Revision of the Posted Workers Directive misses the point

Posted workers are EU citizens with an employment contract in their home country, who are temporarily posted to a host EU country by their employer when their employer provides a certain service. For example, if a Polish construction company builds a house in Germany it might post workers from Poland who have Polish contracts.

Just this week, the Employment Committee of the European Parliament voted in favour of the European Commission’s proposal for a revision of the Posted Workers Directive (PWD). It is expected that the Parliament’s plenary session will soon approve it, after which negotiations with the Council will start.

This revision is frequently portrayed as a measure for fairness, enforcing the principle of equal pay. Even the EP’s press release highlights that “Posted workers to get equal pay for equal work in the same workplace”.

But let me raise three questions:

1. Is the ‘equal pay’ narrative correct?
2. How significant are the proposed changes?
3. Is a revision of the posted workers directive urgent?

My short answers to these questions are:

1. No
2. Not really.
3. No

Now let me explain why.

Equal pay for equal work at the same place?

“Equal” pay means that two persons earn the same amount, and “equal pay for equal work at the same place” is a key demand from representatives of a number of high-wage EU countries. However, before debating how posted workers can fit into such a vision, it is important to remember that there actually is no “equal pay principle” among local (national) workers in any country. The wages of two workers doing the same type of job in the same industry vary a lot, depending on many factors such as seniority, productivity and the profitability of the company – along with more troubling factors like gender. Thus, posted workers are posted into already-unequal labour markets.

Is the ‘equal pay’ narrative correct?

Indeed, the revised PWD will not prescribe equal pay for posted workers. That is to say, it will not require that the wage of a posted worker in a certain industry must be the same as, for example, the average wage of local workers in that industry. Instead, the revision (if finally approved) will require that the host country’s rules on remuneration should apply to posted workers. For example, if a Christmas bonus is guaranteed to local workers by law or collective agreement, such a bonus should be paid to posted workers too.

This means that the actual wage of posted workers might not increase much. The current regulation already requires that posted workers be paid at least the minimum wage of the host country. But, in fact, most posted workers are paid above the minimum wage even when they are posted from low-wage to high-wage countries, as the findings of Marek Benio show. So, keeping with our Christmas bonus example, an employer who does not wish to increase the overall wage cost of a posted worker could in most cases cut the base salary (at least to the level of the host country’s minimum wage). Thus the sum of the base salary and the Christmas bonus could remain the same as the wage was before the revision of the PWD. Only a small group of posted workers (who work for the minimum wage) will benefit from a slightly increased salary if they are currently missing out on bonuses or other benefits.

How significant are the proposed changes to the PWD?

As I noted above, the new regulations on remuneration will not be revolutionary. But the revision also affects many other parts of the PWD. How important are these changes?

How significant are the proposed changes?

First, the proposed revision would limit the duration of posting to 24 months, although this limit can be extended if a company needs more time to complete the service it was required to provide. There are two options regarding the application of this 24-month limit: it might apply to each individual worker, or it might apply to a particular position. If the 24-month limit applies to individual workers, this new requirement will again have a minor impact, because very few posted workers are posted for such a long period. The average duration of posting is just 98 days.  And, after all, common sense would suggest that if someone stays in a country for more than two years, then she or he could be considered as a local worker.

However, the situation would be different if the 24-month limit were to apply not to each individual worker, but to each position. For example, if a position were filled, consecutively, by 5 posted workers who each work for 6 months, then the 5^th person would be in excess of the 24-month limit. That 5^th worker would then have to be treated as a local worker for the full period of her/his 6-month term. If so, it might be difficult to convince this 5^th worker to move to the host country, because changing her/his legal status just for a 6-month contract might be cumbersome.

However, both options would allow the exception described above, whereby the 24-month limit could be extended if a company needs more time to complete the service it was required to provide. So, overall, the 24-month limit is also unlikely to have a major impact on postings.

Second, the rules set by universally applicable collective agreements are also set to become mandatory for posted workers in all economic sectors, such as the regulations governing the rights to strike. That will likely increase the administrative burden for companies posting workers, but might not involve a drastic change. Even under the current PWD, the host country’s rules regarding the minimum wage (including overtime rates), maximum work periods, minimum rest periods, minimum paid annual holidays, conditions for hiring out workers, health, safety and hygiene regulations, protection of pregnant women or those who have recently given birth, of children and of young people, and equal treatment between men and women and other provisions on non-discrimination all apply. So, even under the current PWD, companies posting workers already have to obey a large number of host country labour regulations.

Finally, the revision brings new regulations on subcontracting and temporary work agencies. Here the changes could be more impactful. There were a number of abuses of the current PWD by complicated chains of subcontracting, whereby it was difficult to track whether the actual person who was doing the work benefited from all regulations of the PWD. Therefore, extending the rules to subcontracting and temporary work agencies is welcome.

Nevertheless, on the whole I do not expect that the revised regulation will have a significant impact on posting, though it will certainly increase the administrative burden for companies posting workers. However, there is an important exception: the transport sector. For example, a truck driver might drive through several European countries, spending the minimum required time in many countries so that local labour laws must apply to her/him. Applying the labour laws of several countries to a single truck driver on a single journey would be counterintuitive and involve immense administrative burden. Fortunately, the special status of transport is well recognised and there are plans to apply sector-specific rules, although these will take some time to agree. Until then, the revised PWD will be applicable to road transport too, so let’s keep our fingers crossed that the sectoral agreement will be reached before the revised PWD comes into effect.

Is the revision of the posted workers directive urgent?

There was a very strong political drive for a directive revision, as we discussed in this post last year. But the economic and social cases for a revision are very weak.

Clearly, there have been abuses of the PWD. Beyond the subcontracting problems mentioned above, in some cases “letterbox companies” were established in countries with low social security contribution rates. These companies did not carry out any meaningful activities in their “home” countries, but exploited the possibility to post workers from a country with low social security contributions to a country with higher social security contributions. There were other abuses of social security contribution payments too, such as improper declarations and payments in the home country.

Is the revision of the posted workers directive urgent?

Another problem is bogus self-employment, whereby a person is forced to set-up her/his own business and issue an invoice to the company instead of being employed by the company, in order to avoid labour laws.

However, the planned revision of the PWD addresses only the subcontracting problem, not the social security fraud and bogus self-employment (which is, by the way, a much more general problem and not specific to posted workers). The social security problems could be addressed by the straightforward proposal of Aussilloux, Bénassy-Quéré, Fuest and Wolff, who suggest the establishment of a single EU interface for monitoring social security contributions. A single EU social security identification number for each European citizen (to which national identification numbers would be linked) would help a lot in limiting social security frauds. But this is unfortunately not on the agenda.

Sometimes companies posting workers are accused of unfair competition. Indeed, this has been a major inspiration of the political disgruntlement against posted workers and a key driver of the political reform. When home wages are lower than wages in the host country, posted workers typically earn less than the average wage in the host country (although they earn more than at home). But there are good economic reasons for wage differentials (different levels of productivity) and the posting of workers plays a very minor role in the competition between low-wage and high-wage EU countries. Much more important are imports of goods from low-wage to high-wage countries and offshoring production from high-wage to low-wage countries.

Furthermore, the number of posted workers from low-wage to high-wage EU countries is very small. As the most recent numbers reported by Uuriintuya Batsaikhan indicate, all EU posted workers (that includes postings from high-wage to other high-wage countries) account for only 0.9% of total EU employment if we consider the number of workers. But this falls even further to 0.4% if we consider the so-called full time equivalent (most posted workers are posted for less than a year). Then, as I argue in this presentation, we must keep in mind that only one-third of posted workers come from low-wage EU countries to high-wage EU countries. Thus the share of posted workers from low-wage countries in the employment of high-wage countries could be around a mere 0.1%, in full-time equivalent terms. This is really a minor share, and the effects on competition and wage setting in host countries must be minimal.

In fact, PWD revision is a distraction from the very real problems affecting EU labour markets. I have already discussed bogus self-employment and social security fraud, but an even more important problem is undeclared work. As I argue in the above-mentioned presentation, the number of undeclared workers in high-wage countries is more than 100 times the number of posted workers from low-wage countries. Undeclared workers are at the complete mercy of their ‘employer’, receive no social protection at all and can be paid below the minimum wage. Undeclared work creates major social problems, undermines welfare states, and leads to unfair competition. Undeclared work is the real problem, but we do not see sufficiently increased efforts to fight it.