EU Directive on minimum wage and collective bargaining: What lies ahead for employers?

 Germany fulfills the requirements regarding minimum wages, but not collective wage agreements.

EU Directive on minimum wage and collective bargaining: What lies ahead for employers?

In mid-May, the Bundestag had only just decided to raise the minimum wage to twelve euros per hour as of October when Brussels also released a related announcement. At the beginning of June, the European Council, Commission and Parliament agreed on a directive on appropriate minimum wages, which simultaneously aims to achieve collective bargaining coverage of more than 80 percent of employment contracts.

One of the three EU key targets is to reduce the number of people facing the risk of poverty and exclusion in the member states by 15 million by 2030. The new EU directive on appropriate minimum wages forms part of this context. However, there are serious doubts as to whether the new rules adopted by the EU member states and the European Parliament at the beginning of June will provide suitable instruments for this purpose.

No uniform minimum wages, but EU-wide standards for review and adjustment

The EU Minimum Wage Directive does not aim to achieve an EU-wide minimum wage, but rather to implement standards to increase the minimum wage within specific time intervals. The member states shall be required to create a procedural framework including clear criteria such as purchasing power, general wage level, wage growth rate and labor productivity development. In countries with a statutory minimum wage, such as Germany or France, the minimum wage should increase at least every two years. If a country has an automatic indexation mechanism, the process should take place every four years. The social partners must be involved in the process of setting and updating the statutory minimum wages.

The good news is that the directive will not initially have any consequences for German employers in terms of wage levels due to the increase to twelve euros from October, resulting in Germany having one of the highest minimum wages in the EU. However, it also stipulates better monitoring and enforcement of minimum wage protections.

The stated goal: 80 percent collective bargaining coverage

However, the new directive major implications concerning the autonomy of collective bargaining: Brussels regards collective bargaining as a key tool for setting wages. Consequently, the directive intends for the member states to strengthen the ability of social partners to engage in collective bargaining. In countries with collective bargaining coverage is below a threshold of 80 percent, national governments shall be required to prepare an action plan to promote collective bargaining. Currently, Germany has a collective bargaining coverage of 43 percent, only slightly more than half of the goal.

However, this raises the issue of whether Brussels is exceeding its competence here. Ultimately, collective bargaining autonomy is a pillar of the social market economy and is protected by both Art. 28 of the EU Charter of Fundamental Rights as well as the constitution and other national laws. There is a reason why the European Treaties rule out the responsibility of the EU for “wages” pursuant to Article 153 (5) TFEU.

Encouragement for Collective Agreement Compliance Act from Federal Minister of Labor, Hubertus Heil

In any case, the EU plans support the plans of the German Labor Minister, Hubertus Heil, to increase collective bargaining in Germany with the help of a Collective Agreement Compliance Act. This act will stipulate that public contracts shall only be awarded to companies which pay collectively agreed wages.

However, the timing for such new regulations is extremely unfavorable: German companies are already suffering the consequences of the steep increase in energy and raw material prices. Currently, the severity of the economic consequences of the war in Ukraine remains completely unclear. Instead of more restrictions, employers now need even greater flexibility. Collective bargaining is only attractive if provides a certain latitude which can be created through collective agreements with opening clauses and a modular structure. Interfering in the autonomy of the social partners is the wrong approach, particularly under the current circumstances. The resistance from Sweden and Denmark to the EU minimum wage directive is also evidence of this, even though the wage levels and collective bargaining coverage are very high in both countries. Sweden and Denmark’s employers’ associations and unions handle almost every labor-related aspect through collective bargaining, and governments refuse to tolerate interference from Brussels in their labor market policies.

No immediate effect

The EU Parliament and Council have yet to formally confirm the agreed compromise at the beginning of June. The EU countries will then have two years to transpose the directive into national law.

Given the recent minimum wage increase in Germany, the EU Minimum Wage Directive currently has no impact on employers as yet. It is still unclear how the new regulation will be exactly implemented. For example, Brussels does not have any means of enforcing the 80 percent collective bargaining coverage. Although it is true that high inflation is making money scarce, especially for low-income earners, prospects are also improving, especially for the low-skilled, the long-term unemployed or people with barriers to placement, especially when the economy is flourishing. As a consequence, both companies and people in the low-wage sector benefit from measures that improve competitiveness rather than further restricting it. Therefore, the end of the day, politically enforcing a high level of collective bargaining achieves little. Attractive collective agreements from the social partners are a more effective approach, as reflected by the practices in Denmark and Sweden.