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Liability for "LSD"

July 2017 - Real Estate & Property. Legal Developments by Dorda.

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On 1 January 2017 the Austrian Wage and Social Dumping Prevention Act (Lohn- und Sozialdumping-Bekämpfungsgesetz – abbreviated to "LSD-BG") came into effect. An enhanced liability regime for the principal shall reduce and ultimately eliminate the undercutting of wages, in particular in the construction sector. The last six months have shown increased awareness of potential liabilities by principals and workers.

The Wage and Social Dumping Prevention Act has national and international roots with provisions deriving from former Austrian legislation and from directive 2014/67/EU, in particular article 12 on the subcontracting liability. The following scenarios are covered by section 8-10 of the new Act:

  • Liability of the principal for wages of posted workers from non-EU countries (sec 8);
  • Liability of the principal for wages of posted or assigned workers for construction services (sec 9), mainly based on art 12 of the EU directive;
  • Liability of the contractor for wages of workers of the subcontractor from EU countries (sec 10).

All three provisions are mandatory and cannot be opted out. While section 8 and 10 had already been in effect in a similar form, section 9 is entirely new. Construction companies have been facing challenges with the new section 9 with case law about to develop in the next months. The following shall provide a brief summary of this liability and ideas on how to tackle the new issues in general contractor agreements in Austria.

  • Section 9 requires a tripartite relationship: (i) the principal agrees on services with (ii) the constructor who employs (iii) workers for the provision of the services.
  • The workers have the right to claim from the principal the wages as set out under Austrian laws, regulations or collective bargaining agreements (legally, the principal acts as surety provider with immediate recourse – BĂĽrger und Zahler).
  • The principal is only liable if they either knew or should have known about the undercutting of wages. While knowledge is likely to be the exception and hard to prove in court, the alternative may be easily triggered, especially if the price for the services is comparatively low (in particular compared to Austrian contractors). Courts, however, should be reluctant to apply section 9 too easily as this would put principals under massive constraints in negotiations forcing them to request more information before contracting and also increasing transaction costs.
  • Right of Recourse: If section 9 applies, the principal has the right to deduct any monies paid to the worker from the remuneration agreed on in the contracting agreement. If the remuneration has been fully paid, the principal can also reclaim the monies from the contractor.   
  • Procedures: Workers must approach the Office for Leave and Severance Payments of Construction Workers (Bauarbeiter-Urlaubs- und Abfertigungskasse) which decides by informal letter sent to the principal. If the principal refuses payment, the worker must file a lawsuit against the principal within nine months in order not to lose his claim.

Contracting agreements should contain clauses covering the potential liability under the Wage and Social Dumping Prevention Act, in particular on the question what the principal can do if a claim is asserted. In addition, agreements should cover the construction stage with continuing obligations of the contractors to regularly provide information on their workers on the site (name, address, social security number, etc). Such information allows the principal to act fast and eliminate risks immediately.

Principals and contractors are well-advised to address the new liability regime in their contractor agreements in order to reduce the risk of liability. Lengthy proceedings may otherwise be the consequence.

Author: Klaus Pfeiffer

Attorney / Expert on Real Estate and Construction Law at DORDA Attorneys at Law