When the EU welcomed in 10 new countries in 2004, many still rebounding from years of Soviet rule behind the Iron Curtain, it unknowingly set two different labor markets on a crash course toward conflict. In the West are established unions that demand high wages through collective bargaining agreements. In the East are workers–some organized, some not–who are willing to provide services for a fraction of the wages their Western counterparts demand.

To save money, companies began to migrate facilities to the Eastern member states and import cheaper labor from these regions. This angered the unions, which tried to stop

businesses from moving East or hiring Eastern workers by launching strikes and blockades. However, such collective actions, which are protected under EU law, run into direct conflict with EU law that allows companies to establish and provide services in any member state.

The European Court of Justice, the highest court in the EU, is now addressing this conflict in two groundbreaking cases. The ECJ’s top advisers, the advocates general, issued their opinions in May. These opinions aren’t binding; however, the ECJ sides with the AGs the majority of the time. Their decisions don’t fully reconcile the conflicting policies, but they do call for limitations on the collective actions unions can initiate.

“The future direction of the European social model may be profoundly affected by the decision of the ECJ when it ultimately rules on these two cases,” says Sandro Garofalo, shareholder in Littler Mendelson in Minneapolis.

Limited Action

The first case involves a Finnish flagged passenger and cargo ferry owned by Viking Line. Viking, which had employed mainly Finns to operate its ships, announced plans in 2003 to reflag the vessel as Estonian and man it with Estonian union workers, reducing labor costs by 80 percent.

This infuriated the Finnish crew members, who claimed that under Finnish law they retained the right to negotiate terms and conditions of employment for the ship’s crew. In response to the plan, the workers contacted the International Transport Workers’ Federation (ITF), a coalition of 600 transport workers’ unions, in November 2003. ITF called upon its members to cease all negotiations with Viking, and threatened its members–including those in Estonia–with sanctions and disaffiliation if they did not comply. This ended any chance Viking had of transferring its business to Estonia.

In 2004 Viking sued the ITF, claiming its actions violated the company’s right to establish business in any EU member state. In May the advocate general issued his ruling.

“The question before the AG was whether social policy that’s serving a public interest, in this case that of the union workers, could justify restrictions on a company’s freedom of movement,” says Laurence Rees, a partner at Reed Smith in London.

The AG’s opinion failed to clarify this point. The AG wrote that collective actions that seek to promote objectives of the EU’s social policy do not trump EU companies’ right to freely establish, but that the freedom to establish “does not preclude a trade union ?? 1/2 from taking collective action” in all circumstances.

However, the AG did comment that the sweeping actions of the ITF were likely too extreme, thus potentially handing a significant win to companies. If the ECJ decides to follow the AG’s reasoning, it’s likely union organizations such as ITF won’t be able to force union workers to join in a collective action to prevent companies from establishing elsewhere in the EU.

“What’s meaningful about this opinion is the AGs seem to be saying that when an obstacle is raised by coordinated union action, which ITF employed, and it has the effect of restricting the freedom of establishment, there is a strong possibility that such actions are susceptible to abuse,” Garofalo says.

Balancing Act

Even with this win in Viking Line, it’s still unclear exactly where courts will strike the balance between unions’ right to take collective action and companies’ right to establish business wherever they see fit. Thankfully a coinciding case called Laval may answer this question.

In 2004 a subsidiary of Laval un Partneri, a Latvian construction company, began work on a Swedish building site. The company posted Latvian workers at the site and paid them below the local rates. Local Swedish trade unions then attempted to enter into an agreement with Laval to force them to pay their workers comparable wages. When the parties couldn’t reach an agreement, the union blockaded the construction site.

“The Swedish union basically said, ‘We don’t want workers from countries with lower salary profiles entering the market and making its members’ employment less favorable,” says Katarina Nordblom, partner at Bird & Bird.

With the blockade in place, the Latvian workers could no longer work on the site, causing the subsidiary to go bankrupt. Laval sued the union in a Swedish court, arguing the blockade violated the EU’s rules concerning the freedom to provide intra-EU services. Like Viking Line, this case ended up before the ECJ.

Unlike Viking Line, however, Laval created the groundwork for a test to determine whether a collective action may preclude the right to freely provide services throughout the EU. Specifically the AG said that such a collective action can preclude the movement of services “provided that the collective action is motivated by public-interest objectives, such as the protection of workers and the fight against social dumping, and is not carried out in a manner that is disproportionate to the attainment of those objectives.”

This concept of proportionality, experts believe, may very well become the test EU courts apply in the future to balance these competing policy objectives.

“It’s unclear what ‘proportional’ would mean,” Rees says. “However, the ECJ will likely lay down broad principles to define it, and then it will be up to the individual courts of the member states to apply them.”

Freer Movement

The ECJ will likely decide the two cases within the next several months. Although the rulings in Viking Line and Laval won’t necessarily be the definitive rulings companies are looking for, it’s likely that they’ll at least give guidance on this issue.

“This is still an area where competing rights need to be reconciled, and there will continue to be some development in the law that will help employers understand what collective action will be permissible and what will run afoul of economic freedoms in the EU,” Garfalo says.

But for now, companies operating throughout Europe can feel somewhat assured they’ll be freer to conduct business thanks to certain limitations the courts will impose on unions.

“The freedom to establish has in effect been given precedence in the final analysis over the most potent forms of collective action,” Rees says. “However, it’s been established that a degree of industrial action to pressure employers seeking to relocate or bring in workers from another member state is not unlawful per se.”