Chamber’s Proposals in Defence of Law-Abiding Construction Companies

The Chamber of Commerce has submitted four amendment proposals for the draft act that places an obligation on the contractors of the construction sector to pay the salary of the employees of the sub-contractors if the sub-contractors have not paid to their employees.

According to the Working Conditions of Employees Posted to Estonia Act, a contracting entity is obliged to pay the salary of the employees of the sub-contractor if the sub-contractor uses employees posted to Estonia for building, repairs, maintenance, alterations or demolishing of buildings and does not pay their salaries. An employee posted to Estonia may request from the contracting entity payment of the salary to the extent of one minimum salary. The contracting entity is not obliged to pay the salary if they prove that they applied due diligence in their relations with the sub-contractor.

The Ministry of Social Affairs has drawn up Draft Amendment Act of the Employment Contracts Act according to which, this obligation is applicable, in addition to employees posted to Estonia, to all workers in the construction sector. This requirement arises from the European Union Directive. Therefore, it is not possible to prevent establishing this obligation, but we have submitted several proposals for amendments to the Ministry of Social Affairs so that the new obligation would be as clear as possible for the contracting entities, sub-contractors as well as employees of sub-contractors.

Law must clearly state who are subject to the new requirement
The draft act adds to the Employment Contracts Act the principle that if an employee is doing construction, repairs, maintenance, rebuilding or demolishing of buildings and the employer does not pay their salary, the salary will be paid by the person who contracted the sub-contracting from the employer of the employee.

In the Chamber’s opinion it is not clearly understandable who is meant by the ‘person who contracted the sub-contracting’. For example, it is unclear if the new requirement is applicable for all entities who contract construction works or only for main contractors who order sub-contracting. In the Chamber’s opinion, the Directive states that this requirement is only applicable for the contracts between main contractors and sub-contractors. Therefore, we made a proposal to use instead the ‘person who contracted sub-contracting’ the phrase ‘contractor who contracted direct sub-contracting’. In such case, it is excluded that the new obligation would be applicable for anyone who contracts construction works.

Definition of due diligence of decent entrepreneurs needs clarification
According to the draft act, contracting entities are not required to pay the salary of the employees of the sub-contractor if the contracting entity has observed the due diligence of a decent entrepreneur during the course of their daily economic activities and in the mutual relations with the sub-contractor. According to the explanatory memorandum, the due diligence of a decent entrepreneur means that board members are obliged to operate at any time according to the law, in the interests of the company they are managing and economically in the most reasonable manner from the point of view of that company.

In the Chamber’s opinion, such explanation is too general and does not give enough clarity for the contracting party or the employee of the sub-contractor, in which cases must the contracting entity pay, at least partially, the salary of the employees of the sub-contractor. For example, reading the explanation above, there may be a situation where a board member concludes a contract with a sub-contractor that is economically in a difficult situation, because it is economically the most reasonable thing to do, ad that even if the contracting entity should later partially pay the salaries of the employees of the sub-contractor. In such case, the board member has if performed their task of due diligence and the employees of the sub-contractor do not have the right to request payment of the salary from the contracting entity.

The Chamber of Commerce has made a proposal to clarify the definition of due diligence of a decent entrepreneur in the act. For example, the draft act could set out more clearly what should the contracting entity do in order for their due diligence obligation to be considered as performed.

Contracting entity should be able to request repayment of the salary paid to the sub-contractor’s employee
The draft act does not contain a provision that would give the contracting entity the right to request repayment of the salary paid to the employees of the sub-contractor from the sub-contractor or the employees if the employees have also received a salary from their employer. According to the explanatory memorandum, in such cases, the contracting entity shall have the right to request repayment of the salary from an employee of a sub-contractor under the provisions of unjust enrichment. Additionally, the explanatory memorandum sets out that functioning communication between the employer and the contracting entity will facilitate the prevention of cases of unjust enrichment.

We pointed out to the ministry that the communication between the sub-contractor and the contracting entity might not function if the sub-contractor has economic difficulties and is unable to perform their duties to the contracting entity or there is a dispute in terms of performance of the contract concluded between parties. Additionally, the sub-contractor might not be motivated to notify the contracting entity several months after the performance of the contract that the sub-contractor has paid the salaries to the employees. Therefore, there may be situations where the contracting entity does not find out that the employer has paid the salaries to their employees.

In order to prevent such problem, the Tax and Customs Board could notify the contracting entity when the contracting entity has the right to request repayment of the salary paid to the employees of the sub-contractor. Additionally, the draft act could, in such case give the contracting entity the chance to request repayment of the paid salary also from the sub-contractor.

Amendment should not have a retroactive effect
In the Chamber’s opinion, the amendments to the Employment Contracts Act included in the draft act could have a retroactive effect. For example, if the contracting entity and sub-contractor have concluded their contract before the amendment enters into force, the contracting entity might find it difficult to prove that they followed the due diligence obligation of a decent entrepreneur upon concluding the contract, and would not be able to avoid the obligation to pay the salary. The reason for it is that if the contracting entity concluded the contract before the amendment entered into force, they did not know that they have to collect evidence on the fact that they checked the sub-contractor’s background upon concluding the contract.

In order to prevent the draft act from having a retroactive impact, we made a proposal to the ministry to amend the wording of the draft act in the way that the amendment would be applicable only in the cases where the contracting entity and sub-contractor concluded their contract after the amendments entered into force.

The amendments planned with the draft act will enter into force 10 days after being published in Riigi Teataja, however, the date of entry into force is not known at the moment. Furthermore, it is not yet known, if and to what extent will the ministry take the Chamber’s proposals into account.

You can read the Draft Amendment Act of the Working Conditions of Employees Posted to Estonia Act and Employment Contracts Act prepared by the Ministry of Social Affairs HERE