Do Not Limit the Number of Subcontractor Tiers
A regulatory framework that limits the number of subcontracting tiers would, in practice, undermine the modern business logic of many many industries, not only the construction sector, and also large parts of the service sector. The consequences for trade, jobs, and growth would be costly, write experts Elin Lilliehöök och David Johnsson.
A proposal recently discussed in the European Parliament calls on the European Commission to introduce rules limiting the number of subcontracting tiers a company may have, as a way to combat criminal activity. The issue of subcontracting also arises in the context of other upcoming EU initiatives, such as the Quality Jobs Act and the Fair Labour Mobility Package. However, votes in the Parliament’s Committee on Employment and Social Affairs and in the plenary have clearly shown that there is no support for such a restriction.
Our report shows that such a proposal would not only weaken growth and competitiveness but could also conflict with EU rules on the freedom to conduct a business. Moreover, it would likely be ineffective compared with other measures aimed at tackling labour-related crime.
Over recent decades, the growing use of subcontractors has contributed to higher productivity, stronger competitiveness, and increased innovation.
While the proposal initially targeted the construction sector, it has since expanded to cover a wide range of industries, including agriculture, household services, transport, food production, cleaning services, hospitality, and healthcare. Combating criminal activity and labour exploitation must remain a priority, but limiting subcontracting tiers would risk lower growth, weaker competitiveness, and create disadvantages for small businesses. Europe instead needs stronger economies, improved competitiveness, and more construction activity—particularly to help finance increased defence spending in response to the threat from Russia.
Over recent decades, the growing use of subcontractors has contributed to higher productivity, stronger competitiveness, and increased innovation. Restricting these structures would therefore have several negative consequences, including:
· Reduced competition
· Lower productivity
· Fewer opportunities for small and medium-sized enterprises
· Less efficient use of machinery and workforce
· Reduced ability to benefit from economies of scale
· Increased bureaucracy at all levels, from contracting authorities to the lowest subcontracting tier
· Reduced delivery reliability and risk diversification due to limitations on subcontracting
Shorter supply chains are sometimes argued to improve safety, reduce criminal activity, and strengthen working conditions. However, statistics show that accidents in the construction sector have declined in both Sweden and the EU while the number of specialist companies and subcontracting tiers has increased. It is therefore unclear whether such regulation would have the intended effect.
In conclusion, limiting subcontracting tiers would risk harming growth, jobs, and competitiveness across Europe.
Finally, limiting subcontracting tiers could conflict with fundamental EU principles, including freedom of contract, freedom of establishment, and the free movement of services. It may also fail the proportionality test and risk disadvantaging small companies.
In conclusion, limiting subcontracting tiers would risk harming growth, jobs, and competitiveness across Europe. More effective measures to combat labour-related crime include improving cross-border information exchange and strengthening monitoring of companies and individuals. Better access to information would make it easier for authorities and businesses alike to identify and prevent criminal activity.
