German Federal Fiscal Court: Customs can audit foreign transport undertakings on compliance with Minimum Wage Act

In three decisions (VII R 34/18;VII R 35/18;VII R 12/19) on the same day, 18 August 2020,  the German Federal Fiscal Court (Bundesfinanzhof) confirmed that the German legislature was authorised to entrust customs authorities with verifying compliance with employers’ obligations under section 20 of the German Minimum Wage Act (Mindestlohngesetz). Thus, transport undertakings established in the European Union that have employees who work in Germany are required to allow customs authorities to verify their compliance with minimum wage provisions.

1. What was the background of the decision?

The judgments were based on court actions filed by transport undertakings established in Slovakia and Poland, the employees of which worked in international road transport. The cross-border transportation was to and from the Federal Republic of Germany; only either the unloading or the loading took place in Germany. In two cases, it was in dispute whether the drivers were merely involved in ‘transit’ traffic and not even loading or unloading took place in Germany. In order to determine whether compliance with the minimum wage was compulsory for the applicants, at least temporarily, the customs authorities ordered the implementation of an audit under sections 2 onwards of the Act to Combat Undeclared Work and Unlawful Employment (hereafter: German Undeclared Work Act (Schwarzarbeitsbekämpfungsgesetz)) and, in particular, compliance with the provisions on minimum wage laid down in section 2(1) no. 6 of the Undeclared Work Act, read in conjunction with section 20 of the Minimum Wage Act. In the context of the audit order, the customs authorities ordered the applicants to produce employment contracts, salary invoices and proof of payment, employment registers and the names and addresses of the respective customers.

The transport undertakings brought a court action against that order, claiming that the customs authorities were not competent to carry out an audit under sections 2 onwards of the Undeclared Work Act since the Undeclared Work Act was not applicable to them as foreign carriers. They stated that there had been no ‘deployment’ to German territory. Furthermore, they argued that the Minimum Wage Act is contrary to the federal rules of competence, the principle of specificity and EU law. Furthermore, the audit was argued to be disproportionate, inappropriate and arbitrary.

2. The decisions of the German Federal Fiscal Court

The Federal Fiscal Court rejected the appeals filed by the transport undertakings as unfounded and found that the German federal legislature was authorised to entrust the customs authorities with the task of verifying compliance with the obligations laid down in section 20 of the Minimum Wage Act. Under the Minimum Wage Act, transport undertakings established abroad that have employees who work in Germany must submit to an audit of the work actually carried out in Germany. In particular, the court deemed the conferral of the auditing authority not to be contrary to either fundamental rights or EU law.

As regards the disputed auditing powers of the customs authorities, the Federal Fiscal Court stated that the federal legislature was entitled to invoke the competence referred to in the second sentence of Article 87(3) of the German Basic Law. Referring to the case law of the European Court of Justice (judgment in Mazzoleni and ISA, ECLI:EU:C:2001:162, para. 34 onwards), the Federal Fiscal Court also found that the obligation of foreign employers to keep those documents and to produce them upon request was not disproportionate to the objectives pursued by the Minimum Wage Act. The court stated that this ultimately corresponds to the proportionality referred to in Article 9(1) 2(b) and (c) of Directive 2014/67/EU.

However, the Federal Fiscal Court referred to the case law of the German Federal Constitutional Court (Bundesverfassungsgericht) according to which there is still need for interpretation of “who is covered by the definition of ‘workers employed in Germany’ in section 20 of the Minimum Wage Act and consequently also who, as the employer of the employees concerned, is subject to the rules on compliance and verification of the obligation to pay minimum wages laid down in sections 16 onwards of the Minimum Wage Act. In particular, it is unclear whether, without exception, any work carried out in German territory, even in the short term, constitutes employment in Germany or whether this requires a certain period of time or a link to the German social security system and to the cost of living in Germany.” (Federal Fiscal Court (7^th Panel), judgment dated 18 August 2020 — VII R 34/18 referring to the non-acceptance order handed down by the German Federal Constitutional Court dated 25 June 2015-1 BvR 555/15).

But that was not the pivotal point in the disputes at issue. The German Federal Fiscal Court held ”that despite the issues specified above, the customs authorities must have the option of determining at all the extent to which the workers concerned are or were actually employed in Germany. Only after this determination does the question arise whether the amount of work determined to have been done establishes a sufficient link, within the meaning of the case law of the European Court of Justice, to German territory, with the result that the obligation to pay the statutory minimum wage provided for in section 20 of the Minimum Wage Act applies in the case at hand.” (BFH (7^th Panel), judgment dated 18 August 2020 — VII R 34/18).

3. Conclusion

In its judgments, the German Federal Fiscal Court did not rule on the question in dispute as to whether the Minimum Wage Act applies to short-term employment  on German territory at all, but made it clear that the customs authorities have auditing powers.

The judgments now have the consequence that foreign employers whose employees work in Germany in whatever form cannot, as a general rule, evade verification by the customs authorities.