Liability for “LSD”

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 – Bürger 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

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