Who is my employer,according to the Supreme Court of the Republic of Slovenia?

Abstract

A judgment of the Supreme Court of the Republic of Slovenia deals with a case that illustrates the difficulties of identifying the de facto employer in subcontracting arrangements - which has also become an issue in several EU-level disputes.

This commentary considers whether an individual other than the contractual employer can be recognised as an employer, drawing from the judgment of the Supreme Court of the Republic of Slovenia, Pdp 366/2021, issued on 20 December 2022. Addressing this query, the Labour and Social Division of the Supreme Court of the Republic of Slovenia (LSD) provided insights, in a five-member chamber, during the proceedings of an extraordinary legal remedy. The LSD's deliberations included the exploration of the concept of the concealed employment relationship and the identification of an employment relationship concerning the abuse of rights.

1. Background of the dispute

The applicant served as a full-time harbour transport worker, committing to a 40-hour workweek under an employment contract with the first defendant from 1 August 2017 until 24 December 2019. Notably, despite the first defendant not being the actual provider of the harbour transport services to which the worker was assigned, it redirected the worker to the third defendant, the actual service provider. A service contract existed between the first and third defendants, outlining the referral arrangement according to which the first defendant directed the worker to the third defendant. Consequently, the worker became an integral part of the work processes of the third defendant, operating under its direction and supervision, commonly referred to as the ‘directive authority of the employer.’

The seconded employee was working under worse conditions compared to those employed directly by the third defendant. For example, he was paid less for the work he did and had less favourable working hours. Ultimately, when the third defendant terminated its business relationship with the first defendant, the latter terminated the worker's employment contract for business reasons.

2. Proceedings at national courts

The worker initiated legal proceedings before the Labour and Social Court, seeking a declaration affirming the existence of an employment relationship and the acknowledgement of all associated rights. These rights encompassed various aspects such as remuneration, specifically the disparity in salary he would have received had he been directly employed by the third defendant, a proportionate share of holiday allowances, and the obligation for the payment of contributions, taxes, among other entitlements. In the initial trial, the Court determined that there existed a concealed employment relationship with the third defendant. Subsequently, the third defendant filed an appeal against this judgment.

Upon appeal, the Court of second instance held that there was no employment relationship between the worker and the third defendant. Dissatisfied with this decision, the plaintiff pursued an extraordinary legal remedy against the ruling of the Court of second instance. The LSD was tasked with adjudicating on the question of whether the plaintiff could legitimately assert the existence of an employment relationship and the associated rights with the third defendant, notwithstanding the fact that he had been referred to work for the third defendant by the first defendant.

The LSD sought to ascertain whether the interaction between the first and third defendants in this case truly constituted a mere provision of services based on civil contracts or if it potentially involved an illicit form of employment relationship. The central concern was whether the two defendants had potentially circumvented legal regulations by disguising an employment relationship through ostensibly permissible combinations of civil contracts. This strategy, if employed, could have been aimed at maximising their profits while undermining the rights of the employee. Additionally, such an approach could make it more challenging for the employee to secure employment protection. The LSD aimed to discern whether there was a legitimate provision of services or if there existed a deliberate attempt to manipulate legal structures to the detriment of the employee's rights.

Recognising the vulnerability of the worker as the weaker party in an employment relationship, the Recommendation No. 198 concerning the Employment Relationship (adopted by the International Labour Organization in 2006) emphasises the need for protection. It aims to thwart contractual arrangements that could potentially strip the worker of their rights and protections. In the case under consideration, the LSD determined that the first and third defendants were operating under civil contracts that were legally sound but, in practice, served as a means to evade employer obligations. This evasion resulted in depriving the worker of rightful entitlements and protections, highlighting a misalignment between the formal legality of the contracts and their practical effects on the worker's rights.

The business model under scrutiny in this case is an example of what is referred to as the externalisation of the employment relationship. Within this model, workers are outsourced to an external contractor (the third defendant), who functions as the de facto employer and holds decisive influence over the external contractors serving as formal employers (the first defendant). The primary objective of such a business cooperation is to generate profits for the participating companies.

The dynamics of the business relationship between the first and third defendants clearly indicate that the third defendant wielded substantial influence over the first defendant. Notably, the third defendant stood as the exclusive business partner of the first defendant, establishing a situation where the first defendant was entirely dependent on the third defendant. This dependency eventually led to the termination of the plaintiff's employment contract by the first defendant, citing business reasons, when the third defendant severed its business ties with the first defendant.

During his employment, the plaintiff executed tasks integral to the work processes of the third defendant, as the first defendant did not engage in harbour transport work and lacked the capacity to incorporate him into its work processes. The plaintiff conducted his work exclusively on the premises of the third defendant, using the latter's work equipment, following its instructions and supervision. Furthermore, the third defendant provided specific training to the worker and ensured his safety at the workplace. There was a practical and substantial connection between the plaintiff and the third defendant.

According to both national and international law, the autonomy of contractual parties is not absolute; it is restricted to safeguard the interests of the more vulnerable party, which, in the context of employment relationships, is the employee. Civil law provisions come into play as subsidiary regulations in matters pertaining to employment contracts. Additionally, national legislation, specifically the Employment Relationships Act (referred to as ERA), expressly stipulates that work cannot be conducted under civil contracts when the essential elements of an employment relationship are present (Article 13 of ERA).

The cornerstone principles governing contractual relationships are the principles of good faith and the prohibition of the abuse of rights. Consequently, while the first and third defendants may have entered into civil contracts with each other, these agreements should not have resulted in the exploitation of the employee's rights, which was evidently the case here. By resorting to ostensibly lawful contracts, the first and third defendants circumvented legal provisions and perpetrated an abuse of the worker's rights. This underscores the imperative to uphold the principles of fairness and to prevent the misuse of legal structures in employment arrangements.

Based on these findings, the LSD reached the conclusion that, despite the formal employment relationship between the worker and the first defendant (as evidenced by their employment contract), the worker was, in practice, in a de facto employment relationship with the third defendant. The LSD asserted that the true employer was the third defendant, not the contractual employer as formally stated.

The LSD determined that the worker was engaged in a disguised employment relationship with the third defendant, emphasising the incongruence between the formal contractual arrangement and the actual working dynamics. This recognition underscores the significance of the true substance of the employment relationship, as opposed to its mere formal characterisation.

3. De facto employer in EU level case law

A comparable decision was rendered by the Court of Justice of the European Union (the Court) in the Dutch case C-242/09 Albron Catering BV v FNV Bondgenoten and John Roest within the framework of preliminary rulings. The Court's interpretation focused on Directive 2001/23/EC dated 12 March 2001, which concerns the harmonisation of laws among Member States regarding the protection of employees’ rights in cases of transfers of undertakings, businesses, or parts thereof (Directive 2011/23 EC). The central question was whether an undertaking not belonging to a group could be considered a ‘transferor’ under Article 2(1)(a) of Directive 2011/23 EC when workers were referred to it by another undertaking within the group.

The Court emphasised that the existence of an employment relationship is not solely determined by a contractual arrangement between parties. Even though the workers had contracts of employment solely with the undertaking that was part of the concern, not with the non-group undertaking to which they had been referred and worked permanently, the Court ruled that an employment relationship could be established without a direct contractual relationship.

The non-group company was recognised as a transferor under Directive 2011/23 EC, illustrating that EU law prioritises the provision of adequate protection for workers over the presence of a contractual link. The Court clarified that the essence of EU law does not require the existence of a mandatory contractual connection for workers to enjoy necessary protection. The decisive criterion lies in the factual situation, and the Court emphasised the application of the general principle of legal certainty and the consequent protection of workers’ rights based on the factual reality rather than formal contractual designations.

4. Aftermath and outlook

In the case of Luka Koper, the Court recognised the problem and the abuse of workers’ rights and agreed with the ruling of the Supreme Court of the Republic of Slovenia that workers must be provided with adequate protection. The effects of this judgment have been very positive. Not only did Luka Koper employ the plaintiff in this case on a regular basis on the basis of an employment contract and pay him all the necessary wage and contribution differentials, but the judgment in Pdp 366/2021 of 20 December 2022 had more far-reaching effects. In fact, Luka Koper started to rehire most of the workers, i.e., most of those who had previously worked through the business model at issue, in order to ensure that the rights of all workers were adequately protected.

The controversial business model involving the externalisation of the employment relationship became particularly relevant after the major financial and economic crisis that hit Europe in 2008. Previously, such business cooperation practices, which in reality disguised the employment relationship, were less common. Historically, Slovenia has not regulated the problematic behaviour of employers. It has only regulated in respect of agency workers, in situations where an employer who, in accordance with the labour market regulations, carries out the activity of providing work to workers, sends the workers to another employer (the employer providing the work), where the seconded workers have the same rights as workers who are regularly employed by the other employer.

It would certainly be useful if Slovenian legislation extended the scope of protection to all workers and not only (as is currently the case) to agency workers; only in this way would all workers receive adequate protection of their rights. There are ongoing proceedings before national courts in which Sava Turizem d.d., the largest Slovenian tourist company (more than 90% of which is state-owned), which owns a large number of hotels in well-known Slovenian tourist destinations (e.g., Portorož, Bled, Radenci, etc.), is facing allegations of violations of the rights of workers, more specifically, of chambermaids and cleaners. Sava Turizem is the owner of the Bernardin Hotels in Portorož, where workers have been the most vocal and public about violations of their rights. Sava Turizem has outsourced the cleaning services in some of its hotels. ¹ Cleaners who should be employed by Sava Turizem do their work through external contractors hired by Sava Turizem, e.g., Aktiva d.o.o., Samsic d.o.o.. Sava Turizem is supposed to have around 300 maids for external cleaning services, of whom only around 40 are regularly employed at the Bernardin Hotels site, and these are also expected to be outsourced soon. ² In the hotel business, chambermaids and cleaners are essential to the business, and so the company's practice of outsourcing is not appropriate. The company cannot violate workers’ rights and fail to provide them with adequate protection simply by seeking the lowest prices for the services. The company has been outsourcing its cleaning services for ten years, as this model is considered to be less risky for the company than employing workers, given the market situation. ³

The victims of such unacceptable practices are very often foreign workers or less educated workers who are not empowered enough (most of them are less educated; some of them are not proficient in the language; they do not know their rights, etc.) to come forward and exercise their rights.

Outsourcing is a common business model in Slovenia, particularly in the public sector, as we can see from case of Sava Turizem. This is particularly problematic, as it is the state that should be setting an example to others that the law must be respected and that the workers must be provided with adequate labour rights and social security. If there is a regular need for work, workers should be employed on the basis of a regular employment contract.