the bonuses can be double the amount of the banker’s ordinary annual salary, if bank shareholders agree pursuant to a special procedure.

Advocate-General’s Opinion

The UK raised six main complaints against the bonuses rules: lack of competence by the EU to regulate pay; infringement of the principles of subsidiarity and proportionality; violation of the principle of legal certainty; illegal delegation of power to an EU agency (the European Banking Authority); breach of EU rules on data protection and privacy, due to the potential disclosure of the pay received by bankers; and a breach of the principles of customary international law, due to the extraterritorial effect of the rules. Advocate-General Jaaskinen argues that all five complaints be rejected.

First of all, the Advocate-General argues that Article 53 TFEU (the legal base for this measure) is correct, because that legal base can extend to banking regulation generally, not just the promotion of the freedom of establishment for banks. The pay cap does not constitute a ‘social policy’ measure, since it does not regulate the basic salary paid to bankers, which is the basis for calculating any additional bonus.

Secondly, data protection rules are not violated, because the disclosure of bankers’ pay is only discretionary, not mandatory. In the event that Member States make a request for such disclosure, they would then be bound by EU data protection law.

Thirdly, conferring powers upon the EU agency is not illegal, because the powers do not concern the essential elements of the legislation, and the EU Banking Authority does not adopt the measures itself, but merely recommends their adoption to the Commission.  Fourthly, the principle of legal certainty is not infringed by applying the new rules to pre-existing employment contracts. Fifthly, the principles of proportionality and subsidiarity are not violated, because the creation of a uniform system of risk management was better achieved at EU level, rather than national level, and the EU institutions have great discretion to assess how these principles apply. Finally, the UK has not made out its argument that customary international law rules out the extraterritorial application of such limits.

Comments

This case is not about whether limiting bankers’ bonuses is a good idea. Rather it concerns whether it is legal for the EU to limit them. If the EU lacks such power, there would in principle nothing to prevent Member States from limiting bankers’ bonuses individually, if they wished. The argument about whether to do so would then be held at a national level, rather than the EU level.

Some of the UK’s complaints are clearly unconvincing.  As the Advocate-General suggests, the argument about international law is not fully fleshed out or convincing. The legal certainty argument fails to consider that employment law regulation usually impacts upon existing contracts; this is justifiable in light of the public-interest principles underlying the very nature of employment law. Anyway, bonuses are inherently variable. As for the data protection argument, the Opinion largely follows what the CJEU established already in EP v Council (family reunion): if EU law provides for options for Member States, the compatibility of those options with human rights law should be judged when and if Member States exercise those options. In any event, prior case law on data protection and salary disclosure does not set out an absolute ban on release (see Satamedia, for instance).

The UK’s other arguments are rather stronger. While it is true to say that the EU’s banking agency does not actually take the final decision relating to implementation of the bonus cap, it does more than simply provide expert advice on this issue. The Commission must then either act on this advice or do nothing at all: so it does not have full discretion to adopt the delegated acts (see the complex decision-making system set up by the Regulation establishing the Banking Authority). This process is fundamentally questionable because it blurs the accountability for the decision being taken (and moreover, it is too convoluted to be transparent).   

As for proportionality and subsidiarity, certainly the events of the last six years have demonstrably indicated that a more decentralised system of managing banking risks was ineffective. Hopefully the EU-wide measures will be more successful, but in any event the nature of the subject-matter calls for an EU-wide response, in light of the level of integration between European financial markets and the potential cross-border impact of bank failures. But that isn’t the point: the UK is not challenging the entirety of the capital requirements rules, but only some of the handful of provisions which regulate bankers’ bonuses. In fact, it is not challenging those provisions which prevent bankers from receiving bonuses as a consequence of risky behaviour, but only those provisions which regulate bonuses regardless of bankers’ actions. So the opinion should instead have asked whether these provisions meet the requirements of the subsidiarity principle. It is hard to see how they do.

This brings us to the biggest problem with the Opinion: the argument that the legal base on freedom of establishment can regulate bankers’ bonuses. The legal base point here can only be understood by viewing the Treaty as a whole. It has separate provisions on social policy, which include a ban on EU regulation of pay (Article 153 TFEU). The general internal market power (Article 114 TFEU) specifically states that it ‘shall not apply to’ measures ‘relating to the rights and interests of employed persons’. The Treaty drafters’ intention was clearly to provide for lex specialis rules relating to regulation of pay.

The ban on EU regulation of pay has been clarified in the case-law of the CJEU. In the Impact judgment, for instance, it ruled that the EU could not regulate the level or components of pay, but it could establish non-discrimination rules relating to pay as regards categories of workers. Similarly, the working time directive provides for holiday pay, but does not regulate the level or components of pay which a worker normally receives (which then constitute the basis on which the holiday pay is calculated).

Following the logic of these precedents, it is true to say that the capital requirements legislation does not set the level of bankers’ pay, on the basis of which the bonuses are capped. But it does regulate the components of pay, by determining how much of the total amount of pay can be variable. The Advocate-General’s reasoning would mean that the EU would be free to regulate at least some aspects of workers’ pay in any area of law subject to special rules in the Treaty, rather than the general internal market legal base. So the EU could regulate aspects of the pay of farmers, fishermen, transport workers and anyone in other service industries.

It could reasonably be argued that aspects of pay in these other fields can exceptionally be regulated by EU law where that is an essential component of the regulatory framework. This could be the case in banking, for instance if the overall amount of pay could damage the existence of the bank or bonuses were linked to risky behaviour. The legislation does have rules on these issues, but the UK has not challenged them. So it follows that the opinion is fundamentally unconvincing on the legal base point.

In light of the financial crisis, there are many good reasons to regulate banks more effectively, and it would not be shocking if Member States wanted to react to understandable public anger at the huge cost of bank bail-outs by limiting bankers’ income. But resentment at bankers’ pay, even it is entirely justified, cannot authorise the EU to exercise powers which any reasonable interpretation of the Treaties suggests that it just does not have.


Postscript (November 21st): Like any Advocate-General's opinion, this view is non-binding, although a number of British journalists and politicians forgot this when the opinion was released. In any event, the point is moot since, following publication of the opinion, the UK's Chancellor decided to drop the legal challenge. His official reason was to save taxpayers' money, but this is not convincing since a large majority of the legal fees will surely already have been incurred, and there is still a chance to get them reimbursed if the UK wins the case. A victory for the UK would have not have been improbable, given that the CJEU did not follow this Advocate-General's views in the last major banking law case (concerning the ban on short-selling), and that the analysis of the legal basis point is not very convincing. 

 

Barnard & Peers: chapter 14, chapter 19