Thursday, 20 May 2021

The revised Blue Card Directive: the EU's search for more highly skilled non-EU migrants


 


Steve Peers, Professor of Law, University of Essex

One sign of the difficulty in resolving differences of opinion within the EU on immigration and asylum issues (other than visas and border controls) is that no new legislation on these issues has been agreed since 2016 (that was the revised Directive on admission of students, researchers and trainees, discussed here). This five-year drought may soon to come to an end, with the recent agreement on revision of the Blue Card Directive on highly-qualified non-EU workers. (Note that the recent deal must still be formally approved by the Council and the European Parliament. This blog post is based on the full legal text of the agreed revised Directive. UPDATE, May 21 2021: the full text of the agreed Directive has  now been made public by Statewatch).

Background

The existing Blue Card Directive was adopted in 2009. While it aimed to encourage admission of highly- qualified non-EU migrants, a report in 2014 (discussed here; the summary below draws on this earlier blog post) indicated that it had modest impact. Therefore the previous Commission tabled a proposal to replace it in 2016 (discussed here). The Council agreed its negotiating position in July 2017, as did the European Parliament. However, negotiations between the two institutions were difficult (see reports of December 2017, February 2018 and December 2018), and ended at the start of 2019. However, they were resumed in autumn 2020, leading ultimately to the recent agreement.

The UK, Ireland and Denmark opted out of the 2009 Directive and the 2016 proposal. However, having since left the EU, the current Directive is, and the revised Directive will be, relevant to UK citizens seeking to move to the EU after the end of the transition period in the withdrawal agreement, ie from the start of 2021.

The current law

What are the main features of the current law? First of all, it co-exists with national law on admission of highly-qualified workers. Next, Member States or the EU can enter into more favourable treaties with non-EU countries. Other EU law can set higher standards than the Directive, whereas Member States can set higher standards for some of its provisions.

The conditions for admission include a salary threshold of at least 1.5 times the national average. As an option, Member States can reduce this to 1.2 times the average for some jobs (managers and professionals). Highly qualified employment is defined as having a higher education qualification of at least three years. As an option, Member States may accept admission of those with five years’ professional experience in a field. They must have a work contract or job offer valid for at least one year. Member States can determine a quota of the overall numbers to be admitted to their territory.

A Blue Card must be valid for a period of between one and four years. Member States may choose to apply a labour market preference for EU and resident non-EU citizens (including long-term resident non-EU citizens in another Member State) upon first entry and during the first two years of residence. They may also choose to reject an application for ethical reasons (ie, trying to avoid a ‘brain drain’ from developing countries).

Applications can be made from outside the country or when legally resident, although Member States may opt to be more generous (considering applications also from those legally present), or less generous (requiring applications from outside the country, if national law provided for this when the Directive was adopted). Member States have to decide on an application within 90 days, and inform the applicant as to the reasons for any rejection. Refusals, non-renewals or withdrawals of Blue Cards must be open to legal challenge.

As for the rights of Blue Card holders, they are restricted to employment meeting the criteria for initial admission for two years. After then, Member States may treat them equally with nationals as regards highly-skilled employment. After two years, changes in employment are subject to prior authorisation of the authorities.

Blue Card holders can stay if they become unemployed and look for a replacement job – unless this happens multiple times or the unemployment lasts for more than three months. They have equal treatment with nationals as regards working conditions, education, social security and recognition of diplomas (except for study loans or grants and housing).

There are also rights for family members, derogating from some limits on family reunion in the relevant EU Directive. Blue Card holders do not need a minimum residence period or a prospect of long-term residence for their family member to join them. Integration measures can only apply after entry, and there is a shorter deadline for issuing permits.

Furthermore, there are derogations from the EU law on long-term resident (LTR) non-EU citizens. Blue Card holders can cumulate periods spent in multiple Member States, subject to certain conditions, to qualify for long-term residence status. There are longer permitted absences from the territory. And even before qualifying for LTR status, which takes five years, Blue Card holders can move to other Member States after only 18 months, subject to still carrying out highly-qualified employment (among other conditions).

The 2014 report

According to the 2014 report on the application of the Directive, the numbers admitted with a Blue Card were modest (15,000 in 2013). Eight Member States had set a quota for the number of admissions. Six Member States opted to reject applications in national law on ‘brain drain’ grounds, although none had actually rejected an application on these grounds. However, only two Member States had set higher salary thresholds than the usual rule (1.5 times the average salary) set in the Directive. Nine Member States legislated for the option to have a lower salary threshold for some workers, although only four made active use of it.

Most Member States applied some kind of labour market test before issuing a Blue Card. One Member State had set an overall time limit of four years for Blue Card holders, even though there is no explicit rule in the Directive on this point (as compared to the Directives on seasonal workers – discussed here – and intra-corporate transferees – discussed here).

Fifteen Member States had implemented the option to withdraw the Blue Card if the holder needs social assistance, and two Member States applied a pre-existing national rule requiring applicants to apply from outside the country of origin. About half the Member States required a 90-day wait for a decision on the application, and just under half set shorter deadlines. Nine Member States did not grant equal treatment in employment after a two-year waiting period, and most required authorisation in the event of a change in employer within that period. A number of Member States did not grant equal treatment in education, and about half of the Member States limited the application of a rule permitting longer absences from EU territory as regards acquiring long-term resident status.

On the other hand, some Member States exercised the options to apply more favourable rules. Twelve Member States opted to treat experience as equivalent to qualifications. Nine Member States took the option to set a lower salary threshold (1.2 times the average salary) for professions in shortage occupations. Most Member States allowed applicants to apply for a Blue Card not just if they were legally resident, but also if they were legally present. Several Member States had more favourable standards as regards equal treatment.

The Commission’s original impact assessment for the 2009 version of the Directive (see my discussion in the Commentary on EU Immigration and Asylum Law) suggested that the EU is comparatively weak at attracting highly-skilled migrants, in part due to its immigration regime. The main features of national immigration rules which attracted migrants were routes to permanent residence, geographical mobility, and the publicity effect of the schemes. Academic analysis also suggested that liberal rules on family reunion and job mobility were significant.

However, the main elements of the original Blue Card proposal which aimed to attract highly-skilled migrants were dropped or watered down: a short decision-making deadline; a derogation from the salary threshold for younger workers; and the rules on in-country applications, job mobility and validity of permits. The evidence as regards implementation of the Directive suggested that on most of these issues (except for in-country applications), most Member States apply the options in the Blue Card Directive in such a way as to deter applications. Moreover, the mere existence of competing national schemes diluted the publicity effect of the Blue Card system.

Impact assessment

The impact assessment for the 2016 proposal built upon the 2014 report and the impact assessment for the original Directive, noting again that the EU retained fewer highly-skilled workers than its competitors, and arguing again that there was a demographic and economic argument to attract and retain higher numbers. 38,000 residence permits for highly-skilled workers had been issued in 2014 – although that included not only Blue Cards but also national permits. These numbers had been increasing (23,000 in 2012; 34,000 in 2013) but still fell short of the numbers desired on economic grounds. (The national/Blue Card breakdown for those years was: national permits 19 755 in 2012, 21 940 in 2013, and 24 922 in 2014; EU Blue Cards 3 664 in 2012, 12 964 in 2013, and 13 852 in 2014).

In the view of the impact assessment, parallel national schemes were ‘neither effective nor efficient’, with the ‘complexity of the current regulatory framework for recruiting’ highly-skilled workers creating ‘costs and administrative burden’. National schemes, by definition, could not offer the benefits of labour mobility between Member States, but the impact of the mobility rules in the 2009 Directive was ‘very limited’.

It was also desirable to increase retention of students graduating in the EU – although the revised students’ Directive already aims to do that. The issue here was that new entrants to the workforce tend to obtain lower salaries than older workers, and so might fall short of the salary thresholds in the 2009 Directive. Also, the EU system did not include specific rules on highly-skilled migrants starting new businesses, which was a particular feature of the ICT industry. Applying the Blue Card system to refugees and others with international protection could address the problem that some of them are under-employed (ie taking jobs below their skill or education level).

In particular, workers were deterred by: the salary threshold; labour market restrictions; limited possibility of mobility; processing times; delayed admission of family members; the requirement of a one-year work contract (which is more restrictive than competing national laws); lack of familiarity with Blue Cards; and exclusion of entrepreneurs, service providers, and those with international protection.

Ultimately the Commission’s proposal aimed to address many of these points. However, it did not include service providers, despite raising the issue, due to a lack of evidence for a change in the law. It also ruled out the more radical step of moving to an ‘expression of interest’ system.

(See also the executive summary of the impact assessment, and its Annexes).

The revised Directive

The revised Directive, if officially adopted, will expand the scope of the Directive to include refugees and other beneficiaries of international protection, as well as non-EU family members of EU citizens. The Commission also proposed that it should also apply to non-graduates who had three years or more of equivalent professional experience. However, Member States thought this went too far, and the final text is a compromise: it will extend only to non-graduates with three years’ equivalent experience in the high-tech field. For other fields, Member States will have an option to apply the Directive to non-graduates with five years’ equivalent experience.

Next, the Commission had proposed to eliminate the possibility of parallel national schemes for highly qualified workers. However, the Council insisted on maintaining the possibility of such schemes, so the final Directive retains this option. As a compromise, there are new provisions saying that any more favourable rules relating to national schemes must also apply to Blue Card applicants or holders, as regards procedural rights, application fees, fast-track applications for designated employers, labour market access, equal treatment, and family reunion. On the other hand, Member States are not required to extend national rules on substantive conditions for admission to Blue Card applicants or holders.

Similarly, the Commission had proposed that Member States could only retain pre-existing treaties on highly qualified labour migration with non-EU countries, but not sign new ones – but the agreed Directive reverts to the status quo that new treaties are possible.

As for conditions of admission, the period of any contract or job offer necessary to apply for a Blue Card will be cut from one year to six months. The salary threshold will be set between the average salary and 1.6 times the average salary (the Commission had proposed 1 to 1.4 times the average salary). This threshold may be cut by 20% for recent graduates (within the last three years) and (as in the current law) for professionals and managers, but with a floor (added in the final directive): the reduced threshold cannot go below the average salary. (The Commission had proposed that both of these reductions would be mandatory).

A labour market preference test can still be applied on entry. The Commission’s proposal to limit its use was rejected (the proposal had suggested that it could only be imposed where the ‘labour market situation undergoes serious disturbances such as a high level of unemployment in a given occupation or sector, which may be limited to a particular part of their territory’. Also the exception would only have applied in principle for 12 months, subject to 12-month extensions and notification of the Commission). Quotas on entry can still be applied too (the Commission had not proposed to abolish them as regards the first Member State, as the Treaties guarantee Member States the right to set them).

The Commission had proposed to remove recourse to social assistance as a trigger to withdraw Blue Card status, but the final Directive retains it. At the behest of the European Parliament, it will be harder to withdraw a Blue Card from a holder due to unemployment.

Blue Cards will now be valid for a minimum of two years (in place of one to four years in the 2009 Directive). Applications for a Blue Card will now be possible whenever the applicant is legally resident; the limited derogation allowing Member States to ban in-country applications will be deleted. It will remain an option to allow applications from those who are legally present (the Commission had proposed to make this mandatory).

The time period to reply to applications will remain at 90 days (the Commission had proposed to cut it to 60 days). A new rule provides for decisions on applications to be fast tracked to 30 days if the employer is registered in a special scheme. There would be an express right to apply for renewal, a judicial remedy against refusals, et al, and a requirement that fees must be proportionate.

Next, labour market access for Blue Card holders will be wider. In place of the current rules (restriction to highly qualified employment for two years, changes of job subject to authorisation during that period, an option to allow equal treatment in labour market access after two years), Member States may apply a labour market preference test, and approval to change jobs linked to that test, if Blue Card holders seek to change jobs within the first year. After that they may only be required to inform Member States about a change of job. (This is a compromise compared to the Commission proposal, which had suggested that Member States would have to give Blue Card holders full access to highly skilled employment from the outset, with no requirement for approval to change jobs from authorities and no labour market preference test).

The revised Directive will provide that Member States now have an option to allow Blue Card holders to undertake self-employment in parallel with their employment – but they can set conditions and limits, and self-employed activity must be subsidiary. The Commission’s proposal here was more ambitious.  

The waiting period for family reunion will be cut to nothing if applications for family members were submitted at the same time as the Blue Card application. If they were not, it will be cut to 90 days, instead of six months (the Commission had proposed 60 days). Family members will be able to take up any employment or self-employment. Member States will have to cumulate periods spent in different Member States towards the autonomous residence permit which a family member can obtain after five years (currently this is an option), although as a compromise compared to the Commission proposal, Member States may insist that the last two years of this period was spent on their territory.

There will also be new benefits as regards obtaining LTR status. The Commission’s proposal to cut the usual five-year wait to three years (subject to conditions in the event of unemployment) was rejected. However, it will be easier to accumulate five years’ residence in multiple Member States: Member States will have to cumulate not only residence as a Blue Card holder (as the current law provides), but also residence as a researcher, a student (subject to limits), a highly-qualified worker under national law, or a beneficiary of international protection to this end. (This is less liberal than the Commission proposal, which would have required cumulation of any periods spent as a legal resident on any basis in different Member States). The current requirement that the last two years must have been spent in the Member State where the application was made will be retained. On the other hand, the current option for Member States to limit access to LTR status after extended periods of absence will be dropped. (In other words, extended periods of absence for any reason will be able to count towards obtaining LTR status).

Before obtaining LTR status, the mobility provisions will be improved too. Blue Card holders will be able to carry out business activities in another Member State for 90 out of 180 days without a need for authorisation, although if they are travelling from a non-Schengen to a Schengen State for this purpose the latter may ask for evidence.

They will also be able to move fully to another Member State after 12 months, rather than 18. However, the final Directive did not follow the Commission’s proposal to simplify this process even more radically – namely, to allow a Blue Card holder to start work in the second Member State as soon as they had submitted the application. Rather, the final Directive provides that if the Blue Card holder moves from a non-Schengen to a Schengen State, the latter can ask for evidence at the border. Member States would will to decide on the applications within 30 days, but they can refuse if the Blue Card holder had been abusing the system. There will be further simplifications for family members joining them.

Finally, Member States will have two years to give effect to the revised law. The deadline to apply it will therefore likely fall in summer or autumn 2023.

Comments

Whether or not the EU should prioritise the admission of highly qualified non-EU workers and seek to encourage their admission, it is a long-established policy. The following comments focus on how much the revised law is likely to contribute to that objective.

Although many of the Commission’s planned suggestions for reform of the Blue Card system were not accepted in full, most were accepted in part, on the basis of some form of compromise. First of all, while its mandatory extension of scope to graduates of the ‘University of Life’ will be limited to the computing industry, Member States will still have the option to extend it to other non-graduates with sufficient equivalent experience if they wish. Secondly, its extension to refugees and persons with subsidiary protection could be particularly useful to those who are highly qualified.

Thirdly, although parallel national schemes will still exist, their comparative attraction as compared to the Blue Card system will be reduced, since they will be unable to provide more favourable terms than the Blue Card law in many respects. Conversely, it will still be possible for Member States’ systems to compete with the Blue Card as regards substantive terms of admission, although even on this front the liberalisation of the Blue Card admission rules (extension of scope, shorter minimum contract term, labour market preference test, longer minimum validity, salary thresholds) may mean that the gap between national and Blue Card systems is reduced.  And, of course, the Blue Card system offers the benefit of mobility between Member States (itself improved by this Directive), which national schemes cannot.

However, note that Member States can still offer more favourable terms for those applying to national schemes for highly qualified workers as regards access to national systems of long-term residence (which can also continue to exist in parallel to the EU LTR system, according to the LTR Directive). On this point, the rejection of the Commission’s proposal to cut the waiting period for EU LTR status for Blue Card holders is significant, because it means that it is easier for national schemes to attract highly qualified workers by remaining more generous on this issue. The substance of national LTR status might be more generous too (more equal treatment than EU law on EU LTR status requires, for instance). The negotiators of the revised Blue Card law may have missed an opportunity to address this issue by also simplifying transfer between the parallel national and EU systems, or  by adopting rules on holding both national and EU status at the same time.

A proposal to amend the EU LTR law is due later this year, and possibly the revised Blue Card rules on the relationship between parallel national and EU systems could be a template for dealing with that issue as regards LTR status too. Again, a simplified transfer between national and EU systems, or rules on holding both EU and national status simultaneously, ought to be worth considering.

There is a risk that the rules on equality between EU and national schemes results in levelling down – ie, Member States simply removing more favourable features of national systems, resulting in the EU/national systems as a whole being less attractive to non-EU citizens, thus conflicting with the objective of the Directive of encouraging more highly qualified migration. On the other hand, the new Directive could have the reverse effect: Member States particularly keen to attract highly qualified workers may improve national rules in areas where equal treatment is not required (for instance, salary thresholds or long-term residence status), resulting indirectly in supporting the new law’s objectives.

Fourthly, as regards admission rules, the reduction in the length of required contract may have a positive effect in achieving the new law’s objectives. On the salary threshold though, there may in practice be no change: since most Member States apply the 1.5 x average salary threshold already, they are not required to change it to meet the new law’s requirement of a threshold between 1 and 1.6 times national average salary. (The Commission proposal of 1 to 1.4 times national average would, on the other hand, necessarily have compelled every Member State to reduce their threshold). Nor will there necessarily be a change regarding the reduction in the salary threshold for shortage occupations and recent graduates – given that these reductions are optional. As noted already, Member States which are particularly keen to retain national schemes for admission of highly qualified workers may wish to retain a gap between the salary thresholds in EU and national schemes – in which case, they may be reluctant to use the opportunity to reduce the salary threshold for the Blue Card scheme, or to use the relevant optional derogations to reduce the threshold for some groups of workers. Again, though, they may choose rather to reduce the salary threshold for national schemes to retain their comparative attractiveness – thus attracting more highly qualified workers overall, albeit not as Blue Card holders.

Next, the continuation of labour market tests at entry and during the first year may still limit the numbers coming, although the new law definitely liberalises labour market access compared to the 2009 Directive (not much so as regards self-employment though). Allowing applications in-country for all Member States will have a modest effect, since most allowed it anyway. Similarly, few Member States banned applications for renewal; and it is arguable that the rules in the new Directive on renewal, judicial remedies and fees simply confirm the correct interpretation of the existing Directive.

Simplified rules on admission of family members, and their access to employment, may encourage applications from those with family members, particularly those whose spouses wish to work. While the changes on LTR status are modest, and do not affect parallel national rules on LTR status which may be more decisive in influencing applicants, they will be useful for those who have held (or still hold) another status.

It remains to be seen whether the new law achieves its desired objectives. So far, the admission of highly qualified migrants has not been enough to cause a brain drain in non-EU countries, or to contribute much towards the demographic issues the Commission is concerned about. Even the most paranoid ‘Great Replacement’ folks should find it hard to panic about increases of less than one ten-thousandth of the EU population.

It seems likely that the revised law will increase the number of Blue Card holders, as all the amendments push in that direction; none of them make Blue Cards less attractive or harder to get. The departure of the UK from the EU might increase the number of Blue Card applications even if the law had not been amended (although the numbers of UK citizens moving to the EU may nevertheless fall as compared to when free movement applied). Having said that, the new law only indirectly impacts national schemes for admission of highly qualified workers, which (for the reasons discussed above) might still be able to flourish. Also, the impact of a change in migration law can never cancel out other factors influencing migration flows – which include the response of competing non-EU countries (which might respond to any increased appeal of the Blue Card by making their own schemes more attractive), changes in the EU economy (as well as the economies of competing destinations, and source countries), and changes in the educational attainments of EU residents. And even if the numbers of highly qualified migrants coming to the EU (under either EU or national schemes) don’t increase much or even decline, they might nevertheless be higher as a result of the new law than they would have been without it.  

Barnard & Peers: chapter 26

JHA4: chapter I:6

Photo credit: Kerstin Göpfrich, via Wikimedia Commons

Tuesday, 4 May 2021

The tug o’ war for subcontracting in public procurement

 



 

Trygve Harlem Losnedahl, Doctoral Research Fellow at the University of Oslo, Centre for European Law.

 

Current interest

 

Brussels’ internal market watchdogs are communicating diverging views on subcontracting in public procurement.

 

In a large report on good practice for socially responsible procurement from May 2020, the Commission praises the Norwegian municipality of Skien’s model to combat social dumping and work related crime in public procurement.* Among the measures taken by the municipality is to limit the length of the contract chain to increase transparency and control, by requiring that every sub-contractor must be under the direct control of the main contractor.

 

At the same time, the EFTA Surveillance Authority (ESA), which corresponds to the Commission with regard to the EEA-states of Iceland, Liechtenstein and Norway, has sent a letter of formal notice to Norway claiming that a less restrictive national limitation on subcontracting chains is contrary to EU law. The Norwegian national rule applies to the construction and cleaning sectors, and sets the maximum length of three links in the contract chain, i.e. main contractor, sub-contractors and sub-sub-contractors. In the letter of formal notice, ESA leans heavily on a CJEU preliminary ruling from 26 September 2019, C-63/18 Vitali (see brief comments on the judgment by David McGowan in PPLR 2020 issue 1). Vitali was the first ruling from CJEU under the “new” procurement directives of 2014 regarding limitations on subcontracting. The ruling has apparently left quite some uncertainty.

 

In the following, I will give a brief background of the conflicting interests in limitations on subcontracting in public procurement, and case law up until the adoption of the new procurement directives of 2014. A presentation of the Vitali-case will then follow before I (critically) assess ESAs interpretation of the Vitali-case and ESA’s application of the Vitali-case on the Norwegian legislation.

 

The background – getting to the Vitali-case

 

To subcontract or not to subcontract, that has been the question in a number of judgments from the CJEU during the last thirty years (especially Cases C-389/92 Ballast Nedam Groep I, C-5/97 Ballast Nedam Groep II, C-176/98 Holst Italia, C-314/01 Siemens AG Österreich and ARGE Telekom & Partner, C-94/12 Swm Costruzioni 2 and Mannocchi Luigino). There has been a kind of tug-o-war where public buyers have been pulling for a right to limit subcontracting, for such reasons as preventing work related crime (Vitali) and quality control of the procured services (C-406/14 Wroclaw and C-94/12 Swm Costruzioni 2 SpA and Mannocchi Luigino DI). On the other side, supporters of unrestricted competition on the internal market have been pulling to reduce any limitations which could make public contracts less attractive for businesses. From an internal market perspective, limitations on subcontracting are seen as restrictions on the right to provide services. It has especially been seen as restraining small and medium sized enterprises (SMEs). Because SMEs are unable to compete for large public contracts, the only way for SMEs to get a slice of the larger public contracts is via the main contractor, i.e. via the main contractor’s right to subcontract.

 

The interpretation in favour of open competition reached a peak in the Wroclaw-case (C-406/14 Wroclaw), which was decided under the now repealed 2004-directive, and has similar facts as the Vitali-case. The Polish city Wroclaw initiated a procurement procedure for a roadworks contract. The tender specifications set out that tenderers were “obliged to perform at least 25% of the works covered by the contract using its own resources”. In other words, no more than 75% of the works for the specific contract could be subcontracted. Such a tender requirement was compatible with the Polish law at the time, and the Polish government argued that it was compatible with the 2004-directive article 26. Article 26 allowed contracting authorities to “lay down special conditions relating to the performance of a contract, provided that these are compatible with Community law and are indicated in the contract notice or in the specifications.” Article 26 also stated that such conditions relating to the performance of a contract could concern social and environmental considerations.

 

The CJEU found that the 25%-stipulation was contrary to EU law, i.e. the stipulation that the main contractor had to perform 25% of the works itself. The court ruled that the 2004-directive art. 48(3) provided a right to subcontract which was “in principle, unlimited” (para 33). As regards to the argument set out by the Polish government that the 25%-stipulation was a “special condition” allowed under article 26, the court rejected the view. The court stated that “since [the 25%-stipulation] is contrary to Article 48(3)”, the stipulation “is contrary to EU law”. As mentioned, the wording of art. 26 contains the reservation that special contract conditions have to be “compatible with Community law”. Thus, the court must be understood as concluding that since another article of the directive gives a right to subcontract, special conditions under art. 26 which limits that right, are incompatible with union law. As one can see, the court gave the general right to subcontract according to article 48(3) precedence over art. 26, and left art. 26 basically without any substance in relation to setting conditions which could limit subcontracting.

 

To further underscore the court’s view on the right to use subcontractors as a strongly protected right, AG Sharpston argued that in her view, there was only one permissible restriction on subcontracting (paras 31-34). Namely, when contracting authorities are not in a position to verify the technical and economic capacities of the subcontractors and those subcontractors are to perform essential parts of the public contract. The court had opened for such an exception in C‑314/01 Siemens and ARGE Telekom (para 45-46).

 

As I will comment on further below, the 2014-directives intended to put more emphasis on social, environmental and labour protective considerations, thus tilting the balance back from the unrestricted market position.

 

The Vitali-case

 

On 18 April 2016, the Italian legislature adopted legislation which set out that “any subcontracting shall not exceed 30% of the total amount of the contract for works, services or supplies” (para. 9). In other words, 70% of the contract value had to be performed by the main contractor, and there were no exceptions from this 30% limitation. The legislation’s main objective was to combat Italy’s many criminal organizations, which regularly made use of subcontracting in public contracts due to the reduced transparency and division of responsibility that comes with subcontracting. (Reduced transparency and control in contract chains is also highlighted in the Commission report on socially responsible procurement in a case study from Copenhagen (page 240).)

 

The Vitali-case (C‑63/18) treated a restricted tendering procedure launched by the publicly owned Autostrade per l’Italia SpA in August 2016, for the award of works on a motorway close to Milan. The contract value was roughly 85 million euros. Vitali SpA placed an offer in which more than 30% of the service was to be performed by subcontractors. Vitali was excluded since the offer did not comply with the new national 30%-limitation on subcontracting.

 

One does not have to be a trained lawyer to see the apparent discordance between the ruling of the Wroclaw-case and the new Italian 30%-limitation. It follows from the Vitali-judgment that the Italian legislature was aware of the conflict between the ECJ case law and the 30%-limitation, but that the legislature took the new 2014-directives as an opportunity to adopt measures which the former directives prohibited (paragraph 16). However, Italy’s view fell on deaf ears at the court. The court chose to render its judgment without an Opinion from the Advocate General.

 

The CJEUs main reasoning is found in paragraph 38 to 42 of the judgment. The court presents its conclusion (somewhat pre-emptively) in paragraph 38, that the Italian limitation “goes beyond what is necessary” to combat criminal organizations. In paragraph 39, the court presents the legal basis for the necessity condition, namely that article 18 of the directive obliges the contracting authority to observe the principle of proportionality. In paragraph 40 and 41, the court presents arguments for the disproportionality of the Italian 30%-limitation, before it in paragraph 42 argues that combating crime could be achieved with less restrictive measures, thus returning in paragraph 43 to the conclusion that “a restriction on the use of subcontracting such as that at issue in the main proceedings cannot be regarded as compatible with Directive 2014/24”.

 

Since ESAs proceedings against Norway is based on an interpretation especially of the Courts reasoning in paragraph 40 and 41, I cite them in full:

 

“40  In particular, as pointed out in paragraph 30 of the present judgment, the national legislation at issue in the main proceedings prohibits, in general and abstract terms, use of subcontracting which exceeds a fixed percentage of the public contract concerned, so that that prohibition applies whatever the economic sector concerned by the contract at issue, the nature of the works or the identity of the subcontractors. Furthermore, such a general prohibition does not allow for any assessment on a case-by-case basis by the contracting entity (see, by analogy, judgment of 5 April 2017, Borta, C‑298/15, EU:C:2017:266, paragraphs 54 and 55).

 

41 It follows that, in the context of national legislation such as that at issue in the main proceedings, in respect of all contracts, a significant part of the works, supplies or services concerned must be performed by the tenderer itself, failing which it will be automatically excluded from the procurement procedure, including where the contracting entity would be able to verify the identity of the subcontractors concerned and would take the view, after verification, that such a prohibition is not necessary in order to combat organised crime in the context of the contract in question.”

 

ESA’s (mistaken) reasoning

 

As mentioned, ESA has sent a letter for formal notice to Norway claiming that a national legislation which limits subcontracting chains, is contrary to EU/EEA-law. Norway has rejected ESA’s view, and ESA is currently assessing whether to instigate infringement proceedings before the EFTA court (the EFTA equivalent of the CJEU under the EEA Agreement). ESA states in the letter that it “relies on the judgment of the CJEU in Vitali to conclude that the necessity condition is not met”, i.e. that the Norwegian three chain limitation on subcontracting in public procurement is not necessary to combat work related crime.

 

In my opinion, ESA makes three mistakes in its interpretation and application of the Vitali-case. Firstly, ESA cherry-picks legal sources, not taking sufficiently into account amendments in the new directive. Secondly, ESA mistakes a characterization by the CJEU for criterion. Thirdly, ESA fails in its assessment of the similarities and differences between the Italian and the Norwegian rule. I will substantiate these three claims in the following.

 

Mistake 1: Cherry picking legal sources from the 2004-directive, and ignoring changes to the new directive

 

The “new” 2014-directives intended to open more for social, environmental and labour protective considerations, thus tilting the scale a bit back from pursuing the goal of an ever less restricted competition on the internal market. The Commission report addresses this in its introduction:

 

“The 2014 Public Procurement Directives make it clear that social aspects can be taken into account throughout the procurement cycle, from preliminary market consultation, through to the use of reservations and the light regime, and to social award criteria and contract performance conditions. Public buyers across Europe are starting to take advantage of these opportunities and demonstrate real social impact in their purchasing. Despite this, Member States are not yet fully exploiting the possibilities of public procurement as a strategic tool to support social policy objectives.”

 

The most important amendment of the directives in this regard, was the articles on principles of procurement. The “principles-clause” in the 2004/18-directive (article 2) only included the principle of equality, transparency and non-discrimination. When the EU legislator adopted the 2014-directives, it included in the new “principles-clause” (article 18 of the 2014/24 directive) a requirement that economic operators must comply with applicable obligations in the fields of environmental, social and labour law. In Tim SpA (C-395/18) paragraph 38, the CJEU underlined that “the Union legislature sought to establish” the requirement to comply with social, environmental and labour law as a principle of procurement law, “like the other principles”, i.e. equal treatment, non-discrimination, transparency, proportionality and prohibiting the exclusion of a contract from the scope of Directive 2014/24 or artificially narrowing competition. In other words, the CJEU understood (and accepted) the EU legislators’ view that these social principles should be on the same foot as the traditional inner-market principles.

 

Through article 18, the EU-legislator also clarified and limited what had been argued to be a (wide) principle of competition in public procurement law. (See especially Sanchez Graells “Public Procurement and the EU Competition Rules”, 2nd edition, 2015, and for an opposing view, Sue Arrowsmith, "Purpose of the EU Procurement Directives: Ends, Means and the Implications for National Regulatory Space for Commercial and Horizontal Procurement Policies, The," Cambridge Yearbook of European Legal Studies 14 (2011-2012): 1-48.) Article 18 now establishes that “[t]he design of the procurement shall not be made with the intention of excluding it from the scope of this Directive or of artificially narrowing competition.” By including “intention” and “artificially” in the wording of the “principles clause”, it is clear that the competition principle includes a subjective element. Even though it is not clear how this will be interpreted and operationalized, there must be an “intention” in some form by the public buyer to “artificially narrowing” competition.

 

Unlike the Commission report, ESA does not appear to take this development in legislation, nor new case law, into account. ESA does not comment on the development of the directive’s “principles clause”, nor on Tim SpA.

 

Quite to the contrary, ESA appears to cherry pick some of the more “competition friendly” case law from the CJEU, even though this case law concerns the now repealed 2004-directives and despise the fact there exists relevant case law concerning the 2014-directives. An example is that ESA chooses to cite Borta (C-298/15) when it argues that the Norwegian sub-contracting limitation puts unjustified restrictions on competition, even though the CJEU explicitly states in Borta that the new 2014-directive “cannot be taken into consideration in order to answer the questions referred” (para. 29). In Borta the CJEU strongly underscored the interest of competition, as it wrote that “it is the concern of the European Union to ensure the widest possible participation by tenderers in a call for tenders” (para. 48). As to relevant case law under the 2014-directive, Vitali itself addresses the goal of competition under 2014-directive, but the wording that CJEU uses in Vitali (para. 27) is that it is “in the interests of the European Union to ensure, in the field of public procurement, that the opening up of competition in tendering procedures is enhanced.” – in other words, a quite more reserved formulation.

 

ESA’s choosing and interpretation of legal sources, as opposed to the Commission’s, directs ESA to a view which excessively emphasizes the interest of unrestricted competition. This naturally affects ESA’s assessment of the proportionality of the Norwegian limitation.

 

Mistake 2: Characterization, not criteria

 

The other mistake is that ESA takes Vitali’s characterization of the Italian rule as “general and abstract” for criteria. Under the heading “Assessment of the necessity condition”, ESA begins:

 

“The Authority [i.e. ESA] relies on the judgment of the CJEU in Vitali to conclude that the necessity condition is not met… In reaching its conclusion, the CJEU relied on the fact that the [Italian] provision was in general and abstract terms, so that the prohibition applied whatever the economic sector concerned by the contract at issue, the nature of the works or the identity of the subcontractors, and that it did not allow for any assessment on a case-by-case basis by the contracting entity.

 

The Authority considers [the Norwegian provisions] to be materially similar to the provision in Vitali in that they are also in general and abstract terms and do not allow for any case-by-case assessment as to whether or not they are necessary to meet their objective.”

 

In the letter, ESA returns to an assessment of whether the Norwegian rule is set in “general and abstract” terms and if it allows for a proper case-by-case assessment. ESA holds that the Vitali-judgment establishes these as two criteria, which each is sufficient to conclude that at national limitation on the right to subcontract in public procurement is contrary to the proportionality principle, i.e. the necessity condition. The two criteria are (1) that the limitation is set “in general and abstract terms”, or (2) does “not allow for a case-by-case assessment”.

 

As to the first of these two, i.e. “general and abstract terms”, ESA has mistaken a characterization for criteria. When the CJEU writes that the Italian provision was set "in general and abstract terms", it must be understood as a characterization of the Italian percentage rule, not as a criterion for what types of provisions that are (always) considered to fall short of the necessity condition. In law making, general and abstract rules have been an ideal ever since the first (and less successful) codifications of the Enlightenment, such as the very detailed style of the Prussian ALR of 1794, with its 19 160 articles at a detailing level such as “to a library is to be counted the shelves and cabinets where the books are located” (Anners, Erik: ''europeiske rettens historie''. Utg. Universitetsforl.. 1983. Page 211-212).

 

More importantly, such a criterion would be quite impossible to apply. What does it mean that a rule is general or abstract? How do you measure generalness or abstractness of a provision? When does a rule tip to general and abstract from, I suppose, specific and concrete?

 

ESA does not try to develop or elaborate how it understands the criteria of “general and abstract”. ESA does however conclude that the Norwegian three-chain limitation is not “general”, since it is limited to the sectors of construction and cleaning services. Even so, ESA finds that the limitations “are otherwise in abstract terms”, as they “apply limitations on subcontracting based on the number of links in the chain without any further assessment of the nature of the works/services or the identity of the subcontractors.”

 

In my view, neither “general” nor “abstract” are criteria that the CJEU established to assess the necessity of limitations on subcontracting. What the CJEU did in Vitali was to look at the specific traits of the national limitation, to assess whether the limitation was necessary to achieve the limitation’s goal of combatting organized crime. The specific traits that the CJEU highlighted in Vitali paragraph 40, were that it “prohibits, in general and abstract terms, use of subcontracting which exceeds [1] a fixed percentage of the public contract concerned, so that that prohibition [2] applies whatever the economic sector concerned by the contract at issue, [3] the nature of the works or [4] the identity of the subcontractors. Furthermore, such a general prohibition [5] does not allow for any assessment on a case-by-case basis by the contracting entity…” [Numbers added to clarify the different elements].

 

As is often the case when the CJEU undertakes a proportionality assessment, it does not state whether each of the elements in its reasoning are to be understood as criteria that are necessary and/or sufficient for reaching the same conclusion in similar cases. As I have shown above, ESA understands “general and abstract terms” as criteria that are sufficient to conclude that a limitation on subcontracting falls short of the proportionality test. This leads ESA to an all too narrow approach to the necessity condition, instead of a comprehensive assessment where all relevant traits of a national limitation are taken into account.

 

Mistake 3: Not identifying the differences

 

I will here highlight three important differences between the Italian rule in the Vitali-case and the Norwegian rule, which ESA, as opposed to the Commission, misses and/or misjudges.

 

Firstly, the Italian rule applied to all sectors and all contracts. The Norwegian rule is limited to the construction and cleaning sectors, which are sectors especially troubled with work related crime. As shown above, ESA finds that this sectorial limitation does not make the Norwegian rule as “general” as the Italian, but since ESA means that the Norwegian rule is otherwise set in “abstract terms”, it concludes that it has similar shortfalls as the Italian rule. In my view, this is a misjudgement by ESA, which follows from ESA’s own form of Begriffsjurisprudenz, where “abstract” is mistakenly applied as a legal criteria. The differences in sectorial scope of the Norwegian and Italian rules is highly relevant in a normal proportionality assessment. Since the Norwegian rule only applies to two sectors, it is a less restrictive measure than the Italian pan-sectorial rule.

 

The second important difference is that the Italian rule prohibited main contractors from subcontracting more than 70 % of the value of the contract to subcontractors, whereas the Norwegian rule prohibited tenderers from allowing more than two links of subcontractors in the contract chain, i.e. the main contractor, subcontractors and sub-subcontractors. The Norwegian rule sets limitations neither on the value that can be sub-contracted nor on the total numbers for subcontractors or sub-subcontractors, just the length of each chain.

 

The Commission report highlights both these two traits of the Norwegian rule in its presentation of the procurement policy of the municipality of Skien. The municipality has established a main rule of maximum one level of subcontracting under the main supplier, i.e. an even more restrictive rule than the national two-level-limitation. The Commission report argues:

 

“While there is no restriction on the number of subcontractors or the proportion of the contract subcontracted, all subcontractors must be under direct control of the main contractor in order to avoid fragmentation of responsibility. This provision accounts for possible specialisation needs within a contract and does not impair access to public procurement by smaller operators.”

 

Under the Norwegian limitation, subcontractors can carry out 100 % of the works. That was impossible under Italian law, where 70 % had to be carried out by the main contractor itself. So, where the Italian rule effectively removes 70% of the public procurement market of large contracts from SMEs, the same cannot be said of the Norwegian rule. This is a major difference between the Norwegian and Italian limitations.

 

ESA does identify that the Italian provision “limited the proportion of the contract which could be subcontracted”, but ESA does not appear to see, or does not find it of relevance, that the consequence of such a 30 % proportional limitation is that 30 % of the public procurement market is made unavailable to SMEs.

 

The third important difference between the Norwegian and Italian rule, is that the Norwegian rule, unlike the Italian, has exceptions. Norwegian contracting authorities can accept longer supply chains in construction and cleaning contracts when it is “necessary to ensure adequate competition” and where unforeseen circumstances mean that more links are necessary for the contract to be performed. ESA dismisses the relevance of the second since it only addresses practical issues. ESA dismisses the first, since the condition for the exception is “to ensure adequate competition”. ESA means that the condition for the case-by-case assessment should not be conditioned upon the necessity of “adequate competition”, but on the necessity to achieve the objective of the restrictive measure, i.e. to combat work related crime. I agree with ESA that such an exception would better encompass the elements of the EU/EEA proportionality test. In the overall proportionality assessment however, I mean that the case-by-case possibility adds to the conclusion that the Norwegian limitation is in accordance with the proportionality principle in Article 18 of the directive.

 

Conclusion

 

The procedure is still ongoing between ESA and Norway. ESA required more information from Norway on the applicability of the exception, which was provided by the Government in mid-February. ESA is now assessing whether to file an infringement procedure before the EFTA court. Given the uncertainty ESA’s position has stirred up, at least in the EFTA-states, and especially among municipalities and labour unions, we can hope ESA actually files a lawsuit – and loses.

 

* The Report is by the Executive Agency for Small and Medium-sized Enterprises, published 4 June 2020, page 63-64. The report was updated in September 2020, where it is stated on page 63: “This updated version of the report omits a paragraph on subcontracting elements of this practice, which was included in the original version. The paragraph has been removed pursuant to doubts which arose with respect to the lawfulness of such elements.”

 

Photo credit: Erik den yngre, via Wikimedia commons