Unions have now called for the government to respond.
"It's high time the government acts to reassure any concerns about jobs, salary competition, and employment conditions on the Swedish labour force," Swedish Trade Union Confederation (LO) Karl-Petter Thorwaldsson said in a statement following the ruling.
Wednesday's finding by the Council of Europe's European Committee on Social Rights (ECSR) addresses the fallout from a 2004 case in which construction workers' union Byggnads set up a blockade in Vaxholm, in the Stockholm archipelago, where a construction team from Latvian company Laval was building a school.
The Latvian workers were not being paid the Swedish minimum wage, and the Swedish Electricians' Union (Elektrikerna) even joined in the blockade.
The incident prompted a precedent-setting ruling from the European Court of Justice, which in 2007 found that the trade unions' actions restricted the freedom to provide services within the EU. The incident is also nicknamed "The Vaxholm Conflict". In 2010, the Swedish government changed the law in a manner that made it harder for unions to enforce collective action in the defence of foreign workers' rights.
The unions were told to pay 2.7 million kronor ($392,000) for the Latvian company's subsequent court cases and "general damages" in what is also referred to as the "Vaxholm Conflict". Sweden also implemented a number of changes to its laws to comply with the ruling. However, unions have alleged that the reforms, known as the 'Laval law', restrict the rights to freedom of association and collective bargaining.
On Wednesday, ECSR issued a ruling supporting the union's position, finding that foreign workers in Sweden should have the same rights as other workers.
The council noted that, among other things, there was an absence of accessibility to voluntary negotiations between employers and worker organizations, and disproportionate restrictions on the right of trade unions to take collective action in order to regulate employment terms of posted workers.
The mostly blue-collar Swedish Trade Union Confederation (LO) and its white-collar colleagues at TCO jad reported the ruling to the International Labour Organization (ILO) in 2010, claiming it did not respect international treaties on the freedom of association (föreningsrätten).
Spokespersons for the two unions were pleased the issue had been taken further, and urged the Swedish government to take further measures.
"The Council of Europe's criticism is directly aimed to the Laval law that the government approved in 2010 and which contributes to makes LO members anxious," said LO chairman Thorwaldsson.
TCO chairwoman Eva Nordmark added that the statement from the council "further increased the pressure on Sweden" to change the Laval legislation.
"The Swedish government must now get back to the committee with a report of which measures they will take on the committee's recommendations," their joint statement read.
Wednesday's statement from the council was not the first occasion that Sweden has been in the spotlight for the Laval law. In February, the UN also took aim at Sweden, claiming the law contradicted workers right to free association.