Employer’s liability towards the contractor’s / subcontractor’s employees following Law 4554/2018

It has been observed that the assignment of specialized, demanding or urgent tasks to various outsourced providers (contractors) has taken on large dimensions in modern business activity. In particular, a significant percentage of employees are recruited by contractors, but in fact provide their work at the premises of the contracting entity (employer), even under its own management and supervision, without being linked to that entity by any employment relationship and without being able to raise any claim against it.

The adoption of recent Law 4554/2018 and in particular Article 9 thereof, entitled “Liability of the Contracting Entity, Contractor and Subcontractor towards Employees”, was an attempt to address the aforementioned issue, at the price, we would dare to say, of a deep crack in the principle of relativity of obligations.

 

i. Content of Article 9 of Law 4554/2018:

The new regulation establishes the joint and several liability of the contracting entity (i.e. any natural or legal person who, in the course of his/her business, entrusts the execution of a work or part of a work to another natural or legal person/contractor), the contractor/and any subcontractor towards the employees of the latter, for the payment of the outstanding remuneration, insurance contributions and any redundancy payments, arising from the contractual relationship between the contracting entity and the contractor for each particular work or part of work. The above-mentioned joint and several liabilities are valid for three (3) years after the expiration of the contract between the contracting entity and the contractor. Indeed, the above regulation is a mandatory provision and the contracting parties cannot exclude its application. Furthermore, par. 4 of the above article stipulates an obligation for the contractor to send to the contracting entity monthly proof of payment of the remuneration, any redundancy indemnities due and statements of payment of the insurance contributions of his/her employees and of subcontracted employees. The subcontractor has the same obligation towards the contractor.

The law seems to establish a strict liability for the contracting entity / employer, given especially that no employment relationship links the latter with the employees hired by the contractor, while at the same time it is in fact extremely difficult for the contracting entity to exercise full control over whether the contractor is consistent with his obligations towards his employees or not. Therefore, this provision obliges the contracting entity/employer to satisfy any financial claims (salaries, insurance contributions, redundancy payments) of the contractor’s (or his / her subcontractor’s) employees, but without itself relating with them with any contractual obligation.

In “compensation” for the above responsibility of the contracting entity, according to par. 5 of the same article, the latter has the right of recourse against the contractor. In particular, the contracting entity may claim against the contractor the repayment of any sums he/she has been obliged to pay to the latter’s employees, such as outstanding salaries, etc. Respectively, the contractor retains the same right of recourse against any subcontractor.

This article is an “exceptional” provision contrary to our legal system and the principle of the relativity of civil law obligations, under which the contract in principle creates rights and obligations only for the contracting parties. This provision is part of a set of exceptions that have been established to protect the weaker party in a given relationship[1], but at the same time, it differs qualitatively from them in that it goes further to the fundamental principle of the relativity of obligations. In the case of this Article 9 of Law 4554/2018, the responsibility of the contracting entity is not limited by any factor but extends to the full amount of the claim that the employees may have for the particular work or part of work. In practice, in case the employee chooses to turn his claims against the contracting entity, the latter will be required to pay all the outstanding remuneration, contributions and/or compensation due under the particular work, even if that amount exceeds the agreed fees of the contractor.

One may reasonably wonder: What is the difference between the employer in a construction project (CC 702) who has limited liability for the wages of the contractor’s employees up to the amount owed to the contractor and the contracting entity in par. 1 of a. 9 of Law 4554/2018 bearing unlimited liability? Is the role of the contracting entity in the course of its business activity enough to justify such an increase in its liability? The Explanatory Memorandum to the law gives no answer.

In the present case, two (2) conflicting interests co-exist, the protection of employees, towards which the new provision is directed (as apparent from the Explanatory Memorandum) and that of the guiding in civil law principle of freedom of contract. The Explanatory Memorandum does not seem to sufficiently balance the protection of employees with the business interest of the contracting entity, deriving directly from the constitutionally regulated right to freedom of personal development in terms of economic aspect (Article 5 (1) of the Constitution). The process of supervising contractor’s compliance with labor and insurance legislation imposes burdens on the contracting entity, leads to significant management costs and increases business risk, with all consequences that entail.

ii. Special Issues – Problems:

  1. The concept of “work” and its distinction from the provision of independent services:

Paragraph 1 of a. 9 of Law 4554/2018 requires the assignment of a “work or part of a work” by the contracting entity to the contractor. According to CC 681, a work contract is a contract whereby the contractor undertakes to perform work (project) and the contracting entity (employer) undertakes to pay in return for the agreed remuneration. This provision does not provide a legal definition of work (project). However, according to the widely-held view in theory and case law, it is accepted that “work is the result of a human activity, which consists in creating a new situation in relation to what existed before the work was performed”.

The main characteristic of the work contract is the agreement of the parties for the execution of a project by the contractor at a fixed or not fixed time, irrespective of how much and which kind of work will be required to complete the project. The parties, therefore, intend to achieve a certain result of the work throughout the time it is provided, that is to say, the project itself, which must have a market value independent of the work. For this reason, on the one hand, it is stipulated that the contractor bears the risk of the project until delivery to the employer (CC 698) and on the other hand the work contract is automatically terminated upon completion and delivery of the project. On the contrary, if the above conditions are not met, but the parties’ agreement is directed to the provision of the work itself without seeking to achieve a discrete result and without the remuneration being linked to a particular deliverable, then we refer to a services agreement.

In any case, for the proper designation of an agreement as an employment contract or a work contract or an independent services agreement, such designation being primarily under court’s jurisdiction, the actual conditions of performance of the work are investigated irrespective of the legal designation given to it by the parties.

Given that, as mentioned, the provision in question forms part of a set of provisions of an exceptional nature, its interpretation as regards the contracts falling within its scope must be restrictive, so as to preclude its application where the facts do not clearly indicate the existence of a work contract. Therefore, the law practitioner should interpret the work contract closely, in order to minimize the agreements covered by this provision. An extensive interpretation of the “work contract” would pose significant trade barriers, excessively restricting the entrepreneurial freedom.

  1. The contractor’s obligation to disclose its labor cost to the contracting entity/employer and its severe impact on entrepreneurship:

The new provision, in addition to the liability established for the contracting entity in breach of the principle of relativity of obligations, also implies strict obligations for the contractor. In particular, it obliges the contractor to “disclose” to the contracting entity/employer its total labor cost (wages, insurance contributions) required to achieve the project, since it requires the contractor to provide the employer with monthly proof of payment of the wages and contributions paid to his/her employees. It is obvious that, in addition to the bureaucratic procedure that this provision entails for the contractor, the contracting entity may easily calculate the profit of the contractor, thus limiting the latter’s negotiating power and restricting the freedom of trade.

iii. Conclusions

In the light of the foregoing, it is readily apparent that the new provision is in many cases problematic and incompatible with the principle of the relativity of obligations while distorting the concept of work contract as defined in civil law. In addition, this provision seems to offend the core of the constitutionally regulated entrepreneurial freedom, seriously undermining the free economy and entrepreneurship.

But apart from the key theoretical issues that arise, the implementation of the provision in practice should also lead to the discouragement of entrepreneurial activity and consequently of employment, thus leading to results contrary to the original will and the protective purpose of the legislator, and ultimately turning out to be to the detriment of the employees’ interests.

[1]See Article 479 CC: In case of a transfer of a group of property or business, the acquirer is jointly liable with the transferor vis-à-vis the lenders of the enterprise, but up to the value of the transferred assets for the debts belonging to the property or business; and

Article 702 CC: In case of a work contract consisting in the construction of a building project or other immovable property, the employer may be required to pay the salary to the employees employed by the contractor. However, here too, the employer’s obligation is limited, i.e. up to the amount owed to the contractor.

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