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Blocking the “Cyprus route”: notes on the AFMB case and on further prospects for the regulation of labour intermediaries

Andrea Iossa – FORTE Postdoc Fellow at the Faculty of Law at Lund University

1. On July 16th, the Court of Justice of the EU (hereafter, the Court) issued a ruling that has the potential to revolutionise labour law in Europe and beyond. As sensationalist as this might sound, it is clear that the ruling in the case AFMB contains elements that, if extrapolated from the context of the dispute in question, could be of help to give grounds for a re-regulation of the de-regulated and often opaque sphere that currently is provision of labour. As also suggested by the Advocate General Pikamäe in his opinion, the case indicates an approach to re-think the employment relationship «that takes due account of the reality of workers in the single market and the complexity of working relationships today»(para. 40). I will come back to this aspect later (see section 3). The ruling deals also with the question of abuse of law in EU law. This aspect of the ruling will certainly have significant relevance in the discussion on regulatory competition in the EU (see Costamagna). However, this commentary only touches upon this issue as a way to discuss the possible implications from a labour law perspective (see section 4; further on abuse of law in EU law, see, inter alia, Adinolfi, ‘La nozione di “abuso di diritto” nell’ordinamento dell’Unione Europea, RDI, 2012, 329-351; Kamanabrou). On a more immediate take, the ruling might have the effect of blocking the well-known “Cyprus route”, which already in 2016 the European Trade Union Confederation (ETUC) denounced as being a favourite route for letterbox companies in the road transport sector to circumvent social security and labour legislation. This aspect will also be dealt with more extensively later (see section 5). But first let us take a look at the dispute and the decision of the Court.

2. The case originates from a reference for preliminary ruling from the Dutch Higher Social Security and Civil Service Court in a dispute between AFMB Ltd, a company established in Cyprus, and the Dutch Board of Management of the Social Insurance Bank (Svb). The dispute concerned the payment of social security contributions for the international lorry drivers employed by AFMB and operating in the Netherlands under fleet management agreements that AFMB concluded with locally based transport undertakings for the management of heavy goods vehicles. AFMB demanded the Svb to be exempted from paying social security contributions in the Netherlands, since its employees were employed as international lorry drivers with a Cypriot employment contract. The Svb rejected the application and instead ruled that Dutch social security legislation was applicable, because the lorry drivers, albeit employed under Cypriot labour law, resided and operated in the Netherlands. Therefore, the dispute is mainly around the application of Regulation (EEC) No 1408/71 on the application of social security schemes to employed persons and their families moving within the Community and Regulation (EC) No 883/2004 on the coordination of social security systems (hereafter, the Regulations), in so far as they regulate situations in which a worker normally (and not as a posted worker) pursues an activity as an employed (or self-employed) person in two or more Member States (as often is the case for international lorry drivers). The two Regulations state that, in those cases, the worker shall be subject only to one social security scheme, which they consistently identify in the one of the two Member State in which the employer company is registered or has its place of business.

In this regard, the referring court notes that, before being employed by AFMB, the international lorry drivers concerned had never lived nor worked in Cyprus and some of them were even employees of those undertaking with which AFMB has currently fleet management agreements. Furthermore, the referring court mentions that, during the time of their employment with AFMB, the lorry drivers continued to live in the Netherlands and worked in two or more EU Member States, or European Free Trade Association (EFTA) States, but without  carrying out a substantial part of their activities in the Netherlands, as it would be required by the mentioned Regulations to make the law of the state of residence of the workers applicable. Eventually, the referring court formulates its questions to the Court of Justice as to demand which company had to be deemed as the employer for the determination of the applicable social security legislation – the Cyprus based AFMB company, which had formally concluded employment contracts with the lorry drivers and which paid their salaries and contributions by agreement with the operating companies; or these latter Netherlands based transport undertakings, which «recruited the person concerned, to which the person concerned is in fact fully available for an indefinite period, which exercises actual authority over the person concerned and which actually bears the wage costs»” (para. 31). Thus, a dispute concerning the identification of the applicable social security scheme became a dispute over the identification of the employer in cross-border provision of labour.

From the ruling (as well as from the Advocate General’s Opinion), it emerges that the controversy concerns the lack of definition of the concept of employer in the two Regulation. They provide guidance for the resolution of conflict-of-law situations and have their objectives in facilitating free movement of persons (employees and self-employed) by ensuring that all workers moving across Member States are covered by one social security scheme and, at the same time, avoiding the application of more than one Member State’s legislation, which would make free movement less advantageous. However, the Court notes, those Regulations do not clarify how to determine who the employer is, which is crucial for identifying the applicable law in situations like those at stake; nor do they make any reference to national legislation or practice in that regard. As noted by the Advocate General (para. 39), and upheld by the Court (para. 69), the differences between the legislations of the Member States undermine the application of the two Regulations, potentially altering the uniform treatment of similar conflict of law situations. According to the Court, it follows the need for an autonomous and uniform interpretation of the concept of employer throughout the EU.

In that regard, the Court is particularly straightforward; it affirms that «as a general rule, the relationship between an “employer” and the “personnel” employed implies the existence of a hierarchical relationship» (para. 53). In its essence, such a statement does not come as a revelation. The notion of subordination, which is at the basis of the legal recognition of the employment relationship, is built upon the power of control of the employer over the employee. In this sense, already in 1954, the labour law scholar Otto Kahn-Freund described the workplace as ‘an absolute monarchy’ in need for democratisation by means of employment protection and, above all, unionisation and collective bargaining (Kahn-Freund, ‘Legal Framework’, in Flanders, Allan & Clegg, Hugh (eds), The System of Industrial Relations in Great Britain (1954), 42-127). Others authoritative voices in labour law scholarship observed that the relation of subordination in employment is expressed by the power of the employer to decide what, how and when the workers have to perform their labour (Veneziani, ‘The Evolution of the Contract of Employment’, in Hepple (ed), The Making of Labour Law in Europe: A Comparative Study of Nine Countries Up to 1945 (1986), 31-72). Thus, it is generally established that the employment relation is a hierarchical relationship, whose hierarchy is even recognised by the law, which mitigates it in order to protect the weaker party, but also codifies it as the legal form of employment. What appears as potentially revolutionary in the Court’s recognition of the core of employment relations lies in the context in which this acknowledgement occurs: a situation in which the company that is formally – by means of the employment contract – the employer of a group of workers, is different from the company that actually ‘employs’ those workers.

In order to detect who the employer is between these two entities, the Court makes use of criteria already defined in the Manpower case (1970) concerning a temporary work agency in an ante litteram case of cross-border posting of workers for the provision of labour. There, the Court stated that the determination of the employment relationship between the worker and the employer would be given by ascertaining which undertaking would be the one paying the wage to the workers and having the ultimate power to dismiss them on grounds of faults committed in the performance, even when this would be due to the premises of another company (Manpower, para. 18). Following this, in AFMB, the Court affirms that, regardless of the formalistic indications that may derive from the employment contract, in order to detect the real employer «it is necessary to identify the entity which actually exercises authority over the worker, which bears, in reality, the relevant wage costs, and which has the actual power to dismiss that worker» (para. 61). On the basis of the information received by the referring court, the Court finds that, albeit formally employed by the Cyprus based AFMB, in reality the costs of the lorry drivers’ wages were borne by the Netherlands based transport undertakings, which paid a commission to AFMB to manage the drivers’ wages. The transport undertakings also appeared as bearing the possibility to decide whether or not a lorry driver would be required, and, therefore, had the ultimate power of dismissal. A further note is added by the Court: according to the findings of the referring court, for those lorry drivers previously employed by the transport undertakings, «little or nothing has changed», meaning that they still are «entirely at the disposal of and subject to the authority of those undertakings» (para. 78). In conclusion, the Court finds that the employers of those lorry drivers are the transport undertakings, which have the “actual authority” over them (para. 75).

3. As I have discussed elsewhere, the question of the employer’s authority (and of its transformation) lies at the core of the current debate concerning flexibilisation of employment and the gig economy. While the rhetoric of platform economy calls for the employer’s figure to disappear, the facts show a sharpening of authoritarian labour relations (see Woods, Despotism on Demand, 2020). Courts’ decisions around the world and scholarly pieces argues that, despite the alleged autonomy of gig workers claimed by digital platforms, they are quite extensively exposed to the authority of those companies (Pietrogiovanni; Cherry) – for instance by requiring the workers to accepting customers, by deciding the routes to be followed when driving, by monitoring them via digital devices, by managing the money transfers between the customers and the workers, and by unilaterally deciding to “log them off” (that is, to dismiss them) in case of misbehaviour (in this regard, see also the Case Elite Taxi v Uber, especially para. 39). Besides the most known examples of services like passenger rides and food delivery, the world of digital companies is variegated and includes platforms that recruit workers for other companies, as for instance in the case of freelancers finding gigs for companies on online platforms. In such a case, the worker is in principle considered as self-employed, since neither the digital platform nor the company that benefits from the performance of the worker can legally be identified as the employer. It has been therefore argued that those types of platforms should be treated and regulated as private employment agencies.

Such an evolution of employment relations brings about the blurring of the legally identifiable employment relationship and the dissolution of the workplace. In this context, the question of who the actual employer is, remains topical. The AFMB ruling offers new insights for this debate. Who has the authority to decide when the worker is not needed anymore, i.e. when they can be dismissed? Who actually pays the workers’ wage? It would be hard to argue that a digital platform (or a recruitment agency) that recruits a worker for a third company is the one that pays the wage, since, as in the AFMB case, it would only manage the money that the third company would pay for the service of receiving temporary labour.

The logic of temporary labour is at the core of the business that recruitment agencies, temporary work agencies, staffing companies and other labour intermediaries conduct. The idea that a company is entitled to use labour as long as needed but not longer, is behind the different (legal) processes that contributed to the flexibilisation of the labour market. In this evolution, the ‘employer’ of labour is transformed into a ‘consumer’ of labour. The AFMB ruling seems to go in the opposite direction, by instead reaffirming that the company that uses labour is also the company that legally ‘employs’ those workers, with all the ensuing obligations, which in the case in question concerned social security contributions, but they may also extend to labour and employment law. It might be possible to argue, for instance, that the argument of the Court could be used to advocate for a uniform regulation of labour in supply chains and umbrella companies – and all other various multifaceted and complex organisations in which the real employer is hard to detect due to the fragmentation of the employment regimes under which different workers are employed in the same economic production.

4. In this respect, the AFMB case emphasises the effect of the use of outsourcing and subcontracting practices in provision of labour. The fragmentation of working conditions and the circumvention of labour market regulation are well known consequences of the practices of outsourcing and subcontracting. AFMB highlights a further dimension: outsourcing and subcontracting of labour provision via delocalisation. From the facts of the case it emerges that the transport companies located in the Netherlands had “delocalised” labour by simply outsourcing the employment contracts to a company located in Cyprus (i.e. AFMB). Subcontracting labour recruitment across borders is not a new practice. It occurs in sectors like construction, agriculture, logistics, civil aviation for the recruitment of cabin crew and pilots as well as in road haulage, as the AFMB case itself shows. EU internal market law does not prevent subcontracting and outsourcing operations. Through the regulatory framework on economic freedoms of establishment and to provide service and posting of workers, it contributes, instead, to the construction of “labour supply chains” – cross-border assemblages in which labour constitutes the object of complex, often formalised, structures of transactions between companies that move across national borders. What appears interesting in the AFMB ruling is that the Court points at a deficiency of the regulatory framework of the EU internal market: the possibility to undermine the regulation of provision of labour when it occurs across regimes marked by regulatory differentials.

In a passage of the ruling, the Court emphasises that the objective of the two Regulations in question would be undermined if it were easy «for employers to be able to resort to purely artificial arrangements in order to exploit the EU legislation with the sole aim of obtaining an advantage from the differences that exist between the national rules» (para 69). The Court goes even further by affirming that Vsuch exploitation of that legislation would be likely to have a “race to the bottom” effect on the social security systems of the Member States and perhaps, ultimately, reduce the level of protection offered by those systems» (para 69). These observations suggest that the case would be a further episode in the saga concerning regulatory competition in the EU (cf. Costamagna). The Court decides not to explore this path at length; but leaves us with the idea to share what the Advocate General suggests in his opinion. The Advocate General first recognises that the arrangement through which AFMB appears as the employer does not reflect the reality and the criteria of the employment relationship. Second, he observes that that arrangement was put in place in order to circumvent the application of Netherlands social security scheme so that the different companies involved could maximise profits through reducing wage costs. Consequently, the Advocate General concludes that the legal arrangement at stake would constitute an abuse of EU law (para. 82).

It might be interesting to spend some words reflecting on the observations of the Court from a labour law perspective. The notion of a “race to the bottom” is usually used in relation with the question of social dumping to indicate the risk that the possibility for companies to strategically operate across regimes with labour cost differentials would lead to national social and labour standards to decrease. In the AFMB ruling, the Court seems to share this view. This is certainly an interesting development, since it appears as a consolidated interpretation that the cost differentials between countries would actually be incentives to the exercise of cross-border economic freedoms. In famous cases like Viking Line (para. 72) and Laval (para. 99), and in more recent ones like Bundesdruckerei (para. 34), the wage cost differentials between Member States were indicated as elements that make the exercise of economic freedoms attractive. Certainly, the differentials the Court refers to in AFMB concern national rules on the legal recognition of the employer rather than socio-economic conditions or wages between countries. Yet if the aim should be avoiding, as the Court affirms, to «reduce the level of protection offered by [national social security] systems», it might be argued that the same effect – a deterioration of labour standards – derives from other types of cross-border company arrangements and operations that exploit cross-border wage differentials and, therefore, social dumping.

5. By combing this line of argument with the criteria defined by the Court to identify the employer in cross-border situations, the AFMB case gives arguments to contribute to the debate concerning the operations of letterbox companies in the EU, especially in the road transport sector. A recently and rapidly developed “core business” of these companies in the EU is the cross-border provision of labour – a service operated by taking advantage of cross-border cost differentials regarding as for labour and social standards. The proliferation of these companies in the road haulage sector is a problem that national and European trade unions have addressed in recent years. In the summer of 2017, the Belgian transport union AVBB-BTB/FGTB-UBT launched a campaign against IKEA for subcontracting their transportation services to companies registered in low wage countries in Eastern Europe. The European Transport Workers’ Federation (ETF) backed up the initiatives by launching the campaign Fair Transport Europe, aimed at fighting against the effect of social dumping on working conditions for lorry drivers. In many of the cases denounced by trade unions, lorry drivers contracted by company located in Eastern European countries and operating on the roads of Germany, Belgium and the Netherlands, would be paid salaries far below the minimum wage of locally hired drivers and have limited access to social insurance and employment benefits as well as they would often spend weeks on end living out of their trucks and have almost no access to basic sanitary services. This might have not been the case for the lorry drivers formally employed by AFMB, as they all permanently lived in and operated from the Netherlands. Yet, the case shows the different arrangements of subcontracting and the consequences that the resort to letterbox companies in the road transport sector might have on fair competition and working conditions. These aspects are at the core of the Mobility Package – a set of directives and regulations revising the rules on international road transport and cabotage in the EU. As divisive as they might be, the rules set in the Mobility Package, provisionally agreed at EU level in December 2019 and later confirmed in February 2020 by the Council, shows the need for addressing social dumping in road transport. A further help in this regard could come by the establishment in 2019 of the European Labour Authority (ELA), which has the mandate to «assist Member States and the Commission in their effective application and enforcement of Union law related to labour mobility across the Union and the coordination of social security systems within the Union» (Art. 1.2 of Regulation (EU) 2019/1149). Yet the work of the ELA would probably fall short in contributing to the harmonisation of rules across the EU Member States. The AFMB ruling, instead, seems to suggest that, in order to avoid a race to the bottom and the deterioration of working conditions, the route to follow is to ensure common rules. Starting from tackling those practices and company operations that take advantages of the unevenness across Member States’ labour law and social security regimes, the way to follow would be to re-regulate provision of labour, possibly reducing the impact of outsourcing and subcontracting of labour recruitment. Ultimately, this will reaffirm one of the fundamental principles set by the 1919 Constitution of the International Labour Organisation – that Labour is not a commodity.

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Andrea Iossa

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