HL Deb 17 November 1992 vol 540 cc550-70

4.12 p.m.

Baroness Elles rose to move, That this House takes note of the report of the European Communities Committee on the Protection of Posted Workers [5th Report, HL Paper 16].

The noble Baroness said: My Lords, a draft directive adopted last year by the European Commission concerning the posting of workers in the framework of the provision of services has been considered by sub-committee E of the European Communities Select Committee. Its report has been published under the somewhat cryptic title of Protection for Posted Workers. I have to explain to those Members of the House who have not been involved in the drawing up of this report what this draft directive refers to. The directive seeks to encourage the free movement of services throughout the European Community, to ensure legal certainty as to the laws to be applied where otherwise a conflict of laws may arise, to protect the worker, and to avoid distortion of competition which could be consequent on differences in pay, working time and holidays between the member states of the European Community.

The principal concerns for the committee were, first, whether the directive would attain its objectives; secondly, whether the directive might have a negative impact on the labour market rather than contribute to reducing unemployment; thirdly, recognition that labour laws vary considerably from state to state; and, fourthly, whether, while legal certainty might be ensured, the employee or worker would be guaranteed that certainty in practice. We are grateful to those who gave evidence to the committee, both written and oral, and to the legal adviser, assistant, and clerk to the committee.

While some bodies were in favour of the directive, there was no concrete evidence provided by any of the bodies who produced either written or oral evidence that problems had so far arisen, at any rate as far as the United Kingdom is concerned, in those cases where undertakings based in the United Kingdom had posted workers to do temporary work in another member state or indeed in other member states. I should like to outline briefly some of the issues set out in the report and the grounds for our conclusions without, I hope, being too repetitive for those who have had the onus of reading this report.

It is useful to look first at the provisions of the Rome convention on the law applicable to contractual obligations ratified by 10 member states at the time of our deliberations, and open to member states of the European Community. It only remains for completion of certain procedures for the convention to apply in all the member states. This convention has been in force since 1st April 1991—just about 16 months ago—which of course is not a long time. The principal objective of the convention is to provide freedom of choice for parties to a contract as regards the law to be applied to that contract.

A second objective is to clarify which law is to apply where the parties have not made it clear which is the applicable law. The convention covers individual contracts of employment, and provides in Article 6 a guaranteed protection for the employee based on the law of the country in which the employee habitually carries out his work. However, under Article 7(1) there is provision for mandatory rules of the law of another country to be applied, in so far as these rules are applicable, regardless of the law applicable to the contract. Under Article 22 of the convention, the United Kingdom and three other member states so far have reserved the right not to apply the latter provision. The United Kingdom therefore will not apply any of its labour laws in such a way as to override freedom of contract where the proper law of contract is neither English nor Scottish law.

In the draft directive, the Commission is seeking, by providing that certain mandatory rules shall apply throughout the Community for undertakings posting workers to another member state, to remedy what it regards as a lacuna in the convention. While the freedom to provide services is set out in the treaty under Articles 59 and 60 there still remain legal obstacles and uncertainties, and that the committee unanimously agreed. A case in point which was brought to the notice of the committee is the recent Rush Portuguesa case. This referred to the European Court of Justice and relates to Portuguese workers who were sent to carry out work in France. Although the Portuguese company had the right to send its workers under the provision of services article in the treaty, the court stated that member states: were not precluded from extending their legislation or collective agreements entered into by both sides of industry to any person who is employed, even temporarily, within their territory, no matter in which country the employer is established. But the Court did not go any further than that. Hence the Commission's attitude to this particular draft directive, because it is partly on the basis of this judgment that the Commission proposes that there should be what is termed a hard core of conditions applicable to the posted worker in accordance with the laws and regulations of the host state, as well as those laid down by collective agreements or arbitration awards, setting out the workers to whom these conditions would apply, and with a proviso that these laws would not be applicable to postings of under three months' duration.

The provision referring to collective agreements or arbitration awards covering the whole of the occupation and industry concerned having an erga omnes effect and/or being made legally binding in the occupation and industry concerned has raised certain queries. The TUC in its written evidence questioned the clarity of this provision. In the United Kingdom, collective agreements, while not legally binding, are reflected, as explained in UCATT's evidence, in the individual contracts of employment as in the case of the NJCBI agreement, and are seen to be part of the implied terms and conditions of a building worker's employment contract.

I should like to express our gratitude to the noble Lord, Lord Wedderburn, for his helpful note on national laws on collective agreements in member states, setting out the very different approach of the United Kingdom compared with that of other member states, as well as the differences between the member states in the application of agreements to different occupations and industries. I should like to say at this point that the committee very much regretted that, for medical reasons, the noble Lord, Lord Wedderburn, was not able to take part in the discussions during the deliberations of the committee. I know that we shall be hearing today some interesting points, which may or may not be in total agreement with the content of the report. In view of the noble Lord's distinguished position as a leading labour lawyer not only in the United Kingdom but throughout Europe, we shall listen with the greatest interest to what he has to say.

The nub of the directive lies in Article 3, which sets out the hard core items which must be applied to the posted worker in accordance with the laws of the host country. Mandatory rules of the host state would apply to working time, pay and holidays as well as to health, safety and hygiene at work, protective measures for pregnant women and including other groups needing special protection, equality of treatment between men and women, and prohibition of discrimination on grounds of colour, race, religion, opinions, national origin or social background.

The committee recognised the essential importance of posted workers being protected by the same health safety and hygiene rules, though they are mainly already covered by Community legislation applicable in all member states. Similarly, the committee agreed with the two other terms of protection, though some doubt was raised as to Community competence in regard to racial discrimination. However, no one on the committee denied that that was an essential protection for all workers throughout the European Community. It is on the question of application of rules on the remaining three hard core items that the committee concluded that it could not agree with the Commission's proposal. I should like briefly to outline our anxieties.

Several reasons are set out in the report—I have in mind, in particular, page 20—among which it is stated that there would be an intolerable additional burden on businesses, especially small businesses, to estimate correctly the effect of mandatory rules of another member state on its contracts with its employees. Holiday periods vary from state to state, but not in such a fundamental way as to operate unjustly. The complexity of adjusting contracts for short periods, even those over three months—although it may be four or five months—where, possibly, the posted worker has to work in more than one host country, seems unreasonable. If that is not a particularly legalistic approach, it is, nevertheless, a very practical one which reflects our genuine concern for the protection of the worker.

However, it is the minimum pay condition which gives rise to the greatest complexity and concern. Not all member states have rules covering national minimum wages. If the minimum only is to apply, it still leaves the posted worker with a variation of pay packet as against his fellow worker, the national of the host state. Therefore, what might have been the desirable aim of bringing about equality in the wage packets of host member state nationals and the posted worker, is in fact not achieved. In any case, pay in accordance with the decisions of the European Court of Justice includes social security benefits, family allowances, credit facilities, to say nothing of medical care, maternity benefit, unemployment benefit and pension rights.

Anyone who has had to deal with the administration of cross-border claims relating to those provisions—and those who have served in the European Parliament will be among them—will agree that by far the simplest, fairest and most protective solution from the point of view of the employee is to retain the home system without running into unnecessary complications and delays.

I should also add that there is a further complication with regard to pay adjustments which has not in fact been mentioned by the Commission. As I understand it, posted workers will, for tax purposes, remain resident in their home country. Their tax liability will therefore be under home country law. That would add a further complication to an already complex issue where, I should have thought, certainty and guarantee based on existing contracts of employment must be essential ingredients for the posted worker.

The proposal further complicates the task of businesses, especially small businesses, when tendering for a contact to provide services within another member state under, for example, the public procurement directive for provision of services. Following on from the Note in the report by the noble Lord, Lord Wedderburn, on, for instance, French law (covering collective bargaining) it would seem—at any rate to me; but perhaps the noble Lord will be able to explain—that, while the directive would lead to the application of French law, it would be difficult to identify the consequences of that application when assessing the pay rates, including benefits, to be calculated when tendering for a contract. It seems to me that there is a wide variety of results consequent upon collective agreements. We maintain that security for the posted worker lies in the continued application of his home state rules with regard to pay, including his right to home state benefits, and that this is also desirable for the obvious administrative reasons which I have already mentioned.

The application of host state rules regarding working time again raises the issue of freedom for the posted worker to decide with his employer what is most beneficial to him. It was pointed out in evidence that, for example, construction workers—and they seem to be the category of worker which is most affected, or at any rate, would be affected for the time being by the draft directive—going to another member state would prefer, in order to return home to their families earlier, to complete their work in a shorter time, without tight restrictions of hours per day. That was confirmed in the reply that the committee received from the Government. I should like to express our gratitude for that most full reply.

There are one or two other points where our examination of the directive led us to feel that there is a lack of clarity and as regards which the committee has asked for further clarification. First, there is the question: to whom should it apply? The Commission proposes that it should apply to all posted workers whatever the country of the undertaking which employs them. It is not clear how the treaty provisions of Articles 57(2) and 66 (the legal base upon which the Commission has relied in proposing the directive) can apply to any other than the member states of the European Community. I should be grateful if, at some stage, the Commission can be asked how that anomaly may be clarified; that is, how can the proposed directive applies not only to member states but also to any third country from which posted workers come as regards an undertaking in one of those third countries?

Secondly, more detailed clarification is needed for workers such as cross-frontier workers, seamen, tourist guides and others who would be excluded from the measures set out in the directive. I think that that should be fully spelt out in the directive so that those categories of worker know where they stand. At the time when we considered it, the draft directive was defective in many ways both as to law and as to consequences for undertakings which would have to operate in a complex area without certainty of existing contracts with their employees.

We believe that it would be beneficial to see whether the provisions of the Rome Convention may assist in resolving conflict of law questions in relation to individual contracts of employment—as I have already said, it has been in force for only a few months—before embarking on this new unchartered course. If the single market is to work for the benefit of all, especially for workers, reducing unemployment must surely be one of the main objectives. For more extensive use of cross-border contracts for the provision of services, there must be a need to guarantee workers their existing rights and for posted workers to know what their guaranteed position is with regard to family allowances, social security benefits and the rights which pertain to workers generally throughout the Community. Should evi-dence come forward showing that provisions of the Rome Convention do not fulfil its principal objective, that there is unfair treatment of posted workers, or that there is resentment between nationals and non-nationals coming from Community member states, we would strongly recommend that the situation be reviewed.

As a result of the brief outline of our report that I have given your Lordships, I very much look forward to hearing what other members of the committee and other speakers have to say about it. I shall also listen with the greatest care to my noble friend Lord Ullswater when he tells us what is the Government's position and how far the draft directive has gone down the line of European Community legal procedure.

Moved, That this House takes note of the report of the European Communities Committee on the Protection of Posted Workers [5th Report, HL Paper 16]—(Baroness Elles.)

4.27 p.m.

Baroness Turner of Camden

My Lords, I should like first to congratulate the committee on the production of a very clear and extremely informative report. I should also like to thank the noble Baroness for the clarity of her explanation. The draft directive concerning the posting of workers in the framework of the provision of services is explained in a quite exemplary manner in the report. Moreover, the committee was careful to ensure that it took evidence from those with a keen and legitimate interest in the subject; for example, the CBI and the Engineering Employers' Federation as well as the Institute of Personnel Management and major unions, including the TUC. Naturally, the Department of Employment has made its views known and they are included in the report.

The Community has come to the view—which I am sure is correct—that the completion of the internal market is bound to lead to an increase in the number of short-term postings of employees in the services sector to other member states in the Community. As the noble Baroness has already pointed out, some of the respondents indicated that they had not hitherto encountered problems. But things are bound to change. It is pointed out that where an employment relationship is temporarily carried out in a member state other than those whose laws govern the contract of employment, issues as to which law applies are likely to arise.

It seems to me that the directive has a number of quite reasonable objectives. First, it wants to ensure so far as possible that there is clarity and an avoidance of legal uncertainty. Secondly, there is the commendable desire to try to ensure that posted workers are protected from exploitation. Thirdly—and this is connected with the second objective—it wants to ensure that the principles of fair competition are maintained so that it would not be possible for a provider of services to succeed on the basis that his labour force was cheaper than those bound by more stringent laws operating in the host country. Personally, I can see nothing wrong in all this. I do not accept that there is no need for such a directive, simply because the Department of Employment is not convinced there is a need for it. The attitude in the past of the United Kingdom Government has been in opposition to any attempt to interfere in industrial relations where the aim is to benefit or to protect the employee; and it seems to me the same stance has been adopted in relation to this directive.

It is not surprising either that this view as to the necessity for a directive has been supported by the CBI, the Engineering Employers' Federation and other organisations normally representative of employers' interests. However, the Institute of Personnel Management and the unions take a different view, the Institute of Personnel Management believing that it would be beneficial to clarify which laws govern the conditions of temporarily posted workers, and the TUC arguing—surely sensibly—that posted workers ought to receive a written statement of their terms and conditions before they accept a posting elsewhere in the Community. As has been explained, the directive seeks to identify a so-called hard core of protective legislation with respect to workers who are temporarily posted to work on the territory of another member state.

The list of working conditions is set out in detail on page 12 of the report. There seems to have been little opposition from respondents to conditions relating to health and safety and equal treatment being applied to posted workers; but strong opposition by employers to the inclusion of pay, working time and minimum paid holidays—even though it is intended that minimum paid holidays and minimum rates of pay should apply only in postings of more than three months.

In this latter connection, it should be noted that the union representing building workers was opposed to the three-month "threshold", claiming—I am sure correctly—that many building workers are posted to other countries within the Community for shorter periods and need protection against exploitation for these shorter periods. Others expressed doubts about the threshold, pointing out that it might induce employers to post employees for periods of three months or perhaps lesser periods.

There are problems about the United Kingdom. The noble Baroness has already alluded to that aspect. We do not have minimum rates of pay laid down by statute, except where wages councils exist, and the Government are intent upon doing away with those, a move that will be vigorously opposed from these Benches. But now is probably not the appropriate time for talking of that. However, there are industries, where there are collective agreements which could be applied and be deemed to be a means of giving effect to the directive. The unions favour the directive on the reasonable ground that if operative it would prevent undercutting and thus ensure that the objective of fair competition is maintained, while at the same time giving protection to employees who are posted to other states in the Community.

They, and other respondents, also raised the matter of non-Community undertakings. UCATT in particular drew attention to the East European building workers being employed in the United Kingdom and other Community states at rates of pay considerably lower than those set out in the building industry's national agreement. That seems to me an important issue and it needs to be addressed.

We now come to our comments from these Benches on the conclusions of the committee in relation to the draft directive. First, the committee agrees that the draft directive is a potentially useful measure to assist courts in member states to clarify the law applicable to employment contracts of posted workers. It seems to me that is a sensible thing to say. However, they go on to say—and the noble Baroness has explained this earlier—that rates of pay, working time and paid holidays should not be matters where the host state may issue mandatory rules overriding freedom of contract. In other words, the committee has decided to agree with the Government and the employers' organisations which gave evidence. I regret that this is so. These are, after all, the most important items to the worker in his contract of employment. If the intention is to prevent undercutting, and thus ensure fair competition, it is difficult to see how this can be obtained if rates of pay are to be excluded from consideration.

Nor is it possible to prevent the exploitation of workers unless the protection afforded to them includes the most important item: what they are actually going to be paid. To an employee, what he is paid and how long he has to work for it are the most important items in his contract of employment. I do not accept the committee's conclusion that it is a form of fair competition for an employer in a member state, perhaps with high unemployment or a minimum wage law, to take advantage of relatively cheap labour to provide cross-border services.

It has always been necessary in a civilised society—even one committed to a market philosophy—to protect those who are most vulnerable. Obviously, in recessionary situations where there is a lot of unemployment and job uncertainty, it is absurd to talk as though the parties to an employment contract are in any respect on an equal footing. It is one of the positive aspects of the Community, in my view, that this is acknowledged and we have the social chapter—which unfortunately the United Kingdom Government have decided they will not have. When we debated Maastricht in this House, I said that the United Kingdom Government believed that they could deal with unemployment by creating "sweat-shop Britain". This kind of outlook still informs their thinking, and I am sorry that in relation to pay and working conditions the committee seems to have chosen to go along with it. I think it was wrong to do SO.

Let me say finally that I support the directive but I believe it needs amplification. In particular, I should like to know how it is proposed that it should be enforced. I should like some clarification about the position of undertakings external to the Community, and I support entirely the opinion of the European TUC that posted workers should have the right to a statement of terms and conditions from employers before accepting posting to another member state.

4.37 p.m.

Baroness Robson of Kiddington

My Lords, when I put my name down to take part in this debate, as a member of the committee which produced the report, I did not realise that we were going to have a Statement and that we were also going to have a long debate on the amendment of the noble Lord, Lord Bruce of Donington, at the beginning of our session. Unfortunately, I have a long-standing engagement, which means that I must leave your Lordships' House at five o'clock and I apologise therefore for not being able to stay until the end.

As a member of the committee, I am in agreement with its recommendations. In my view, the directive itself helps to clarify and fill in gaps in the Rome Convention, particularly in relation to Articles 6 and 7. However, the directive misses out certain points. For instance, there is no clear definition of the word "posting" or what "a posted worker" means. The noble Baroness, Lady Elles, mentioned that. There is a great need for clarification as to the position in which people may find themselves if, as a result of their occupation, they are permanently crossing borders.

We considered which mandatory rules should be applied to a worker in the host country and to what extent a proper balance must be arrived at between the interests of the host country and the interests of the provider from another state. I was certainly keeping in my mind all the time the primary objective of the directive, which, in my view, is the removal of obstacles to the free movement of services. It is not, in itself, a directive particularly dealing with a measure of worker protection. That exists in other directives within the Community and therefore the balance of interests is most important.

The mandatory rules in the host state must obviously cover matters such as health and safety and non-discrimination. But we must take great care all the time to prevent the mandatory rules from stifling competition within the single market just as we must take great care to see that competition does not penalise the worker excessively. There is a very fine balance between the two aspects of the problem.

On matters such as rates of pay, hours of work, work on Sundays and paid holidays, the committee came to the conclusion that they should be left to the law of contract in the provider state. We had evidence particularly from the construction and engineering industries. It was stated forcefully that hours of work were of great importance as quite often speed of completion was of the essence in some contracts taken on by these two industries. For example, with a firm in this country which had achieved a contract for major repairs on a power station in another country, it is important to the other country that the job is completed as quickly as possible. Hours of work are of the essence. Therefore, one should not follow whatever mandatory rules exist within the host state.

Secondly, the employer of the posted worker may have a core of employees who may be posted across frontiers on a recurrent basis. Employers frequently have workers who are always working abroad, but not always in the same country. So there is the problem of the worker from the same company having to face up to different conditions on pay and working hours. I believe that that is one of the reasons why it is sounder to have paid working hours dependent on the rules of the home state, not of the host state.

The question of a worker who has been posted abroad has already been mentioned by the noble Baroness, Lady Elles. The worker has to take into account the tax liabilities and social security benefit of the home state. But he must also take into account the increased costs of working abroad, travel and accommodation, when he is not living at home.

Thus it seems to me that the committee came to the right conclusion in deciding that there should be a balance between the rules that must be obeyed in the host state and the rules that should still govern employment from the home state.

One of the most difficult questions is how the directive should be enforced, by whom, and how it should be monitored. The Pappayanakis Report proposed that the competent authorities should be set up in each member state with adequate powers to monitor and enforce regulations. I have never been in favour of setting up any more authorities than necessary.

The Institute of Personnel Management suggested that enforcement of this directive should be through the national courts of the host state. But, on the basis of the recommendation in the report, it would have to be through the courts of both states because they would govern different parts of the directive. I would say that the most important aspect is that the question of enforcement should be resolved.

4.45 p.m.

Lord Wilberforce

My Lords, I wish first to join other noble Lords in thanking the noble Baroness, Lady Elles, for her clear presentation and, so far as I am concerned, for her chairmanship of Sub-Committee E, of which I was a member and which produced the report. It was a remarkable job to have got it done in such a short time and short compass.

In the directive we are concerned with quite a significant piece of European Community legislation. I do not believe that anyone would dispute that the matter of posted workers is entirely suitable for regulation by means of a directive, whatever one may think about other emanations from Brussels. The directive deals with a real situation which is likely to become more conspicuous as the single market comes into effect. There are sure to be more posted workers seeking and taking up employment across borders.

It must be in the United Kingdom's interests that the situation should be recognised since we or our big companies, both in the construction industry and in engineering, send a number of people to take part in important projects on the Continent such as Euro Disney, Expo in Seville and so on. Therefore, we have an interest in seeing that the legal system is clear. On the other hand, that brings about a number of complications which brought the report into being.

It is difficult to evaluate the merits or demerits of the directive because the objectives are multiple, not single. As the noble Baroness, Lady Turner, said, there are three quite separate objectives—the free movement of workers, the protection of workers and the promotion of fair competition. Those are not always consistent with each other and one has to strike a balance between them which is a matter of judgment.

Under the heading of "worker protection", the report of the European Parliament, which is in the committee's report, takes the view that the most important factor is that workers and also employers should be placed under a legal regime and should know what that legal regime is. That appears on page 50 of the committee's report. The TUC naturally takes the same view. If there is one slight omission in the report from the sub-committee, it is that it does not sufficiently underline the necessity for employer and employee to be supplied at an early stage with full particulars of what the legal regime is. That brings us to the Rome Convention 1980 with which the directive has been running in parallel for a number of years, as successive drafts have been produced. In my view, it is important that one should recognise—as I am sure the Government do—that the Rome Convention deals with the conflict of laws. It is designed to deal with matters of private international law which arise when people of different nationalities—say English and Spanish—seek employment in another state and work side by side with people coming from yet other member states of the Community, or even from outside the Community, as the noble Baroness said.

The object of the Rome Convention is simply to establish for the benefit of both employer and employee what is the law which governs their contract of employment. One has then to recognise that workers and employers, as well as having a contract of employment, are interested in a number of important requirements in the public law field: requirements as to health, hygiene, social security, minimum wages and so on.

So one has not done everything when one has found a legal regime. One still has to reconcile it with what are called mandatory requirements. The Rome Convention recognises this in Article 7 which, however, is fluid and is not accepted at the moment by the United Kingdom.

The subject of mandatory requirements brings one at once into the whole area of labour law. That matter is fully recognised by the Commission in its introduction to the directive. It is worth noting that the Commission states at paragraph 24 on page 33 of the report that Article 3—the critical article in the directive, which gives the list of requirements— does not intend to harmonise the material rules of the Member States concerning labour law … but to co-ordinate their conflicts of law rules … In that sense, this is not a labour law instrument, but a proposal concerning international private law". The same point is made in paragraph 27. Therefore this is not a matter of harmonisation. The measure does not attempt to harmonise, however desirable one may think harmonisation is. It is not a social security measure either. As one of our witnesses pointed out, social security matters are being, and are intended to be, dealt with by other directives from the Community. An example of a social security matter is the problem of education of workers or of their families who are sent to work in another state. That matter was raised by one of the witnesses. It is extremely important; it has even been considered by the European Court of Justice in Luxembourg. It would, of course, be attractive and nice if one were able to have all matters such as social security, education, minimum wage and others dealt with in one directive. But having regard to the way in which these matters are worked out in the Community, that is simply not possible.

In the result the directive is much more modest in its aims. It produces a list in Article 3 of what it calls core matters which are in general to be made effective. The report agrees with that list, subject to some modifications. The principle, in other words, of having a core list of non-exhaustive requirements is, in the report's view—I agree with that—a correct one, even though one may venture to disagree as to detail in some items.

I wish to say a few words about competition, which is one of the objectives of the directive. Fair competition is an objective, and one has to recognise the reality of what competition may be. There are enormous differences in wage rates and conditions of work between workers in different member states. The tables in the report show that between Portugal and Denmark there is a difference of a factor of nine in wages for manual workers. The difference is even greater between construction workers in the two countries. Denmark pays its construction workers 10 times the rate that is paid in Portugal. As the noble Baroness, Lady Elles, said, the pay of a worker constitutes more than simply a weekly cheque. All kinds of other items are recognised by the European Court as ingredients in pay such as pensions, allowances and perks.

There is more to competition than pay. The Engineering Employers' Federation states on page 19 of the written evidence in the report that there are different levels of productivity of workers as regards quality control and in other areas. All these matters enter into fair competition. One cannot simply fasten on to the amount of the weekly pay cheque. Competition may, however, be very real and very serious. Can one do anything to ensure that it is fair? The directive seeks, in the view of our report—again, I agree—to strike a compromise between the requirement of fair competition and the protection of workers. Our report follows that, subject to a reservation which it makes as regards items one to three of Article 3. That relates to pay and conditions.

It is the view of the report—again, I agree—that one must not be too ambitious or too inflexible about these matters. One must leave something to progress according to developments. Above all, one must not overlook the problems of enforcement. The noble Baroness, Lady Turner, rightly drew attention to the necessity of enforcement. However, I respectfully suggest that in doing so she very much weakened the force of her argument to have the directive extended to matters of pay, conditions and social security. The more one takes in in this area, the more difficult it must be to achieve and to devise a satisfactory measure of enforcement.

The noble Baroness, Lady Robson, referred to the Pappayanakis Report which, fastening on this point, suggests the setting up of competent authorities with adequate powers. The prospect of setting up yet another elaborate body to monitor the working out of social security, pensions, pay and other areas in relation to all these possible combinations of workers from different states in different labour markets is terrifying. I believe that the report has taken a realistic line in turning away from that and suggesting that the list of mandatory requirements should be limited. As it is realistic and a fair compromise and as it is the best way of achieving the three objectives I have mentioned, I respectfully support the report and hope that the Government will do the same.

4.56 p.m.

Lord Wedderburn of Charlton

My Lords, I, too, thank the noble Baroness, Lady Elles, for her introduction to today's debate and also for her leadership from the chair in our committee on the occasions when I was present in the committee and on the occasions when I was not present, to which she kindly referred. I knew that under the noble Baroness the committee would produce its report, as indeed occurred.

It is a matter of fact, and we should not forget it, that almost everyone is agreed there should be a directive. The European Parliament, the Commission, the economic and social committee and indeed the report of the sub-committee support that view. That latter report speaks of the directive as being a potentially useful measure. It is agreed that problems of legal uncertainty and social difficulty are arising and that the Rome Convention is insufficient by itself to solve them. That is especially true if one renounces Article 7 in the manner of the United Kingdom and three other governments.

This report contains a presumption that the directive, or something like it, is needed. I wish to make two points in regard to the evidence. First, it has been said there is some likelihood that a directive of this kind is likely to contribute to unemployment. I think the burden of proof is on those who make that assertion. I do not believe there is evidence to support that. There is certainly no such evidence in the report.

Secondly, it is said that there are uncertainties. I suggest that this draft directive is not outside the normal range of uncertainty. I do not know of a draft Bill or measure which does not have a large number of uncertainties. A Bill without uncertainties is like a tiger without spots. It would be unfair to my brethren who earn their living on those uncertainties if the position were any different. What one has to ensure is that as many uncertainties as possible are cast out.

The social evidence has been recently added to by a working party report—I understand that is being sent to the Commission—co-ordinated by Dr. David Marsden of the London School of Economics. That report has two findings of interest. First, the movement of workers, in terms of mobility in the normal sense, under the treaty has not increased very fast—that is not surprising—but postings and a variety of similar practices have increased, and are likely to increase, not least because of the manner in which capital can flow among frontiers. The rate of mergers has doubled in the past five years. Therefore, there are more internal labour markets, and the posting of workers within those internal labour markets in multinational enterprises is likely to involve a large number of postings and a variety of types of employer. Dr. Marsden writes: Such developments raise many problems, among which are the transferability of terms and conditions negotiated in one country to another and the potential disadvantage of women's access to careers". That, too, has a dimension which relates to problems for women workers especially.

The Commission's proposal for a directive was not for the free movement of workers nor based upon welfare for workers. It was based upon Articles 57 and 62 relating to the provision of services in the Community. That immediately raises the question of creating or removing obstacles to free competition in the single market. It is at that point that I believe the report, in its final deliberations, is open to question by confining the permissible subject matter of the directive to only a few of the conditions of employment of posted workers and by excluding from mandatory application in the host state's laws, or collective agreements, maximum working hours, minimum pay and paid holidays. The noble Baroness referred to a note on collective agreements which I prepared for the committee and that is an issue to which we shall have to return. The application of collective agreements in the Community will create more and more difficulties.

The report supports its solution by applying the maxim of freedom of contract. I should like to make two points in relation to freedom of contract as that subject appears in the report. It is a well-known will-o'-the-wisp. The general point is the one made by my noble friend Lady Turner. It is a commonplace in freedom of contract and employment matters that terms and conditions are, for the most part, imposed conditions for the average individual employee unless they are negotiated by his or her trade union. Even the Rome Convention departs from the classical maxim of freedom of contract when it comes to employment contracts in Article 7. That is very significant.

There is also a particular reason why blanket application of the maxim of freedom of contract is not useful here. If no directive on posted workers is adopted the result will not be freedom of contract in the form in which it has been debated here or written about in the report. National governments will retain their competence to make rules for their own employment law in respect of their own minimum standards provided; and I apprehend that this is a proviso which has to be made to any quotation from the Rush Portuguesa judgment (I have my own but I shall not use it because we have already heard from the Rush Portuguesa judgment). They are not discriminat-ory. There may be situations in which the Government will have to be careful to avoid that.

For the most part, if we do not have a directive we shall have what the Engineering Employers' Federation—which I do not claim supports the directive in all respects—describes as a piecemeal approach. The choice is between co-ordination through a directive and not freedom of contract but a market in which states, as time goes on, will individually apply different national laws to posted workers. It is therefore not helpful to the argument in the report to claim that freedom of contract will produce the greater certainty. Nor is it a sensible solution.

One could draw an analogy between the directive, at its minimum, and a double taxation agreement. It seems to me that our report approved the double taxation agreement but excluded the basic rate. That would be very strange indeed. The report argues that the directive should require member states to apply common terms of employment to posted workers on safety at work, discrimination—a wide area of discrimination far beyond our present law, except in Northern Ireland—temporary work and protection of young workers and pregnant women, but not further than that.

Beyond that I do not claim to be a matter of legal analysis. It is a judgment of political economy. My judgment would be that the report errs when it says that, it is a form of fair competition for an employer based in a Member State, perhaps with high unemployment or a low minimum wage law, to take advantage of relatively cheap labour to provide cross-border services". There is no protection of the employee there. With great respect to the noble Baroness, who will no doubt tell me where I should look for that if I have missed it, I did not find any protection of the employee as a basic ground for the proposals in our report in the subsequent paragraphs either. I did not find it in paragraphs 79 and 80, where the interests of the host state and the interests of the employer are balanced. I accept that the interests of both states are involved. However, that somewhat strabismal perspective omits the interests of the posted employee and of the other workers involved. There is no single concrete instance of employees' interests in that sense.

It is here that I approach the matter slightly differently from my noble friend Lady Turner. It is not so much an issue of the Maastricht agreement. We all have our own personal views on that. That is not very important at the moment. What is important is that from the Madrid summit onwards the United Kingdom Government, as one of all 12 governments, have accepted that by 1993 the market must have a social dimension. The Government have accepted statements from the Madrid summit that the social and economic dimensions of the market are equally important.

If that is so then the directive, which is based largely upon the economic issue of competition and provision of services, must nevertheless be tested in the social dimension of the interests of the workers concerned, which will be equally important. That is why the Commission speaks of the need: To protect the workers concerned from practices which may emerge in the international framework". It is also why the European Parliament's Pappayanakis Report seeks to, protect workers from exploitation as a cross-border labour market develops and from "social dumping". Longer passages are printed with our report.

To the practical and legal problems, which are likely to increase, must be added the social dimension for the employees both in the host community and in the posting state. Merely to say that cheap labour is a fair competitive device without addressing the problems of unprotected undercutting is not wise. There is disillusionment with the Community; not just in Britain but in Denmark and France and across the whole Community. That is due partly to bad luck because during a recession people do not feel so good; but people expected, because they were told again and again, that there would be a social dimension to the internal market of the Community which would take the edge off what everybody knew would be a difficult period in the first year or two of that internal market. The recession does not distinguish between working hours, pay and rules on safety at work. Nor do people who are at work, who know that those will be the targets of the recession in their households and in their families.

In a sense this is a small matter, but if we take away from instruments such as the one proposed a dimension of protection for employees then we may unintentionally contribute to the acceleration of a negative process which could have frightening consequences in the next few years.

5.10 p.m.

The Parliamentary Under-Secretary of State, Department of Employment (Viscount Ullswater)

My Lords, I welcome the opportunity to take part in the debate. I read with great interest the report prepared by the Law and Institutions Sub-committee (Sub-committee E) under the chairmanship of my noble friend Lady Elles. I am most grateful to my noble friend and her colleagues for giving the issues such a thorough and expert examination. I am grateful to her for the way in which she explained the report and its contents to the House today.

The report and the evidence it contains will make a valuable and lasting contribution to our consideration of the proposed directive in this House and elsewhere. The Government will take careful account of its findings and recommendations.

The subject of our debate today may seem at first sight dry, technical and obscure. But first impressions are misleading. The development of a free and open market in services is one of the most important aims of the European Community. It is an aim which the United Kingdom has consistently supported for many years. The draft directive that we are considering could either help the process or hinder it.

My departmental colleague the Minister of State for Employment has given some detailed comments on the sub-committee's report in a written response. I am grateful to my noble friend for her words of thanks for that response. I shall therefore concentrate on the two major issues raised in the report and in the debate. The two main conclusions are, first, that the draft directive is a potentially useful measure in assisting courts in clarifying the law; and, secondly, that posted workers should not be covered by mandatory rules on rates of pay, annual paid holidays and working hours in the host country.

On the first point, the European Commission has argued that the directive would help resolve legal uncertainty. The Select Committee agrees that the draft directive could potentially be useful for that purpose. The Government accept that legal uncertainty could discourage the use of posted workers in the supply of services between member states of the Community. When employees are posted temporarily to work in a member state where they do not have a contract of employment, are they covered by the law of their home country—the country where they have their contract of employment—or of the host country where the temporary work is done? What happens if neither legal system clearly covers them, or if both systems cover them and there is a conflict between the two?

Existing case law of the European Court of Justice has gone some way towards resolving these questions. Broadly, the court has established that any member state is entitled to apply its own statute law or equivalent provisions to workers from other member states who are temporarily working within its jurisdiction, provided that in doing so it does not discriminate in favour of its own providers of services. Clearly, that is a very important and desirable proviso.

The Rome Convention on the law applicable to contractual obligations also lays down some useful rules to determine which system of law governs a contract. Nevertheless, it leaves some points to the discretion of individual states. Notably, it is left to them to decide whether to apply their mandatory rules, such as statutory employment law, to posted workers. Any employer or user of posted workers would therefore need to take account of the legislation enforced in the host country, discover whether it applies to posted workers, and what it requires if it does.

In principle, some uncertainty or conflict could arise. Whether it actually does arise is another matter. The Commission's explanatory memorandum provided little evidence on this point. My department therefore highlighted the issue in its consultation exercise. We asked what problems employers and users of posted workers had encountered in practice. While they did report some practical problems, these tended to be more concerned with taxation and social security matters, which are not covered by the draft directive, than with employment law. The evidence given to the Select Committee confirmed that there could be a problem in principle, but my noble friend Lady Elles confirmed that few if any witnesses gave any concrete examples of actual difficulties in practice.

The noble Lord, Lord Wedderburn indicated that the increase in the flow of capital across boundaries in the member states was likely to be followed by an increase in the number of posted workers. I am prepared to accept that assumption. However, the Government remain uncertain about the extent of the practical problem to be dealt with. We do not say that there is no problem. But the evidence is inconclusive. Under our presidency of the Council we have therefore focused on this issue in discussion with our Community partners.

Assuming that a significant problem does exist, we must be satisfied that the directive would help resolve it. Many employers and users of posted workers are sceptical on this point. Some even fear that the directive in its present form would increase rather than reduce the uncertainties. That is perhaps too pessimistic. But there is a real danger that adding a layer of Community legislation above the existing legislation of member states could complicate matters rather than simplify them.

We must also take account of the Rome Convention. While the convention admittedly leaves some potential problems unresolved, we should remember that it only came into force in the Community in April 1991, as my noble friend made clear.

The noble Lord, Lord Wilberforce drew attention to the Rome Convention and the fact that it dealt with a conflict of law. However, I believe he also questioned whether the directive as it stood was strictly necessary or strictly required. It may therefore be rather premature to propose measures to complement the Rome Convention before the effect of its operation over a reasonable period of time can be assessed.

The second main conclusion of the Select Committee's report was that rates of pay, working time and paid holidays should not be matters where the host state may issue mandatory rules overriding freedom of contract. My noble friend Lady Elles and her colleagues rightly said that there is a need to strike a balance between the potentially conflicting interests of the host state and the employer. The interests of the employee must also be considered. It is far from easy to decide where the balance should be struck. The European Commission favours an approach which would require mandatory rules on pay and related matters to be applied to posted workers but only after a threshold period of three months. Some Members of the European Parliament would prefer a shorter threshold, or none at all. In contrast, the Select Committee would prefer these matters, and working time, to be excluded from the directive entirely.

Both the noble Baroness, Lady Robson, and my noble friend Lady Elles drew attention to construction workers posted to another member state where they may wish to work longer hours in order to fulfil and finish an important construction contract. Indeed, if I understand the committee correctly, it does not believe that member states should be allowed, let alone required, to apply their domestic law on these matters to posted workers. That would involve some curtailment of the discretion that member states enjoy at present.

The noble Baroness, Lady Turner, and the noble Lord, Lord Wedderburn, signified their dissent from that conclusion of the committee. The evidence provided to the committee was divided and, therefore, it is not surprising that some members of the committee should support the views put forward by the trade unions. The Select Committee rightly placed much emphasis on the need for free and fair competition for services within the single market. It argued that in some member states lower wages are a legitimate competitive advantage, as the noble and learned Lord, Lord Wilberforce, stressed by referring to the tables published in the report. The directive must not have the effect of restricting any legitimate cost advantage in the supply of services.

The noble Baroness, Lady Turner, and the noble Lord, Lord Wedderburn, made the important point that the exploitation of posted workers should be avoided. However, employees, posted or otherwise, will have agreed their contracts of employment in their own country. We must also consider the practical implications of the directive for the employers and users of posted workers. There is a danger that the directive as it stands would create new bureaucratic complications for employers. There might be particular difficulties in determining the appropriate terms and conditions for posted workers in member states where there are many legally binding local and sectoral agreements. There would certainly be difficulty in ensuring that comparisons are made on the same basis between the pay of posted workers and that of their host country counterparts. That point was made by many noble Lords.

For similar reasons there could be practical problems in determining the holiday entitlement of posted workers. Most other member states have statutory rules on minimum holidays and often have many mandatory public and local holidays. Calculating any extra leave entitlement in relation to a worker's existing holiday terms would be a complex exercise and a particular burden for smaller firms. My noble friend Lady Elles drew attention to that matter.

The issue raised by the committee's report is clearly both important and difficult. On the one hand, freedom of competition in the single market is a central aim of the Community; on the other hand, member states already have a certain discretion to apply their domestic law to posted workers, provided that they do so without a discriminatory effect. They will be reluctant to see that discretion curtailed. The EC Commission has proposed one way of striking a balance; the Select Committee favours a different approach; while the European Parliament and some member states may prefer to go in the opposite direction. The Government have not yet reached a final conclusion. In our presidency of the Council we aim to promote a constructive debate on the issues.

The Select Committee also discussed the appropriateness of the legal base chosen by the Commission. Its report concludes that Articles 57(2) and 66 of the treaty are an adequate and appropriate legal base. The United Kingdom has doubts on this point, as do other member states. The committee's report suggests that the directive is not primarily a measure of worker protection. Nevertheless, the primary effect of the directive's only substantive requirement (Article 3) is to ensure that posted workers are not deprived of the benefit of whatever relevant employment rules apply in the member state to which they are posted. This does on the face of it appear to be a measure of worker protection whatever the underlying motives for it.

Another reason for questioning the legal base chosen by the Commission is that the draft directive attempts to regulate the position of workers posted into the Community from non-EC countries, even where there is no supply of services between member states. There is considerable doubt about whether that would fall within the proposed legal base and, indeed, whether it is a proper matter for action by the Community at all. Similarly, some of the matters covered by Article 3 of the draft directive, such as discrimination on grounds of race or social background, are not in themselves within the competence of the Community. We are not satisfied that it is proper for the Community to concern itself with them even in the indirect way proposed in the draft directive.

In conclusion, I am sure your Lordships will agree that although short in length the directive raises many complex issues. We hope to pursue those in further discussions in the Community. The United Kingdom presidency of the Council has proposed a discussion among Ministers of some of the key issues raised by the proposals. That may take place at the Social Affairs Council on 3rd December. It would help to clarify the priorities and standpoints of other member states and the prospects for agreement on a way forward. The European Parliament also has still to deliver an opinion on the proposals. I understand that a debate in a plenary session of the parliament is not expected until the new year. I have indicated that on some matters, such as the Commission's proposal for a three-month threshold, there may be a difference of opinion between the Commission and the parliament.

As matters stand the Government remain open minded about the merits of the directive but want to be convinced that it addresses practical and not just hypothetical problems. In the Government's own consideration of the issues, the committee's report will be invaluable. I thank my noble friend Lady Elles for chairing Sub-committee E and the Select Committee for the valuable report. I thank noble Lords for their contribution to our debate.

5.26 p.m.

Baroness Elles

My Lords, I thank my noble friend Lord Ullswater for his reply to the debate. I thank also noble Lords who have taken part, in particular the noble and learned Lord, Lord Wilberforce, and the noble Lord, Lord Wedderburn, who were members of the sub-committee.

We have dealt with many points tonight, all of which I regard as important. Some noble Lords considered that we were not sufficiently concerned with the protection of workers. I do not agree with that conclusion. Our main concern is that there should be a practicable solution for employers. The onus on them to discover the necessary facts—if, for instance, employment contracts for those who are going to work abroad must be drawn up in detail before a posted worker is sent—must not be burdensome. Above all, our main concern is that there is certainty for the posted worker himself. I do not believe that that certainty is guaranteed under the directive as drafted.

There is no certainty as to the wage which a posted worker will receive in the host state if the provisions remain in Article 3. There is no provision for knowing that social security benefits, family allowances and so forth, which go with what is termed under European Community law "pay", will be guaranteed, thereby assuring posted workers that the benefits will be available to their families while they are working in another member state.

Finally, it is important to point out, as the noble and learned Lord, Lord Wilberforce, did, the effect of the distortion of competition. That is a difficult issue and I do not intend to take up the time of the House tonight. However, workers might go from their home state to another where wages were lower. Therefore, it is understandable that, in accordance with the terms of the directive, the worker from the home state can retain the higher wages while in a member state where the wages are lower. There is not a simple answer to that particular problem. I hope that the Government will look closely at the issues that have been raised on all sides of the House and take them into account.

Above all, I assure noble Lords that in spite of opting out of the social chapter, many of us on this side of the House are well aware that there is a major social dimension in the development of the single market. We are concerned that there should be social measures to protect posted workers, whether in their home state or in a host state. I look forward to the Government's conclusions as regards the adoption of the directive in due course.

On Question, Motion agreed to.