Opinion of the Advocate-General



Opinion of the Advocate-General

1. The present case concerns derogations from freedom of movement for workers, authorised during the transitional period in respect of the Member States which acceded to the European Union in 2004 (the ‘new’ Member States), and the extent to which they may affect freedom of establishment, from which no such derogations are authorised.

2. Taking advantage of that transitional period, Austria has continued to subject almost all workers from ‘new’ Member States to the same legislation as workers from third countries. To prevent the legislation from being circumvented, all members of partnerships, and partners in limited liability companies with a participation of less than 25% (‘minor partners’), are presumed to be workers. Until they rebut that presumption, they cannot pursue their activity or register their partnerships or companies in Austria.

3. The Commission considers that, in applying that legislation to partners from ‘new’ Member States, Austria has encroached on freedom of establishment. The question therefore arises as to how far Member States can go to safeguard their permitted derogations from freedom of movement for workers.

I – Factual and legal background

4. As is well known, on 1 May 2004 the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia acceded to the European Union.

5. Article 24 of the Act of Accession authorises transitional measures detailed in several annexes, including derogations from freedom of movement for workers: for a period of five years after the date of accession, ‘older’ Member States are permitted to continue applying national measures regulating the access to their labour market of workers from ‘new’ Member States. (2) Many ‘older’ Member States, including Austria, have taken advantage of this transitional period. (3)

6. The Ausländerbeschäftigungsgesetz (Austrian law on the employment of foreigners, the ‘AuslBG’) regulates access to Austria’s labour market. (4) It is intended for workers from third countries, and in principle does not apply to Community workers. However, a transitional provision makes it applicable to workers from ‘new’ Member States, with the exception of Cyprus and Malta. (5)

7. The AuslBG defines ‘employment’ in order to determine who may constitute a worker and therefore fall within its scope. It begins by stating, in quite general terms, that employment is activity ‘within a work relationship’ or ‘in a quasi-employee relationship’. (6) It also cautions that, in assessing those relationships, ‘it is important to look at the true economic content and not the external appearance of the facts’. (7)

8. However, employment is presumed in a particular situation: members of a partnership and minor partners in a limited liability company are classified as workers if they perform activities for their partnership or company. Paragraph 2(4) of the AuslBG states:

‘… Employment [as defined above] exists in particular:

1. when a member of a partnership, with the purpose of achieving the objective of the partnership, or

2. a partner in a limited liability company with a participation of less than 25%

performs for that partnership or company activities which are typically performed within a work relationship.’

9. The objective of that presumption is, according to Austria, to combat the practice of circumventing the AuslBG by the creation of partnerships or companies. For example, Austria alleges that ‘many limited liability companies have been created with a large number of partners who in reality act as workers when performing their activities, since in respect of those activities they are under the authority of one partner – as a general rule Austrian – who benefits from a dominant influence by virtue of the company’s articles of association’.

10. To rebut such a presumption of employment, the partner must request the regional office of the Arbeitsmarktservice (‘labour market service’) to determine that he ‘personally exercises’ a ‘significant influence’ on the management of the partnership or company, the burden of proof falling on the partner. (8)

11. If the labour market service does not come to a decision within three months, the partner may pursue his activity. (9) It is assumed that the partner may also do so should the request be accepted sooner.

12. Conversely, a refusal bars the partner from carrying out his activity until he is granted access to the Austrian labour market as a worker, under the general conditions of the AuslBG. Indeed, a refusal even after the deadline has passed obliges the partner to cease his activity within one week. (10)

13. It has been alleged by the Commission, without being contested by Austria, that the presumption of employment further complicates the registration of partnerships and companies under Austrian law.

14. When a citizen of a ‘new’ Member State applies to register a partnership or company, Austrian authorities demand either the above determination by the labour market service or a certificate of exemption. To qualify for the latter the citizen will need to have carried out authorised work in Austria for at least five of the last eight years and be lawfully established – conditions which are rarely fulfilled. (11)

15. However, it emerged at the hearing that Austrian authorities in charge of registration have some discretion in applying the AuslBG. It appears that they do not always demand the above documents but concentrate on certain sectors, in particular the construction sector. As a result, the number of determinations of self-employed status by the labour market service seems to be low. (12)

II – Pre-litigation procedure

16. By letter of 16 March 2005, the Commission informed Austria that it considered that classifying members of partnerships and minor partners in limited liability companies as workers, in accordance with the AuslBG, led to a restriction of freedom of establishment under Article 43 EC. It invited Austria to submit observations within two months.

17. On 19 May 2005, Austria replied denying such a restriction of freedom of establishment. The classification as workers was intended to prevent circumvention of the AuslBG, a national measure allowed under the transitional derogation from freedom of movement for workers. Accordingly, it was justified and proportionate.

18. On 4 July 2006, the Commission issued a reasoned opinion rejecting the justification advanced by Austria. It gave Austria a two-month deadline to take the necessary measures to remove the alleged restriction on freedom of establishment.

19. In its response of 7 September 2006, Austria maintained its position that the restriction concerned freedom of movement for workers and was justified by the need to safeguard the proper functioning of the labour market.

20. The Commission thereupon brought the present action under Article 226 EC. Lithuania asked leave to intervene in support of the Commission.

21. The Commission thus asks the Court to ‘declare that, by requiring, for the registration of companies … on application by nationals of the new Member States of the EU other than Malta and Cyprus, a determination of their self-employed status by the employment market service or the production of a certificate of exemption, in which connection, for determining the self-employed status … a determination procedure is to be carried out during which … the self-employed activity may not be pursued, the Republic of Austria has infringed Article 43 EC’.

III – Assessment

22. Several aspects of the Austrian system are liable to raise issues of Community law: (a) it targets citizens from the ‘new’ Member States; (b) preventing them from registering their partnerships and companies; (c) prohibiting them from pursuing an activity; (d) as a consequence of their classification as workers; (e) which is presumed, and in order to be rebutted requires a determination procedure by the labour market service. These amount to restrictions on the right of establishment, which furthermore are imposed only on some Community nationals.

23. Despite their discriminatory character, these restrictions may be justified as necessary to guarantee the effectiveness of the restrictions on freedom of movement for workers from ‘new’ Member States that are allowed during a transitional period. The issue is therefore how to define the borderline between restrictions on freedom of movement for workers, which in this case must be accepted, and the freedom of establishment guaranteed by the Treaty, which must be preserved.

24. The Commission has focused on the requirements imposed by Austrian authorities on citizens of ‘new’ Member States for registering a partnership or company. Those registration requirements certainly restrict freedom of establishment. (13) However, they are also inherently linked to another restriction, namely the prohibition on partners from pursuing an activity.

25. Under Austrian law, members of partnerships and minor partners in limited liability companies from ‘new’ Members States are prohibited from pursuing their activity until the Austrian labour market service determines that they are not in an employment relationship or they obtain a certificate of exemption. Independently of registration requirements, that prohibition restricts the partners’ freedom of establishment. (14)

26. Underlying those restrictive measures is the presumption, under Austrian law, that such partners should be classified as workers. That classification is the reason why they cannot pursue their activity and register their partnerships and companies, and why in order to do so they must prove to the labour market service that they ‘personally exercise’ a ‘significant influence’ on the management of the partnership or company. The presumption of employment, and the conditions under which it can be rebutted, lie at the core of the restrictions on the right of establishment.

27. Austria argues that those restrictions are necessary to control access to its labour market. The Act of Accession allows Austria to maintain national measures regulating such access for a transitional period. This raises the first question, which I will deal with in section (A) below: can the prohibition of partners from ‘new’ Member States from pursuing an activity until they rebut a presumption of employment, which prevents them from registering their partnerships and companies, be justified?

28. That question, however, arises from an unusual situation. Beneficiaries of freedom of establishment under the Treaty may be classified as workers under Austrian law. It necessarily leads to a second question, which I will address in section (B): is that classification as workers lawful under Community law?

29. Such a question, which touches on the dividing line between freedom of movement for workers and freedom of establishment, bears significance beyond the context of the Act of Accession and its transitional measures.

A – Whether the prohibition of partners from ‘new’ Member States from pursuing an activity until they rebut a presumption of employment, which prevents them from registering their partnerships and companies, can be justified

30. Under the Austrian system, partners from ‘new’ Member States may not freely carry out an activity or register their partnerships or companies. In order to do so, and in view of the difficult conditions for obtaining a certificate of exemption that would allow them, they have to prove to the labour market service that they are not in an employment relationship. Such a system is openly discriminatory and could therefore be justified only by relying on a Treaty provision.

31. The Commission argues that, since the measures restrict freedom of establishment, the relevant Treaty provision is Article 46 EC and none of the justifications set out in that provision apply. Austria claims that the measures can be justified by the derogation from freedom of movement for workers in the Act of Accession.

32. The Act of Accession allows ‘older’ Member States such as Austria to keep in force national measures regulating the access to their labour market by workers from ‘new’ Member States. That derogation is obviously exceptional, and should be interpreted restrictively. It cannot be used to regulate access to any other economic activity but the labour market; none the less, where the labour market is concerned, it must be applied effectively.

33. Still, it should always be remembered that such derogation prevents citizens from ‘new’ Member States from enjoying a fundamental freedom, and hence from enjoying the full status of Community citizens. One should be particularly careful not to allow the derogation to extend to other fundamental freedoms. Any use of derogations allowed in respect of citizens from ‘new’ Member States in order to justify additional restrictions – notably of other fundamental freedoms – to which other Community citizens are not subject should be treated with the utmost suspicion.

34. If partners from ‘new’ Member States are carrying out their activity in Austria’s labour market as workers and in competition with other workers, Austria has a Treaty right – under the Act of Accession – to prohibit that activity.

35. That assumes that their classification as workers by Austrian law is correct and lawful under Community law, an issue I will deal with in section (B). As I will also explain there, if the partners from ‘new’ Member States are indeed workers, they cannot benefit from freedom of establishment as regards the pursuit of their activity. It goes without saying that, in such a situation, there will be no question of justifying the prohibition of that activity – freedom of establishment will not apply.

36. If, on the other hand, partners from ‘new’ Member States are not workers, and Austria’s classification is not correct, freedom of establishment will apply. A justification will be necessary in order to prohibit partners from carrying out their activity, but Austria will no longer be able to invoke the regulation of its labour market, as allowed under the Act of Accession, since the partners are not workers. (15)

37. While partners must pursue an activity either as workers or under freedom of establishment, the same is not true in respect of registering their companies or undertakings. As a step in setting up an undertaking in another Member State, registration is always covered by freedom of establishment. (16)

38. As such, preventing a partnership or company from being registered amounts to a restriction of freedom of establishment and must be justified. However, such prevention is also a result of the presumption under Austrian law that the registering partner is a worker. Can it be justified by the derogation from freedom of movement for workers contained in the Act of Accession?

39. In allowing Austria to continue regulating the access to its labour market, the Act of Accession should also allow it to adopt the necessary mechanisms to enforce that regulation. If partners from ‘new’ Member States are indeed workers, then preventing the registration of their partnerships and companies denies them the legal means to pursue an activity. However, that enforcement mechanism acts in a disproportionate, inadequate, and even arbitrary manner.

40. The prevention of registration is disproportionate because it impedes the start-up of the legal entity, independently of any substantiated claim that it is involved in circumventing Austrian law. It simply assumes that any partnership or company with partners from ‘new’ Member States will be implicated in such a scheme. Furthermore, it seems possible for the Austrian authorities to assess whether someone is pursuing a particular activity as a worker ex post . (17) In fact, that assessment will be easier, and carried out more accurately, once the activity is taking place.

41. The measure also seems inadequate, since partner status can be changed once registration has allowed the partner to start the activity. (18) Lastly, the Austrian authorities appear to apply the legislation at their discretion, reserving it for sectors like construction – presumably for political and economic reasons which, however, do not meet any standards of legal certainty, transparency and predictability. (19)

42. In short, preventing partners from registering their partnerships or companies, on the basis that they are presumed to be in employment, always constitutes an unjustified restriction of freedom of establishment. On the other hand, prohibiting partners from pursuing an activity may either fall outside freedom of establishment or amount to an unjustified restriction of that freedom, depending on whether the partners are correctly classified as workers or not. I will therefore turn to this issue.

B – Whether the classification of partners from ‘new’ Member States as workers is lawful

43. In the present case, partners from a ‘new’ Member State are prohibited from pursuing their activity in Austria because of their classification as workers. That results in either a permitted derogation from freedom of movement for workers or an unjustified restriction of freedom of establishment.

44. In such a situation, the question of who constitutes a worker is no longer a matter of Austrian law and must be subject to Community scrutiny. It can be answered only by reference to the Community definition of a worker, as developed by the Court of Justice through interpreting the provisions on freedom of movement for workers.

45. Since we are dealing with the borderline between freedom of movement for workers and freedom of establishment, such an assessment specifically entails reference to the concept of subordination. Community citizens who wish to conduct activities in another Member State can do so either as workers, benefiting from freedom of movement for workers, or in a self-employed capacity under freedom of establishment. (20) In order to be self-employed they must work outside a relationship of subordination and bear the responsibility for the activity. (21) On the other hand, if they work within a relationship of subordination, they are considered workers. (22)

46. That distinction should be preserved, under national law, when applying a permitted restriction of freedom of movement for workers. If the applicable national definition of worker proves to be too wide, and encompasses beneficiaries of freedom of establishment, it will be the source of an unjustified restriction. The question, therefore, is how far Austrian law preserves the distinction.

47. The classification as workers under Austrian law for the purposes of the present case does not depend on criteria of subordination. When citizens from ‘new’ Member States are members of a partnership, or minor partners in a limited liability company, they are presumed to be workers if they perform activities for their partnership or company which are ‘typically performed within a work relationship’.

48. The scope of that criterion in Austrian law is virtually boundless. An activity which can be carried out in the course of employment can, in principle, also be done independently. Thus, the criterion seems to refer to the social context in Austria and its tradition of activities carried out in an employment relationship or independently. It is no wonder that the Austrian authorities, when called upon to apply this provision, appear to enjoy the widest discretion.

49. Accordingly, partners from ‘new’ Member States who pursue an activity typically performed in Austria by employed persons are classified as workers under Austrian law, regardless of whether they do so within a relationship of subordination. That classification is certain to encompass partners who pursue their activity outside a relationship of subordination and who should thus benefit from freedom of establishment.

50. In those circumstances, I find that the classification, in this context, of persons as workers under Austrian law leads to an unjustifiable restriction of freedom of establishment.

51. The fact that partners from ‘new’ Member States can request the labour market service to certify that they are not in an employment relationship is to no avail. First, the presumption that they are workers is itself an unjustified restriction on the freedom of establishment, to which other Community citizens are not subject. Second, the criteria for granting that certification and rebutting the presumption are again unconnected to subordination and cannot guarantee that beneficiaries of freedom of establishment are not caught.

52. Austrian law demands that partners prove they ‘personally exercise’ a ‘significant influence’ on the management of the partnership or company. A partner who pursues his activity outside a relationship of subordination may, however, have no interest in management and may delegate management tasks to other partners while still bearing the risk of the activity. Conversely, being within a relationship of subordination does not rule out an influence on management. (23)

IV – Conclusion

53. In conclusion, I propose that the Court should declare that, by presuming that members of partnerships, and partners in limited liability companies with a participation less than 25%, from the Member States that acceded to the European Union on 1 May 2004, with the exception of Malta and Cyprus, are in an employment relationship, and by prohibiting them from pursuing an activity, as well as preventing them from registering their partnerships and companies, unless they rebut that presumption, Austria has failed to fulfil its obligation under Article 43 EC.

(1) .

(2) – Article 24 of the Act concerning the conditions of accession of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic and the adjustments to the Treaties on which the European Union is founded (OJ 2003 L 236, p. 33, the ‘Act of Accession’), referring to point 2 in each of Annexes V, VI, VII, VIII, IX, X, XI, XII, XIII and XIV to the Act of Accession (one for each ‘new’ Member State).

(3) – Besides Austria, the following Member States have still not completely opened their labour markets: Belgium, Denmark, France and Germany.

(4) – BGBl. No 218/1975, last amended by BGBl. I No 101/2005.

(5) – Paragraph 1(2)(l) and (m) of the AuslBG. ‘“New” Member States’ will from now on be understood as not including Cyprus and Malta.

(6) – Paragraph 2(2)(a) and (b) of the AuslBG.

(7) – Paragraph 2(4) of the AuslBG.

(8) – Idem.

(9) – Idem.

(10) – Idem.

(11) – Paragraph 15 of the AuslBG

(12) – At the hearing Austria stated that 150 positive determinations were performed in one year. That compared with 100 000 authorisations of access to the Austrian labour market under the AuslBG. The number of negative determinations, and the number of partners who did not initiate a determination procedure after being considered to be in employment, were not given.

(13) – See Case C-212/97 Centros [1999] ECR I-1459, paragraph 19

(14) – See Case C-55/94 Gebhard [1995] ECR I-4165, paragraph 23 (‘[t]he right of establishment … allows all types of self-employed activity to be taken up and pursued on the territory of any other Member State’).

(15) – I cannot see how any other justification could be invoked. Austria has also claimed to be protecting citizens of ‘new’ Member States from being denied the more favourable regime of national labour law as a consequence of attempting to access its labour market through the creation of partnerships and companies. Even if prohibiting them from pursuing an activity constitutes adequate protection, which is doubtful, it is not clear why only citizens from ‘new’ Member States are targeted, or – to put it in a more positive light – need to receive such added protection (see the Opinion of Advocate General Léger in Case C-168/04 Commission v Austria [2006] ECR I-9041, point 62, on the need to apply worker protection generally). Furthermore, this argument again proceeds from the assumption that they are indeed workers.

(16) – See footnote 13.

(17) – See Case C-465/05 Commission v Italy [2007] ECR I-11091, paragraph 76.

(18) – For example, partners with participations higher than 25% in limited liability companies, who will not be classified as workers, may subsequently sell part of their participation.

(19) – See Case C-177/04 Commission v France [2006] ECR I-2461, paragraph 70, and Case C-393/06 Ing. Aigner [2008] ECR I-0000, paragraph 54.

(20) – As mentioned above, if they wish to set up an undertaking, they always benefit from freedom of establishment, but since the restriction to the registration of partnerships and companies is not justifiable there is no need to analyse that situation here.

(21) – See Case C-268/99 Jany [2001] ECR I-8615, paragraphs 34, 70 and 71, and Case C-337/97 Meeusen [1999] ECR I-3289, paragraph 15.

(22) – See Case C-107/94 Asscher [1996] ECR I-3089, paragraph 25, and Case 66/85 Lawrie-Blum [1986] ECR 2121, paragraph 17.

(23) – For example, in some Member States there is a tradition of having labour representatives in management