Contractor’s Liability Act – risk or opportunity?

Real Estate and Construction

The Contractor’s Liability Act, real name Act on the Contractor’s Obligation and Liability When Work is Contracted Out, entered into force in 2007. The objective of the Act is to, in accordance with its name, increase the contractor’s responsibility in selecting a partner.

The Act is applied when using temporary agency workers, but also when agreeing on subcontracts relating to the contractor’s ordinary duties and if a subcontractor’s employee works on the contractor’s premises or worksite. Therefore, the Act does not only apply to the construction industry, even though it is often perceived as such. In construction work, the obligation to investigate has however been extended further than the general rule.

Why does a contractor need to be liable?

The fundamental objective of the Act is to ensure that all companies (both Finnish and foreign) providing services in our country comply with the law. This promotes equal competition between companies. A single company should not gain a competitive advantage from not taking care of, for example, the payment of taxes. The Act is part of the fight against the black economy, as is the requirement to have a tax number when working on a construction site or the obligation to report construction works to the tax authorities.

According to the Occupational Safety and Health Administration, contractors should be set their own obligations, because the pursuit of economic benefit may lead a company to drop their prices when seeking a partnership by, for example, neglecting the payment of statutory employer contributions. The contractor is therefore responsible for verifying that it does not order services from companies that do not perform their social responsibilities.

I think that the fundamental objective of the Act is good and deserving of support.

How does the Act work in practice? What about the administrative side?

I believe, that no one will dispute the fact that the Act has increased the administrative burden imposed on businesses. Every euro is carefully thought-out in contracts and behind each contractual term is a price tag – even terms that are in accordance with the Act, especially if the immediate termination of the contract has been agreed under the Act if documentation is not submitted prior to signing the contract or the submitted documentation is incomplete.

Investigations take time (especially with foreign partners) and a number of concrete issues relating to service delivery should be worked out before signing the contract (often done under time pressure). Important points from the contractor’s point of view, such as the content of the service, and payment and delivery terms, should also be established. Figuring out, for example, the payment of pensions is probably not the first thing that comes to mind in such situations.

The Act’s existence may also be deliberately overlooked if it is perceived as difficult to apply and implement. Moreover, it is clear that the Act is still unknown in some areas. This is reflected in the Regional State Administrative Agency’s 2015 compliance report.

Contractors are also uncertain about what kind of foreign certificates are acceptable or what to do if the required information cannot be obtained from that country. The most challenging requirement in the latest amendments to the Act relates to obtaining reports on the organisation of occupational health care services.

Sure, there is always something good too. The Act has contributed to the fight against the black economy, as companies’ backgrounds are actively investigated and, for example, in the construction industry, use of the service is commonplace. Investigations can give contractors an indication of whether problems in service delivery can be expected. Investigations show how the company operates in society in general and whether it performs its social responsibilities as an employer.

I admit that I too have questioned the effectiveness of the Act more than once during discussions with various entities and clients. However, since this is a mandatory law, we cannot bury our heads in the sand. Would it therefore be better from the contractor’s point of view to conduct these investigations from a risk management perspective during the procurement process rather than as a ‘last evil’ that must be carried out? It is for each contractor to decide whether contractor’s liability is a risk or an opportunity.