Minister for Enterprise Micheál Martin said it was the "stark reality" that Irish Ferries cannot be prevented from reflagging its vessels in another EU state.
During a heated emergency debate on the Irish Ferries crisis, he said said the legal position was clear. Any undertaking that seeks to exercise its right of establishment under European law in another member State, cannot be prevented from so doing, he said.
"The State cannot hinder the exercise of that right. Otherwise it would be in breach of its duties under the Treaty of the European Communities. Once Irish Ferries satisfies the Minister that its proposed reflagging in Cyprus is on foot of its right of establishment, then the State cannot prevent the reflagging. That is the stark reality." It would not be possible to enforce Irish employment terms and conditions on reflagged vessels, he added.
Mr Martin also described as fanciful and farcical claims that there was a link between the Taoiseach's comments on the Government's scope for action and Irish Ferries "outrageous behaviour".
Mr Martin also rejected a Labour Party Bill to prevent reflagging. He said it would be "completely ineffectual and legally unsustainable", and would "compound the situation by unfairly raising expectations of a legislative solution".
Labour's marine spokesman Tommy Broughan insisted the party's Mercantile Marine Bill could prevent reflagging. He also claimed the Taoiseach was "directly responsible for this impasse" and had the opportunity of using the party's Bill.
Mr Broughan said that "our legal advice is that it is perfectly legal. We could pass that Bill this evening as you Minister did a few months ago with the commercial properties Bill to protect our property. Let's protect our workers. Surely our workers are as valuable as our property. Let's pass the Bill and make reflagging impossible."
The company boarded the Isle of Inishfree with a gang of so-called security personnel and gave no warning to the captain of she ship, he said. "Can you believe it that a couple of years after 9/11, just a few months after a disaster in London, they would act in an illegal and almost terrorist-type manner?" Mr Broughan asked.
He said he had received allegations from family and close friends of crew, that they saw metal bars and crow bars in the luggage of the so-called security personnel. He had contacted the National Bureau for Criminal Investigation about this.
Hitting out at comments by the chief executive of Irish Ferries that the company was standing on its own two feet, Mr Broughan asked "what about the €3 million in tonnage tax that this State gave to the company to sustain it? What about the PRSI concessions that were given to the company?"
He also asked what would happen to the significant subventions which the State gives Irish Ferries on an ongoing basis.
Fine Gael's enterprise spokesman Phil Hogan, who sought the debate, said the debate was not about immigration, globalisation or free-market economics. "Rather, this debate is about a greedy, grubby company, intent on maximising profits - that is not just seeking a cheaper labour force, but is seeking a criminally cheap labour force."
Mr Hogan said Irish Ferries, for no good reason whatsoever, other than it runs ships as opposed to buses or trains, does not have to obey industrial relations and employment equality legislation that protects immigrants. The firm "has run roughshod over 40 years of industrial diplomacy - industrial diplomacy that helped create the 'Celtic Tiger' from which all of us, Irish Ferries included, have benefited".
Sinn Féin spokesman Arthur Morgan said Irish Ferries had effectively declared war on workers' rights. What was needed was a "threshold of decency" in treating workers.