EUROPEAN SEMESTER THEMATIC FACTSHEET EMPLOYMENT PROTECTION LEGISLATION

1. INTRODUCTION latter countries courts have ample judi- cial discretion while in the former Employment protection legislation legislation plays a greater role. consists of rules and procedures concerning the faculty of companies Non-compliance with the terms of to hire or dismiss workers. the legislation or with those agreed in collective contracts renders Employment protection legislation dismissal unlawful or invalid. This deals with: has implications for the obligations of the employer and the rights of the worker  the lawfulness of probationary periods, that vary between countries. mandated notice periods and seve- rance payments (payments to workers As a general rule, dismissal motivated by for early contract termination); discriminatory reasons is considered  procedural requirements to be unlawful, while protection to employees followed for individual dismissals or is usually not provided when dismissals collective redundancies; are justified by major disciplinary  sanctions for unfair dismissal; and reasons. Sanctions are generally also  conditions for using temporary or envisaged for the unlawful use of fixed- fixed-term contracts. term contracts, i.e. outside the conditions established by legislation. Such rules and procedures may be enshrined in law or in collective or The rationale for employment individual labour contracts. The effective- protection legislation is to protect ness of employment protection also workers from arbitrary action by depends on additional factors including employers through a series of court interpretations of legislative and requirements the latter must contractual provisions. comply with when dismissing workers. These reflect the social Employment protection legislation is costs of dismissal to some extent. A not granted uniformly in all Member dismissed worker loses income, tenure- States. Apart from the common mini- related benefits and, potentially, mum requirements stemming from EU accumulated job-specific skills and legislation and other international obliga- experience. If it takes a long time to tions (see below), the characteristics of find another job, some workers may employment protection legislation mostly also suffer negative social and health reflect different legal and institutional effects. traditions. In countries with civil law traditions such legislation is usually Society also bears the costs of workers regulated by law, while in common law losing their jobs as the financing of countries it relies more on private unemployment benefits and active contracts and dispute resolution. In the labour market policies falls largely on

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taxpayers. Protection against dismissal rates. These may contribute to higher is recognised by the International unemployment rates and longer periods Labour Organisation (ILO) Conven- out of work for weaker groups such as tions1, the EU Charter of Fundamental young and/or low-skilled workers. On Rights2, the EU Treaty3 and EU the other hand, there is no conclusive Directives setting minimum require- evidence that the strictness of employ- ments for collective redundancies, ment protection legislation affects information and consultation, and overall unemployment rates. fixed-term and temporary work4. These directives provide a common minimum Employment protection legislation level of protection for workers in all is usually the result of complex Member States. legislative and non-legislative frameworks. As such, there is no Unbalanced or excessively rigid 'one-size-fits-all' approach and the employment protection legislation policy response to challenges in this may have undesirable effects on area should be tailored to each the labour market. In particular, country's specificities. Moreover strict protection against dismissal for employment protection legislation employees on open-ended contracts, should be considered as part of a coupled with loose regulation on broader institutional framework which temporary or other non-standard includes social protection systems, contracts, is likely to induce labour active labour market policies and market segmentation5. This is because access to lifelong learning. these factors may create incentives for employers to hire workers under Reforms of employment protection temporary contracts in order to avoid legislation should be seen in relation to high firing costs. Moreover, strict these institutional features and should regulation against dismissals is usually be consistent with a 'flexicurity' 6 associated with low hiring and firing approach . Recent evidence shows that Member States that pursued comprehensive labour market reforms 1 Termination of Employment Convention, encompassing flexible and reliable 1982 (No 158). contractual arrangements, 2 According to Article 30, 'every worker has comprehensive lifelong learning the right to protection against unjustified strategies, effective active labour dismissal, in accordance with Union law and market policies, and modern social national laws and practices'. protection systems, have better able to 3 Article 153 of the Treaty on the maintain employment and preserve Functioning of the European Union provides for the possibility for the EU to support fairness during the economic downturn. Member States in ensuring the protection of workers when their employment contract is The European Pillar of Social Rights terminated, and to adopt directives laying aims to prevent labour market down minimum standards. 4 EU Directives 91/533/EEC on written statement, 1999/70/EC on individual employment conditions, 98/59/EC on collec- tive redundancies, 2001/23/EC on transfer of 6 EU Employment Guideline No 7 recom- undertakings, 1999/70/EC on fixed-term work, mends that Member States should 'take into 2008/104/EC on temporary agency work. account the flexicurity principles' (Council 5 Labour market segmentation means the Decision on guidelines for the employment coexistence in the labour market of different policies of the Member States, 13 October categories ('segments') of workers, 2016). Flexicurity can be defined as an inte- characterised by different levels of job grated approach including four components: security and/or access to social security and i) flexible and secure contractual arrange- other benefits and by low transition rates ments; ii) lifelong learning strategies; from less secure to more secure categories. iii) effective active labour market policies in The main distinction is typically, but not order to facilitate transitions to new jobs; exclusively, between workers with temporary iv) modern social security systems providing contracts and those with permanent ones. adequate income support during transitions.

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segmentation while making employ- 2. POLICY CHALLENGES: AN ment secure and adaptable. This is OVERVIEW OF PERFORMANCE IN EU envisaged, in particular, by Principle 5 COUNTRIES ('Secure and adaptable employment'7) and Principle 7 ('Information about As discussed in the introduction, high employment conditions and protection in segmentation and low dynamism of case of dismissals'8). Both of these fall the labour market are the most under the area 'Fair working conditions'. common challenges where employment protection legislation is excessively strict The structure of this factsheet is as or imbalanced in favour of protecting follows. permanent workers. Moreover, unde- clared work may occur as a result of Section 2 provides an identification of excessive costs for firing regular the main challenges commonly related to workers, in addition to other causes such dysfunctional employment protection as excessive taxation on labour. (Unde- legislation systems. These are high clared work is discussed in a separate segmentation and low dynamism of the thematic factsheet). labour market. The concept of labour market Section 3 describes policy levers related segmentation implies that (at least) to the different challenges and aspects of two 'segments' coexist in the labour employment protection legislation. market. One segment of the workforce comprises workers with stable employ- Section 4 presents an overview of the ment relationships, protection against state of play across Member States. dismissal and full access to social protection. Another segment is charac- Finally, detailed definitions and statistics terised by workers with one or more of are presented in the Annex. the following:

This factsheet is related to those on 9  non-standard employment contracts active labour market policies, unem- providing limited or no protection ployment benefits, undeclared work, and against dismissal; skills for the labour market.  unstable employment relationships and poor career prospects; and

 (frequently) limited access to social protection because they have paid social contributions for shorter periods.

7 Principle 5 states among other things that 'the transition towards open-ended forms of employment shall be fostered' that 'in accordance with legislation and collective agreements, the necessary flexibility for employers to adapt swiftly to changes in the economic context shall be ensured' and that 'employment relationships that lead to precarious working conditions shall be 9 Beyond the traditional distinction between prevented, including by prohibiting abuse of employees and self-employed workers, there atypical contracts'. exist 'atypical' forms of employment such as 8 Principle 7 states among other things that on-demand, on-call, casual, intermittent or 'prior to any dismissal, workers have the right agency work, project contracts, job-sharing, to be informed of the reasons and be granted lending and pool arrangements, and a reasonable period of notice. They have the crowdsourcing. The list is vast and depends right to access to effective and impartial on the specific Member State. In addition, dispute resolution and, in case of unjustified civil law contracts have been increasingly dismissal, a right to redress, including used in some Member States to regulate the adequate compensation'. provision of what are in effect work services.

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In a segmented labour market, fixed- temporary contracts represent dead term/atypical workers are typically in ends rather than stepping stones to this situation against their will (i.e. they permanent contracts. would prefer to work with a permanent contract10) and often perform tasks The combination of high shares of that are not temporary by nature. fixed-term employees and low transition rates towards permanent Moreover, there are limited employment seems particularly opportunities to transition from the less worrying in countries such as Poland, protected to the more protected Spain and France (Figure 1). segment of the labour force. In practice,

Figure 1 — Proportion of temporary workers among total employees, age group 20-64 (2016); and transition rates from temporary to permanent contracts (2015)

Source: Eurostat, LFS and SILC.

Countries with a high proportion of social security systems to include the self-employment may also be more self-employed11. exposed to segmentation problems. This is the case when self-employment The percentage of self-employed conceals partial abuses in order to people (without employees) is highest mask what are actually dependent in Greece (22.2%), Romania (15.4%) employment relationships (so-called and Italy (15.4%), followed by Poland, bogus self-employment) and when the Czech Republic and Slovakia Member States have not adapted their (Figure 2).

10 In the EU, 66.4 % of temporary workers (aged 20-64) in 2015 were in this status because they could not find a permanent job (Eurostat, LFS). 11 Pedersini, R. and Coletto, D. (2010). 'Self-employed workers: industrial relations and working conditions', European Foundation for the Improvement of Living and Working Conditions, 2010.

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Figure 2 — Self-employed without employees as percentage of total employment, 2016

Source: Eurostat, LFS — own calculations.

Strict protection against dis- A combined reading of hiring and missal reduces labour turnover: separation rates12 gives an idea of by increasing the cost to labour market turnover (Figure businesses of separating from 3). When both are high, the labour workers, it tends to reduce both market is considered more dynamic firing and hiring rates. This may and flexible (e.g. as in the case of have little or no effect on overall Scandinavian and Baltic countries on unemployment. However, it does the right side of the figure). affect the process of job creation However, high hiring/ and destruction, the duration of separation rates could be also an unemployment and the age effect of the widespread use of composition of those out of work, temporary contracts. This ambiguity and how efficiently labour is is partly reflected in the case of reallocated across firms and Spain, the Netherlands, Portugal and industries. Cyprus. More specific analysis is in any case necessary in order to draw conclusions about the nature of labour turnover as such.

12 Hiring and separation rates can be computed as the ratio to total employment of, respectively: i) individual transitions from unemployment to employment and job-to- job transitions (hiring rate); ii) individual transitions from employment to unemployment (separation rate). In absolute terms, if hires outnumber separations, net employment increases.

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Figure 3 — Hiring and separation rates, 2016

Source: Eurostat, LFS — own calculations.

Long tenure periods, especially This points to labour market for prime-age individuals, may segmentation — it is a sign that also be a sign of static labour 'insiders' are able to benefit from markets in which workers remain relatively long and stable career attached to their job and do not paths while 'outsiders' experience move between more productive short-term jobs. Figure 4 gives an firms and sectors. This might be indication of average job tenure for relevant in particular where long workers aged 15-64. tenure coexists with a high proportion of temporary workers (e.g. in France, Croatia, Italy, Portugal, Slovenia).

Figure 4 — Job tenure in years (15-64-year-olds), 2016

Source: Eurostat, LFS — own calculations.

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Labour market segmentation does While temporary employees are usually not affect different population young, the chance of being in 'solo self- groups equally. Temporary employees employment' increases with age. This and self-employed workers (without emerges clearly from a European employees) tend to be poorly educated, Commission analysis13 presented in to work part-time and to be employed Figure 5. in agriculture, construction or services.

Figure 5 — Probability of being a temporary employee or self-employed without employees -100 -50 0 50 100 150 200 250 300 Personal characteristics Age 15-19 Age 30-39 Age 40-49 Age 50-59 Age 60+ Female Low educated Medium educated

Job characteristics Part-time Medium Skilled Low Skilled Agriculture Manufacturing Electricity, water supply and waste… Construction Wholesale and retail trade,… Information and Telecommonication Real estate activities Professional and admin services Other Services Temporary employee Self-employed without employees

Source: Labour market and wage developments in Europe, 2017. Note: 1) The graph shows for various personal and job characteristics the change in the likelihood of being a temporary employee or a self-employed person without employees as compared to the reference category. Each bar represents by how much the probability increases for one specific individual characteristic when the others are held constant: for example, being younger than 20 years old increases the likelihood of being a temporary employee by 145% compared to an individual aged 20 to 29.

13 Labour market and wage developments in Europe. Annual Review 2017.

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3. POLICY LEVERS TO ADDRESS THE compensate for the greater security POLICY CHALLENGES the restrictions on firing provide. Strict employment protection, especially A vast amount of literature has concerning procedural requirements, investigated the impacts of reduces the likelihood of jobs being employment protection legislation destroyed in the event of economic on labour markets. A compendium of shocks. By raising the effective cost of recent theoretical and empirical employment, however, it also evidence on the macroeconomic dampens job creation. As a impact of such legislation can be found consequence, it reduces job losses in the European Commission's Labour during recessions but also limits the market developments in Europe 2012 number of jobs created during 14 report and the Employment and expansionary periods, as employers social developments in Europe Review are likely to avoid incurring high 15 2015 . A review of the impact on dismissal costs. Labour turnover is labour market segmentation can be usually low in countries where found in the recent Labour market and legislation entails high and uncertain 16 wage developments in Europe 2017 dismissal costs. These may limit the report. reallocation of employment towards more productive activities. We refer to these three reports for in- depth analyses of the determinants Strict employment protection and outcomes of employment legislation increases the duration protection legislation, including the of unemployment and long-term impact of labour litigation, as well as unemployment rates. The predicted for detailed policy guidance. This effect of such legislation on the overall section presents a non-technical unemployment rate is ambivalent (as summary of the main findings and strong employment protection best policy practices to address the legislation reduces both job creation challenges presented in Section 2. and job destruction). However, the combination of lower job destruction Employment protection legislation and reduced job creation is likely to comprises both a 'transfer' translate into longer unemployment component (e.g. severance spells. In particular, unemployment payments from the employer to tends to last longer for those entering the employee) and a 'deadweight the labour market for the first time loss' component (e.g. procedural and for intermittent spells (e.g. groups costs, dispute settlement where the young, the low-skilled and processes). The deadweight loss women are overrepresented). component raises effective labour costs, thereby weighing not only on The combination of strong dismissal decisions but also on hiring. protection against dismissal for By contrast, the transfer component those on open-ended contracts and may have neutral effects provided that loose enforcement of protection wages are sufficiently flexible to for temporary or other non- standard contracts induces labour

market segmentation. Stricter 14 European Commission (2012), 'Labour employment protection legislation market developments in Europe 2012', regulating permanent contracts European Economy 5/2012. increases the likelihood of temporary 15 European Commission (2016), contracts being used. It also widens 'Employment and social developments in the gap between the job tenure of Europe Review 2015', Directorate-General for permanent and temporary workers and Employment, Social Affairs and Inclusion. between their respective wage 16 European Commission (2017), 'Labour market and wage developments in Europe. Annual Review 2017', Directorate-General for Employment, Social Affairs and Inclusion.

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levels17. Stringent employment allocation of labour resources and less protection legislation mainly affects innovation. By favouring the new entrants to the labour market, the dispersion of job-specific skills, more well-educated and people working in extensive use of temporary work may market services. Strict regulation of also dampen labour productivity temporary hiring does not influence growth. the likelihood of being in a temporary job. However, even where the legal To give the best results, framework is strict, weak enforcement employment protection legislation of it increases the chance of people should not hamper transitions being put on temporary contracts. between jobs. It should allow the With relatively stringent protection of economy to respond smoothly to open-ended contracts, workers hired shocks requiring the reallocation of under non-permanent arrangements labour between different sectors or risk being stuck in unstable jobs. occupations, while protecting workers effectively. Complex and uncertain Nevertheless, it might be considered regulation governing the termination that the employment situation of those of open-ended contracts makes firms in temporary jobs is not always as reluctant to hire workers and engage precarious as often argued. This is in innovative activities because of the because employees may have long- unpredictable costs of dismissing term relationships with the same employees. Workers can also be employer and enjoy the same if not discouraged from pursuing cases of stricter protection rules against unfair dismissal when the dismissal. Firms may also be interpretation of the law makes encouraged to circumvent hiring and enforcement of employment protection firing restrictions by contracting out legislation uncertain. Uncertainty over work to self-employed people. judicial outcomes is also costly for employees: they may see the payment Ill-designed labour regulation can of their salaries suspended while a hinder employment participation, court case is under way and in especially for groups facing situations where judges differ widely specific challenges (the low-skilled, on the expected duration of a case. young people, older workers and women). This can happen if rules and The effectiveness of the dispute costs make employing them resolution system following claims economically unattractive and of unfair dismissal has a strong encourage the persistence of impact on employment protection undeclared work by creating perverse legislation in practice. Early dispute incentives for firms to circumvent resolution frameworks reduce the legislation. direct costs and uncertainty of labour disputes. The design of pre-trial Moreover, while it is widely recognised conciliation and mediation mechanisms that job security can encourage and the distribution of costs between employees to invest in firm-specific the plaintiff and the defendant may skills that help productivity, overly influence the litigation rate. Similarly, strong employment protection the possibility for courts to take into legislation can hurt productivity and account pre-court attempts to growth by leading to less efficient negotiate a settlement may influence the incentives to resolve disputes before going to court. This can 17 These differences remain after controlling ultimately reduce labour litigation and for individual and job-specific characteristics the uncertainty of court rulings. that influence the demand of specific contract types. European Commission (2017), 'Labour In terms of best policy practice, the market and wage developments in Europe. assessment of employment protection Annual Review 2017', Directorate-General for legislation reform priorities across EU Employment, Social Affairs and Inclusion.

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Member States could take into account Appropriate complementary the following aspects: measures, ensuring 'flexicurity', are essential when reforming Segmentation problems can be employment protection legislation. tackled by reducing the gap According to the 'flexicurity' paradigm, between employment protection the focus should be shifted from legislation for permanent and protecting the specific job (job temporary contracts. Excessive use security) to providing employment of temporary contracts and low rates security over a person's working life. of transition to permanent contracts This means that greater contractual may be caused by overly strict flexibility should accompany reforms legislative constraints on individual providing universal and adequate and collective dismissals and/or overly coverage of unemployment benefits, flexible regimes for fixed-term effective active labour market policies contracts. In countries with such gaps, and lifelong learning opportunities. the desirability of a single open-ended These measures would help workers contract linking a worker's protection make the transition from temporary to to their tenure has been emphasised permanent contracts and give them in recent debate. adequate levels of security to face heightened labour market risks. Excessive proliferation of different types of contracts may lead to Support by social partners is serious gaps between insiders and essential to implementing ambitious outsiders ('contractual fragmen- reforms of employment protection tation'). Increasing the flexibility of legislation effectively and ensuring specific types of contracts without they are socially sustainable. modifying the rules for permanent contracts or for collective dismissals The sequencing and timing of has in the past widened the gaps reforms are important. Weakening between insiders and outsiders in the employment protection legislation labour market. This has led to during a downturn may cause greater segmentation of the market in a job destruction that is not number of Member States. compensated by higher job creation. This may result in higher There is no single way to reform unemployment (and higher spending employment protection legislation on unemployment benefits) in the systems but different paths that short run, although in the medium depend on country characteristics. term this will be compensated by The specific scope and direction of stronger job creation. reforms depend on: 4. CROSS-EXAMINATION OF  the priority given to each of the POLICY STATE OF PLAY labour market problems to be tackled; Member States' regulations appear  the features of employment highly heterogeneous, even within protection legislation that can best groups of countries with similar contribute to achieving the reform socioeconomic characteristics. The objectives; biggest differences in employment  the need to address other issues protection legislation across the EU than the legislation itself (e.g. are in the regime for dismissing people unemployment benefits) to ensure on regular contracts. The differences the reform path is effective and relate not only to the legislation's feasible; and stringency but also the instruments to  the wide differences in national protect workers against dismissal. The employment protection legislation greatest differences concern the systems and the need to preserve definition of fair and unfair dismissal their internal coherence. and the related remedies.

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 In some countries the definition (e.g. Belgium, Finland, and of fair dismissal is not restrictive, Sweden). In Austria, employees and unfair dismissals are limited to have access to individual severance cases which are not reasonably accounts. Where severance based on economic circumstances payments exist, the amount varies and to cases of discrimination. greatly between Member States (This is the situation in e.g. depending on the reason for Belgium, Czech Republic, Denmark, dismissal (justified or not justified) Greece, Ireland, Italy, Hungary, and other conditions. Poland, Slovakia and the United Kingdom). In the Anglo-Saxon The regulation of temporary countries, in particular, there is no contracts also differs quite need to justify an economic considerably within the limits of the dismissal as such. In some other principles set out in the Directives on countries (e.g. France, Slovenia, fixed-term work and temporary agency Finland) dismissals are not justified work. Member States also differ on the if they are not based on an rules and procedures for collective objective and relevant reason. dismissals. However, common Further specific conditions apply in principles enshrined in the Directives 18 case of collective redundancy (e.g. on collective redundancies somewhat in Estonia, the Netherlands, reduce the variations between EU Austria). countries.

 Protection of workers in case of Employment protection legislation unfair dismissal differs widely indicators make it possible to across the EU. Broadly speaking, in quantify the overall strictness of case of unfair dismissal a worker is employment protection legislation entitled either to a pecuniary and to compare different countries. compensation on top of what is The OECD compiles such indicators normally required for a fair for most of its member countries (the dismissal, or to be reinstated. OECD Employment Protection Employers may also have to pay Legislation Index) from 21 elements the worker's foregone wages ('back of legislation (see Figure 5 and Table pay'). In some cases reinstatement 1 in the Annex for a description of is not provided for (e.g. Belgium, these indicators). The latest update of Finland) while in others this index covers legislation in force reinstatement is the rule (e.g. in 2013 (or 2014 or 2015 for a limited Estonia, Austria). In some Member number of countries) in 21 EU States, firms may have to both Member States that are members of reinstate a worker and provide the OECD plus three other Member 19 'back pay' (e.g. Italy, Portugal) if States — as such, most recent dismissals are based on reforms are not considered. The discrimination. In others, instead of methodology has been refined to take additional compensation only 'back more systematic account of how legis- pay' is required (e.g. Czech lation, collective bargaining Republic, Ireland). agreements and case law are interpreted20.  The design of severance payments also differs greatly between countries. Severance payment entitlements may be enshrined in law (e.g. France, 18 Hungary, Portugal and Slovenia) or Directives 75/129/EEC and 98/59/EC. 19 established collective agreements The employment protection legislation (e.g. Sweden and Denmark for blue database does not include Bulgaria, Cyprus, Malta and Romania. collar workers). In some countries 20 OECD, Employment Outlook 2013, severance pay does not exist at all Chapter 2.

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Indicators on OECD employment Since 2008 in-depth reforms of protection legislation have limits employment protection legislation and should be interpreted with have been undertaken in a number caution. Not all changes in of Member States, in particular in employment protection legislation southern Europe and parts of eastern modify the OECD indicators. A change Europe. To a large extent the reforms may be insufficient to modify the have weakened permanent workers' scoring given to a particular protection against dismissal. This has characteristic of government regula- been done by, among other things, tion. Alternatively, specific aspects of limiting scope for reinstatement in the the legislation may not be considered case of unfair dismissal, capping back- in the calculation of the index (e.g. the pay, cutting levels of severance pay length and uncertainty of judicial and extending the duration of the trial procedures in case of unfair dismissal, period. or treatment of the self-employed). Moreover, the indicators do not fully In some countries, procedures for capture certain aspects relating to the collective dismissals have been enforcement of employment protection simplified and their cost therefore legislation21. reduced. The regulation of temporary contracts has been changed to discou- In the years before the financial rage their excessive use, including crisis most reforms aimed at through higher non-wage costs23. As a facilitating hiring on fixed-term consequence, the employment protec- contracts. Between 2000 and 2008 tion legislation indicator for open- employment protection legislation ended contracts has either remained indicators for individual regular constant or markedly decreased contracts and collective dismissals (Figure 6). remained broadly stable. At the same time the regulation of fixed-term The fall in the indicator appears to be contracts was noticeably loosened in a particularly strong for Portugal, but number of countries. These 'partial' reductions can also be seen for labour market reforms have been held Estonia, Greece, Spain, Italy, responsible for increasing the gap Hungary, Slovenia Slovakia, and the between highly protected permanent UK. For some countries (e.g. Italy, the workers and poorly protected Netherlands) the indicator is not able temporary workers22. to capture the effect of labour market reforms implemented after 2013.

21 A third common criticism concerns the inevitable degree of subjectivity affecting the codification of national legal features into a composite index (Venn 2009). Since codifi- cation may at times provide misleading interpretation of national rules and procedures, or ignore relevant non-legislative 23 For a review of labour market reforms, see data, the OECD index should be handled with 'Labour market and wage developments in care or possibly integrated with an up-to-date Europe 2015', Chapter 4, European Commis- and more comprehensive EU-28 database. sion. Additional detailed information on 22 E.g. Blanchard, O and A. Landier, (2001) recent reforms can be found in the LABREF 'The perverse effects of partial labor market database: reform: fixed duration contracts in France', https://webgate.ec.europa.eu/labref/public/. NBER Working Paper 8219. Boeri, T. and P. Recent evidence from LABREF is summarised Garibaldi (2007) 'Two tier reforms of employ- in European Commission (2017), Labour ment protection: a honeymoon effect?', The Market and Wage Developments in Europe: Economic Journal, Vol. 117, pp. 357-385. Annual Review 2017, Chapter 3.

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Figure 6: Employment protection legislation index for permanent and temporary work contracts in 2013* and 2008

Source: OECD Employment Protection Database. *2014 for Slovenia and UK; 2015 for Croatia and Lithuania

Activity to reform employment rules for open-ended contracts, protection legislation has been simplifies and reduces non-standard particularly intense in countries with forms of contracts and increases both large accumulated imbalances internal flexibility rules within firms. and stringent job protection legislation before the crisis. These include Spain, In Lithuania, the revision of the Croatia, France, Italy, Portugal and Labour Code passed in 2016 reduced Slovenia. Belgium passed the single the cost of individual dismissals by status law, essentially harmonising shortening the notice period and notice periods between blue and white reducing severance pay. It also collar workers and redefining unfair loosened restrictions on using fixed- dismissals. Dismissal costs, including term contacts and introduced a for collective dismissals, were also number of new contract types. These reduced in the United Kingdom. The include apprenticeship contracts, remainder of the section presents a project-based work contracts, job- partial list of reforms implemented in sharing contracts and multiple- recent years. employer contracts. In July 2015, the Netherlands introduced a cap on Croatia completed the labour law severance payments for unfair reform started in 2013 by adopting the dismissal and provided more clarity on Labour Act in 2014. This facilitates the the routes to be followed in case of use of some forms of non-standard dismissal (the Public Employment work and simplifies dismissal Service in case of economic reasons procedures. In August 2016, France and the courts in case of personal introduced a reform specifying the reasons). The maximum duration of circumstances in which individual temporary contracts was also reduced dismissals can be undertaken for (from 3 to 2 years) and the number of economic reasons. The reform also months between contracts before a introduces more flexibility into how new chain of temporary contracts can working conditions are set at company start was increased. In 2016 Poland level. In 2014, Italy adopted a introduced restrictions on the number comprehensive labour market reform of consecutive fixed-term employment in the form of the Jobs Act. Among contracts and on their maximum other things, this revises dismissal duration. It also brought the notice

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period for fixed-term contracts into facilitated access to fixed-term line with that for permanent contracts. contracts (e.g. Czech Republic) and temporary agency work (e.g. Greece, More generally, a number of Member Lithuania). Some (e.g. Croatia, Italy, States have tightened limits on fixed- Portugal,) have increased the duration term contracts, and more specifically or renewal possibilities of fixed-term on the use of temporary agency work contracts in order to encourage job (e.g. Denmark, France, Italy, Slovakia, creation. Slovenia). By contrast, others have

5. REFERENCES

 Blanchard, O and A. Landier, (2001), 'The perverse effects of partial labor market reform: Fixed Duration Contracts in France', NBER Working Paper 8219.  Boeri, T. and P. Garibaldi (2007), 'Two tier reforms of employment protection: a Honeymoon effect?', The Economic Journal, Vol. 117 pp 357-385.  European Commission (2012), 'Labour market developments in Europe 2012', European Economy 5/2012.  European Commission (2016), 'Employment and social developments in Europe Review 2015', Directorate-General for Employment, Social Affairs and Inclusion.  European Commission (2017), 'Labour market and wage developments in Europe. Annual Review 2017', Directorate-General for Employment, Social Affairs and Inclusion.  OECD (2013), 'Employment Outlook 2013', OECD Publishing.  Pedersini, R. and Coletto, D. (2010). 'Self-employed workers: industrial relations and working conditions', European Foundation for the Improvement of Living and Working Conditions, 2010.  Venn, D. (2009), 'Legislation, collective bargaining and enforcement: Updating the OECD employment protection indicators', OECD Social, Employment and Migration Working Paper No 89.

Date: 17.10.2017

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ANNEX

Main features of employment  In some countries employers that protection legislation intend to dismiss an employee have to notify, sometimes at the Three main aspects of employment employee's request, one or more protection are usually regulated by third parties (workers' represen- legislation: the protection of workers tatives or the public employment in case of individual dismissal; service, labour inspectorate or other specific requirements for collective government authorities). As well as redundancies; and temporary notification, in some countries forms of employment. employers also have to provide third parties with a justification for The main features of employment dismissals. Depending on the protection legislation for individual country, delays before the notice dismissals are as follows: period can start may exceed 1 month.  Probationary period. During the trial period both parties can termi-  Reasons for individual dismissal. nate the employment relationship at In most cases the legislation on no cost (a notice period and terminating an employment contract severance pay generally do not requires the employer to substantiate apply). To avoid the risk of the reasons for the dismissal. A employers taking advantage of long dismissal can be justified on: trial periods, the legislation often fixes a maximum duration. In some - disciplinary grounds or countries, the legislation allows personal reasons (except deviations from the standard discriminatory cases); maximum length through temporary - economic grounds (elimination derogations, most notably for work- of the post, technological change, related training. In some cases, the unsuitability of the worker). trial period is regulated in such a way as to reduce dismissal costs at its While dismissal on disciplinary start. The maximum trial period in grounds does not involve compen- the EU ranges from less than 1 sation to the worker, dismissal on month to 12 months; in a majority of economic grounds does involve countries it is between 3 and 6 compensation (severance payments) months. in most countries. National laws differ on the scope of valid reasons for  Notice periods and procedural dismissal and the discretion of judges requirements. Labour laws often in questioning employers' decisions. stipulate a notice period for Valid reasons for dismissal can be dismissal and an obligation to defined in a broad way, with the provide prior notification in writing. advantage of providing room to cope Failure to comply with the notice with a disparate range of situations. period may give a right to Alternatively, the reasons for justified compensation for the earnings that dismissal can be very detailed, the worker would have received had thereby reducing labour judges' room this been correctly observed. to scrutinise employers' decisions. In Generally speaking, procedures some countries, unjustified dismissals depend on whether the reason for are limited to cases which are not dismissal is personal (e.g. due to reasonably based on economic incapacity, or for disciplinary circumstances and cases of reasons) or economic. Procedures discrimination. In other countries may also depend on the type of dismissals are not justified if they are worker, company size and trade not based on an objective and union membership. relevant reason. In addition, in case

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of redundancy, dismissals are severance payments exist in case of considered unlawful if the employer dismissal for economic reasons but fails to take into account specific are not usually due in case of circumstances of the dismissed dismissal for disciplinary reasons. In workers (e.g. tenure, family some countries employers do not responsibilities, professional qualifi- bear any severance payments but cations, age/gender balance in a the notice period can be very long firm). In some countries, lawful (e.g. Finland, Sweden)24. In others, dismissal requires specific alterna- severance pay is the main cost of tives to redundancy to be considered. dismissal (e.g. the Netherlands, These alternatives include retraining Spain). The size of severance and/or transfer of the worker to payments is often linked to the another position in the firm. length of service and to the employee's wage level close to the  Consequences of unlawful moment of dismissal. Severance dismissal. In case of unlawful payments may be subject to a cap. dismissal firms face legal In some countries their size is consequences. Normally, a worker is inversely correlated to the length of entitled either to a pecuniary the notice period. The financing of compensation on top of what is severance payments generally normally required for lawful comes entirely from the employer dismissals, or to be reinstated. that undertakes the dismissal, but in Employers may also have to pay a some countries severance payments worker's lost wages. The regime for are shared among several reinstatement differs widely across employers. In Austria, for instance, the EU. In some cases it is not they are financed through a fund in provided for, while in others it is the the name of the employee. This is rule. Often, the decision about portable across employers until reinstatement is left to the worker. In dismissal or retirement, and all some countries, firms may have to employers in the employee's career pay additional compensation if the contribute. worker is not reinstated. In others they are required to pay Collective redundancy procedures compensation only for wage losses are triggered by the simultaneous and for the social security dismissal of a number of employees for contributions unpaid during the reasons not connected to the individual period between the dismissal and the workers concerned. In case of collective judgment. 'Back pay' is capped in redundancies the minimum requirements some countries. In some (e.g. set by the 1998 Directive on collective Germany), the reinstatement option redundancies25 are applicable in all is available to the employee but is Member States. Rules on collective rarely taken up as the structure of dismissals concern: the labour process contains strong incentives for both sides to resolve  Definition of collective dismissal. any litigation by mutual agreement This is the minimum number of before going to court. workers dismissed in a given lapse of time, in a given location, for the  Severance payments. Severance dismissal to qualify as collective. The pay consists of a one-off lump-sum number is often linked to firm/plant payment to a worker who has been size. involuntary dismissed. Severance payment entitlements may be set out in law or in collective 24 agreements. The payment may With few exceptions (Belgium, Germany, differ according to the reason for Greece), statutory severance payments are due without any consideration of the notice dismissal (justified or not justified). period. In the majority of countries 25 Directive 98/59/EC.

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 Procedural and notification out specific projects; and start-up requirements. These concern ventures implying risky and uncertain employers' obligations to: returns). - consult workers' representatives when contemplating collective Different types of contract exist for redundancies, with a view to temporary agency work. The finding alternative solutions specificity of temporary agency work is whenever possible; and that if usually two parties — employer - notify the competent public and worker — are involved in an authority of their intention to employment relationship, then carry out a collective redundancy. temporary agency work includes a third party — the user undertaking.  Criteria for selecting employees Temporary agency workers are to be dismissed. Transparent and employed and paid by a temporary work non-discriminatory criteria may be agency (the employer), but they are indicated by law, in collective placed at the disposal of user agreements, or through the undertakings on a temporary basis and information and consultation work under their supervision. Depending procedure. on the national legislation applicable, temporary agency workers can work  Compensation and other impli- under fixed-term contracts or under cations of unlawful collective permanent employment contracts. dismissals. In most cases, severance payments provided for This form of employment meets a real individual economic dismissals are need of user firms: it enables them, for also due in case of collective instance, to manage production peaks or redundancy. Additional monetary replace absent employees fairly easily. compensation (e.g. co-financing of The minimum level of requirements to unemployment benefits) may have to protect temporary agency workers are be provided by the employers. set by the 2008 Directive on temporary National legislation provides for legal agency work27. consequences if procedural or notification requirements or selection criteria for dismissal are not complied with.

Legislation places constraints on the use of fixed-term contracts in order to prevent discrimination against fixed- term workers and the abuse of such contracts. The minimum requirements for fixed-term contracts to be followed by all Member States are set by the Directive on fixed-term work26. The conditions for using such contracts generally include providing reasons to justify their use and accepting limits on the number of renewals and/or the total duration of cumulated contracts. (Reasons justifying their use include, for example, coping with unexpected fluctuations in demand; replacing permanent staff for short periods; hiring workers with specialised skills to carry

26 Directive 99/70/EEC. 27 Directive 2008/104/EC.

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Table 1 — Strictness of employment protection, OECD indexes

Protection of permanent Protection of permanent Specific requirements for Regulation on temporary workers against individual workers against (individual) collective dismissal forms of employment and collective dismissals dismissal

Belgium 2013 2.99 2.14 5.13 2.42 Czech Republic 2013 2.66 2.87 2.13 2.13 Denmark 2013 2.32 2.10 2.88 1.79 Germany 2013 2.84 2.53 3.63 1.75 Estonia 2013 2.07 1.74 2.88 3.04 Ireland 2013 2.07 1.50 3.50 1.21 Greece 2013 2.41 2.07 3.25 2.92 Spain 2013 2.36 1.95 3.38 3.17 France 2013 2.82 2.60 3.38 3.75 Croatia 2015 2.30 2.32 2.25 2.88 Italy 2013 2.89 2.55 3.75 2.71 Latvia 2013 2.91 2.57 3.75 1.79 Lithuania 2015 2.42 2.23 2.88 3.33 Luxembourg 2013 2.74 2.28 3.88 3.83 Hungary 2013 2.07 1.45 3.63 2.00 Netherlands 2013 2.94 2.84 3.19 1.17 Austria 2013 2.44 2.12 3.25 2.17 Poland 2013 2.39 2.20 2.88 2.33 Portugal 2013 2.69 3.01 1.88 2.33 Slovenia 2014 2.39 1.99 3.38 2.13 Slovakia 2013 2.26 1.81 3.38 2.42 Finland 2013 2.17 2.38 1.63 1.88 Sweden 2013 2.52 2.52 2.50 1.17 United Kingdom 2014 1.59 1.18 2.63 0.54 EU unweighted 2.47 2.21 3.12 2.28 average

Source: OECD Employment Protection Database, www.oecd.org/employment/protection.

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