The freedom to provide services precludes very high financial penalties for infringements of formal obligations

On 12 September 2019, the Court of Justice ruled that very high financial penalties for infringements of a number of formal obligations (obtaining permits and retaining payroll documents) in the context of a secondment are incompatible with the freedom to provide services.

An Austrian contractor had contracted with a Croatian subcontractor to provide a service on Austrian territory. The work was physically carried out by seconded Croatian, Bosnian and Serbian employees of the subcontractor.

During an audit, the Austrian Tax Investigation Service established that for most of the employees no payroll documents nor work permits could be submitted. Both the manager of the Austrian contractor and the managers of the Croatian subcontractor were severely sanctioned for these infringements (i.e. fines of €3,255,000 and €2,400,000 to €2,604,000, respectively).

The Austrian Court concerned posed a number of preliminary questions to the Court of Justice concerning the compatibility of these very high sanctions with the freedom to provide services.

In line with its established case law, the Court of Justice has confirmed that the exercise of fundamental freedoms, including the freedom to provide services, may be restricted by national measures provided that such restrictions:

• can be justified by overriding reasons in the public interest; and
• are appropriate for attaining their objective; and
• do not go beyond what is necessary to attain that objective.

Following this rule of reason exercise, the Court of Justice concludes that the sanction (i.e. the restrictive measure) is disproportionate taking into account the severity of the infringements in this case.

In particular, the Court ruled that EU law precludes penalties for infringements of formal obligations such as obtaining permits and retaining payroll documents:

• which cannot be less than a pre-defined minimum amount;
• which can be imposed cumulatively for each worker without a maximum;
• which are supplemented with an additional amount of 20% for the litigation costs; and
• which, in the event of failure to pay the fine, can be converted to imprisonment.

According to the Court, national legislation imposing such serious penalties on infringements of a number of administrative obligations in the context of a cross-border provision of services must be regarded as disproportionate and therefore an unjustified obstacle to the freedom to provide services.

Conclusion:

This judgment may have an impact on fines imposed for infringements of formal administrative obligations in the context of the provision of services within the European Union.