Select Committee on Education and Employment Appendices to the Minutes of Evidence


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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