Germany Links Public Contracts to Standard Wages in New Law

Germany’s governing coalition has passed legislation linking the awarding of public contracts to companies’ adherence to collective bargaining agreements, aiming to improve working conditions and prevent wage dumping. The law, approved by the Bundestag on Thursday, applies to contracts exceeding €50,000, with some exceptions and a phased implementation of verification processes.

Coalition Agreement and Parliamentary Approval

The draft law was passed with the votes of the governing factions of the Christian Democratic Union (CDU)/Christian Social Union (CSU) and the Social Democratic Party (SPD). The Greens also supported the bill, whereas the Alternative for Germany (AfD) voted against it, and the Left party abstained. This legislation fulfills a key promise made by the SPD within the coalition government.

Scope and Exemptions

The law initially focused on ensuring that companies receiving public contracts worth over €50,000 pay standard wages, as defined by collective agreements. However, concessions were made to the CDU/CSU during negotiations. Notably, the law will not apply to the simple purchase of goods, such as office supplies or IT hardware – known as delivery orders – which were removed from the draft. The law will cover construction and service contracts. The threshold for direct orders from security authorities has been raised to €100,000.

Verification and Enforcement

To efficiently verify compliance, a digital procedure will be implemented, allowing the responsible testing center to directly query wage data from pension insurance companies. However, this interface will not be fully operational until January 1, 2028. Violations of the law will result in contractual penalties, cancellation of orders, or exclusion from future tenders.

Criticism and Opposition

The AfD criticized the law as an interference with collective bargaining autonomy and the economy, arguing that it disadvantages smaller companies due to increased proof, testing, and control obligations. The Greens and the Left party raised concerns about extensive exceptions granted in the armaments sector.

Impact on Infrastructure Investment

The governing coalition believes the new law will help ensure that funds from the €500 billion special pot allocated for modernizing infrastructure are directed towards companies that adhere to collective bargaining agreements. The SPD argues that companies without such agreements may engage in “wage dumping” – undercutting competitors by offering lower prices due to lower labor costs – in public tenders.

Federal Council Review

The legislation now requires the consent of the Federal Council, which could be granted by the end of March.