APPENDIX 30
Memorandum from Richard MacFarlane Research
and Project Development (JG 44)
LOCAL LABOUR IN CONSTRUCTION
THE LEGAL POSITION OF PUBLIC BODIES
AN INTERPRETATION
Note: This is an Interpretation of
the current situation, not a legal opinion. Readers should therefore
seek legal advice (as they think fit) before taking action.
1. THE TREATY
OF ROME
& EC PROCUREMENT DIRECTIVES1.1 Background
It is broadly accepted that the Treaty of Rome
and the EC Works Procurement Directives do have something to say
on the way that either jobs or construction contracts are allocated.
However, since there has been little case law, the interpretation
of the impact of these instruments has been difficult. This has
often led to reticence to get involved in any procedures aimed
at ensuring some degree of "local labour in construction",
on the part of the public bodies covered by Treaty/Directives.
A summary of the position is set out in Public
Procurement (1992). A careful reading of this document indicates
considerable scope for targeting the jobs impact of public sector
construction work, provided that a suitable procedure is adopted.
This Interpretation of the above document, seeks
to present a summary of the position for consideration by public
bodies that wish to adopt a "local labour approach".
However, this is not a "legal opinion" and public bodies
should seek their own advice on this interpretation.
1.2 Application
The Treaty of Rome applies to each "body
governed by public law". Simply, this covers non-commercial
organisations that are established to meet general needs, and
where over 50 per cent of the supervisory board or 50 per cent
of the funding comes from a "body governed by public law".
(See Macfarlane p 73). This scope includes all State bodies, plus
those quango's and quasi-state bodies that are formally independent
but are caught by the 50 per cent rules. Housing Action Trusts
are therefore covered, but Housing Associations are generally
not covered.
The EC Procurement Directives have a specific
"threshold" value of contract before they are applicable.
For works contracts this is 5 million ecu's (about £3.8 million).
For service contracts it is 200,000 ecu's (about £158,000).
The threshold applies to all contracts on one development, or
several developments on one site. So one can't artificially subdivide
a project into different contracts to keep them below the threshold
level.
1.3 The Status of the Treaty/Directives
The first point to note is that there is no
blanket prohibition on "local labour clauses" established
by the EC Treaty/Directives. Member States are free to adopt whatever
rules they like
". . . provided that they comply with all
the relevant provisions of the Community law, in particular the
principles laid down in the Treaty in regard to the right of establishment
and the freedom to provide services." (paragraph 7 p C3/9).
The above position is compatible with that set
out in a discussion document entitled The Beentjes Doctrine:
possibilities and limits issued by the EC Advisory Committee
for Public Procurement on 9 February 1989. This states:
". . . procuring entities are also free,
under Community law, to pursue the goal of reducing long-term
unemployment, provided they respect the provisions of the directives
and the constraints of the Treaty." (11 on p 5).
So what we have to establish is a "local
labour" process that:
— complies with the requirements of
the EC Works Procurement Directives;
— complies with the spirit and case-law
of the Treaty, especially in not discriminating, directly or indirectly,
against non-UK firms in the tendering process.
1.4 Non-Commercial Considerations
Public Procurement makes it clear that
both the engagement of long-term unemployed and other social matters
can be included as contract conditions (provided that the contract
is awarded in a non-discriminatory way). This is again consistent
with the position set out in the EC Discussion document:
". . . other categories of unemployment
. . . almost certainly would be considered by the Court to be
an equally legitimate concern. The same probably applies to a
broad range of social matters . . ." (12 on p 5).
It would appear from this that the range of
"local labour in construction" targets that are typically
used (including the employment of local skilled people in areas
of high unemployment, and the engagement of long-term unemployed,
youth trainees and local small firms), can properly be included
in a construction contract as "social matters".
1.5 The UK Government's View
The Treasury document quotes DoE Circular 16/90
as setting out the Government view. This states that:
". . . certain conditions, which had to
be distinguished from the verification of the contractors' aptitudes
and from the criteria for award, could be acceptable in awarding
contracts . . . provided they were capable of being fulfilled
by contractors from other Member States . . . (and are) compatible
with Community law . . . (and are) . . . mentioned in Contract
Notices in the Official Journal." (paragraph 1 p C3/11).
But it is clear that the Government considers
that asking questions about the likely composition of a prospective
contractor's workforce could imply an intention to discriminate
in favour of local firms (paragraph 6 p C3/11).
1.6 Satisfying the EC Treaty/Directives
The EC Discussion Document provides some indication
of how this "implied intention to discriminate" might
be avoided. It is, in the first place, quite clear that the engagement
of local labour cannot normally be considered as being relevant
in selecting "....the most economically advantageous tender."
(see 17 p.7) as required by Article 29(1). On the other hand it
was also accepted that a contractual condition requiring, for
example, long-term unemployed, was acceptable provided that it
did not "....form a part of the criteria applied by the purchasing
authority to decide to whom to award the contract....(but was)....simply
an obligation which the firm securing the contract would have
to accept" (see EC Discussion Document 14. p7).
So the principle is accepted, that "local
labour" clauses do not contravene the Treaty of Rome or EC
Procurement Directives, provided the contractors' responses to
these clauses is not taken into account when awarding the contract.
This is in line with the UK Government's view set out above, and
has been confirmed in a Draft Counsels Opinion which states that....
"....authorities are free to pursue "secondary
policies" such as the promotion of local labour, at least
where such policies are embodied in contract conditions, rather
than as criteria for the selection of contractors or the award
of contracts." (Notes p.8).
However, there is more indicative material set
out in the Discussion Document. In paragraphs 22-25 there is a
discussion of the circumstances in which a contracting authority
might successfully defend any claim that it's local labour clauses
discriminated against firms from outside the area. The principal
mechanism suggested is to require all contractors' to recruit
from ".... a local employment office...in a position to make
available suitably qualified staff . . ." (para. 24). This
defence would seem to be enhanced where only a proportion of the
labour force has to be recruited locally, where there are high
levels of local unemployment, and where EC structural funds are
being used (para. 25).
1.7 Contract Notices
Where there is an intention to include a "local
labour" clause in a contract covered by EC Works Directives
it must be applied in a way that complies with all the procedural
rules laid down by that Directive. It is therefore essential that:
— the intention to impose a "local
labour" clause in the contract must be included in the Contract
Notice; and
— a statement that the local labour
issues will not influence the selection of contractor;
must be included in any EC Official Journal
Advertisement (see Public Procurement para. 1 page C3/10).
This is a different point from that set out
by DoE Circular 21/89 "European Commission Procurement Directives—Advice
to Local Authorities on Public Supply and Works Contracts".
This advises LA's that they should not advise that they will be
seeking information about a contractors' workforce, and whether
they intend to recruit locally, since such an enquiry was deemed
liable to imply an intention to discriminate in favour of contractors'
who did intend to recruit locally. If a contracting process is
established which includes a contractual condition to recruit
locally, but does not discriminate against firms from any EC Member
State, then it is essential to advertise and make contractors
aware of the existence of the local recruitment requirements.
1.8 Who Can Make a Challenge under Community
Law?
It should be noted that a legal challenge can
only be made where there is an inter-state element to the claim.
This means that any contractor that is established in the UK (ie
a UK contractor or a foreign firm with a UK subsidiary) cannot
use the EC procurement Directives or the Treaty of Rome to challenge
any LLiC requirements or related tender procedures. (Counsel's
Notes).
1.9 Discrimination Against Workers
Most concern, in respect of the Treaty of Rome
requirements, has been focused on the potential discriminatory
effects of "local labour" clauses on the "equal
opportunity" rights of firms to compete for contracts in
any EC Member State. Less thought appears to have been given to
the potential infringement of the right of any worker to obtain
employment in any Member State.
The interpretation of the Beentjes doctrine
set out in the EC Discussion Document indicates that any local
labour arrangements would not be discriminatory if they required
the engagement of categories of worker that were not defined by
nationality; eg trainees, women, long-term unemployed etc. This
requirement could be satisfied by a contractor from any State
by recruiting from this category of labour from any part of the
EC. This is clearly problematic if the intention is to recruit
from the residents of a local area . . . although the reality
is that local people from these categories would be most likely
to get the jobs.
If a LLIC clause specifies a proportion of local
labour, this might be deemed indirect discrimination under the
Treaty of Rome. However, the Counsel has pointed out (p19/20)
that this discrimination would be likely to impact more on other
nationals than on foreign nationals. In an Irish case (Fearnon)
the principle appears to have been established that a State .
. . "is entitled to favour some of its nationals more favourably
than others; the fact that foreigners also fall into the category
of nationals treated less well is not sufficient for a finding
of discrimination." (Counsel's Notes p.21).
So the implication is that neither UK nationals
or foreigners could challenge a LLiC scheme in the European Court.
1.10 An Appropriate Tendering/Contract Process
The above interpretation of the Treaty of Rome
and EC Works Directives, and their impact on the right to establish
"local labour in construction schemes" establishes that:
— labour-force requirements can be
included as a contractual condition provided that the response
to this condition is not used in the selection of "the most
advantageous tender";
— the equality of opportunity afforded
to contractors from any EC Member State will be enhanced where
there is high local unemployment and a named source of labour
that can be used by any tendering firm;
— where a local labour requirement
exists, this must be included in any advertisement in the Official
Journal, together with a statement that this requirement will
not influence the choice of contractor;
— there is not a high likelihood of
a challenge being mounted, since this could only be made by a
foreign firm without a UK subsidiary who felt the arrangements
were discriminatory;
— requiring local labour may indirectly
contravene the Treaty of Rome in relation to individuals rights,
but since it affects other nationals as well as foreigners, the
grounds for a challenge in the European Court appear to be very
weak.
Essentially, what is required is a local labour
scheme that includes the following elements:
— a contractual condition on local
labour that applies to all contractors, and is noted in any Official
Journal advertisement;
— a named source of local labour that
is available to any contractor;
— a tendering process that ensures
that any specific offer on local labour, and the cost implications
of such offer, are not taken into account when undertaking any
tender appraisal and the decision to award the contract.
2. THE 1988 LOCAL
GOVERNMENT ACT2.1 The
Content of the Act
Section 17 of the Local Government Act 1988,
constrains Local Authorities who wish to ensure that contractors
whom they appoint, do recruit local residents. In essence, this
Act declares that Local Authorities (and other public bodies specifically
named in the Act) must undertake their functions in relation to
any proposed or existing contract "without reference to ........the
terms and conditions of employment by contractors of their workers,
or the composition of, the arrangements for promotion, transfer
or training of, or other opportunities offered to, their workforces."
[17(1) and 17(5a)].
The Act is very comprehensive. For example:
— under Clause 17(7) it appears that
you cannot require a contractor to use "non-commercial
matters" in the selection of suppliers and subcontractors;
— under Clause 19(10) a public authority
is deemed to have used non-commercial considerations if they
— ask a potential contractor questions
relating to a non-commercial matter;
— submit a draft tender or draft contract
containing non-commercial matters to a potential contractor.
The Act is quite specific about the bodies to
which it applies. From Schedule 2 we can see that these include
LA's, Urban Development Corporations, Passenger Transport Authorities,
and a number of other bodies. Section 19(6) of the Act extends
the application to a public authority that is carrying out relevant
functions for a LA under Section 101 of the 1972 Local Government
Act. Regulations under Part V of the 1989 Local Government and
Housing Act effectively extend (in England) the requirements of
the '88 Act to "LA controlled" and "LA influenced"
bodies.
There appears to be no legislation which would
make bodies which are not public authorities or controlled/influenced
bodies (eg community groups, businesses, Trusts, Housing Associations
etc.) but are in receipt of LA funding, subject to the '88 Act.
They would therefore appear to be non-constrained.
2.2 The Current Context
The '88 Act is obviously still applicable. However,
it seems to be increasingly at odds with the Government's urban
regeneration approach. For example:
— the current approach is fundamentally
about targeting the benefits of urban renewal at a specific, disadvantaged,
community;
— there are increasing attempts to
link Estate Action funding with targeted economic development
(eg, through Community Refurbishment Schemes).
It is also noted that in the Parliamentary debates
on the '88 Act pressure was placed on the Government to make an
exception for local labour clauses. This appeal was rejected,
apparently, because it was felt that these clauses were, in any
event, in contravention of the EC Procurement Directives. Current
thinking (as set out in 1 above) suggests that these need not
be the case.
This "more open" position is reflected
in the Note for City Challenge leaders prepared by the Department
of the Environment in May 1993. While this sets out some of the
constraints, it concludes that "It is for local authorities
to decide whether any individual proposal meets the legal requirements."
A similar document was released by the DoE to the Housing Action
Trusts, in 1993.
The above might indicate that the "heat"
generated by LA contract compliance activities in the early '1980's,
which resulted in the '88 Act, has now abated. There may now be
opportunities for low-risk, low profile, LLiC schemes of modest
scale.
2.3 A "Risk Analysis" Approach
The interpretation of the Act remains difficult
since there appear to have been no test cases. However, it is
difficult to find a permissible mechanism for specifying in the
tender/contract process that some element of local labour and/or
local subcontractors and suppliers should be used by the contractor.
A more fruitful approach may be to establish a tender/contract
process that provides:
— an equality of opportunity for all
potential contractors;
— a method of ensuring that the contract
is awarded on the basis of "commercial criteria" only:
if you can justify the award of the contract on these criteria
it is difficult to see what loss could be claimed because of a
LLiC clause.
With this approach the LA has to undertake a
risk analysis—asking:
— who is likely to take action—Clause
19(7) indicates that this is limited to
— people with a "sufficient interest"
in the matter, including the contractor and former potential contractors;
— any person who suffers loss or damage;
— what is the likely success of an
action (given the tender process adopted and any additional funding
provided);
— what are the damages that could be
incurred through a successful action—eg Clause 19(8) indicates
that for an unsuccessful tenderer the damages would be limited
to the tender-preparation costs.
3. SECTION 106
AGREEMENTS (PLANNING
OBLIGATIONS)
Local Authorities that have established area-wide
LLiC schemes have sometimes sought to maximise their effectiveness
by encouraging private sector developers to adopt LLiC. To formalise
this some have attached a commitment to local training and recruitment
to the development sites through their role as Planning Authority.
This has been achieved through negotiating a Planning Obligation
under Section 106 of the 1990 Town and Country Planning Act or
Section 50 of the 1972 Town and Country Planning Act (Scotland).
Such obligations are transferred with the title to the property.
Initial research indicates that for such an
obligation to be enforceable it would need to be underpinned by
a legitimate planning rationale, but since all such agreements
have to be entered into on a voluntary basis by the landowner/developer
it is possible to incorporate matters that were not justified
in this way. These matters may not be sustained if they are subsequently
challenged in Court or by referral to the Secretary of State,
but the evidence to date is that such a challenge is unlikely.
It is anticipated that a significant piece of
research will be undertaken (in 1999) on the use of section 106
Agreements in this way, especially since they can be used to target
a cross-section of end-user jobs in addition to construction jobs.
In the meantime LA precedents are known to exist.
Richard Macfarlane.
November 1998
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