Employment protection legislation (EPL) includes all types of employment protection measures, whether grounded primarily in legislation, court rulings, collectively bargained conditions of employment or customary practice. The term is common among circles of economists. Employment protection refers both to regulations concerning hiring (e.g. rules favouring disadvantaged groups, conditions for using temporary or fixed-term contracts, training requirements) and firing (e.g. redundancy procedures, mandated prenotification periods and severance payments, special requirements for collective dismissals and short-time work schemes).
There exist various institutional arrangements that can provide employment protection: the private market, labour legislation, collective bargaining arrangements and not the least, court interpretations of legislative and contractual provisions. Some forms of de facto regulations are likely to be adopted even in the absence of legislation, simply because both workers and firms derive advantages from long-term employment relations
There exist various institutional arrangements that can provide employment protection: the private market, labour legislation, collective bargaining arrangements and not the least, court interpretations of legislative and contractual provisions. Some forms of de facto regulations are likely to be adopted even in the absence of legislation, simply because both workers and firms derive advantages from long-term employment relations.
According to Barone (2001) with the acronym EPL economists refer to the entire set of regulations that place some limits to the faculties of firms to hire and fire workers, even if they are not grounded primarily in the law, but originate from the collective bargaining of the social partners, or are a consequence of court rulings. In particular, provisions favouring the employment of disadvantaged groups in society, determining the conditions for the use of temporary or fixed-term contracts, or imposing training requirements on the firm, affect hiring policies, while redundancy procedures, mandated pre-notification periods and severance payments, special requirements for collective dismissals and short-time work schemes influence firing decisions. The nature of these restrictions on the firms’ freedom to adjust the labour input is quite similar in all OECD countries, but the actual procedural details and the overall degree of stringency implied by them varies considerably. These provisions are enforced through the worker’s right to appeal against his lay-off.
Some aspects of these regulations, like the length of advance notices or the dimension of severance payments can be measured with precision. Other important features of EPL, like for example the willingness of labour courts to entertain appeals by fired workers, or how judges interpret the concept of “just cause” for termination, are much more difficult to quantify.
Effects of employment protection legislation On the duality of the labour market
Some economists have claimed that empirical evidence gives support to their theories, according to which EPL leads to a segmentation in the labour market between the so-called insiders, the workers with a protected job, and the outsiders, who are people that are either unemployed or employed with fixed-term, part-time or temporary contracts, or even in the black economy, and face big difficulties to find a job covered by EPL because of the firms’ reduced propensity to hire. This latter group is mainly constituted by youths, women, racial minorities and unskilled workers.
Whether EPL has any effect on unemployment is an issue of contention between economists. On the one hand, assuming that the cyclical wage pattern is not affected by mandated firing costs, EPL reduces the propensity to hire by employers, since they fear that such decisions will be difficult to reverse in the future, in case of a recession. On the other hand, EPL also leads firms during downswings to keep more workers employed, than they would have otherwise done. Therefore, EPL reduces both job creation and job destruction, so that the net effects on average employment and unemployment are not identifiable a priori. What is instead agreed among economists, is that more stringent EPL lowers the fluctuations in the quantity of labour demanded over the business cycle, leading to smoother dynamic patterns of those aggregates.
Economists considering that EPL has no effect on unemployment include Blanchard and Portugal (2000). In their article they compare two opposite countries as regards their EPL stance: Portugal with one of the more strict legislations in the world and the US with one of the more flexible ones. In spite of these differences, both countries have similar unemployment rates which undermines the argument considering that EPL has any effect on unemployment. Instead, the authors claim that EPL does affect two other variables: job flows and unemployment duration. EPL would reduce job flows (from employment to unemployment: employers are less willing to fire, given that they must pay indemnizations to workers) therefore reducing unemployment but would increase unemployment duration, increasing the unemployment rate. These two effects would neutralize each other, explaining why overall, EPL has no effect on unemployment.
Nickell (1997) arrived to similar conclusions when stating that labor market rigidities that do not appear to have serious implications for average levels of unemployment included strict employment protection legislation and general legislation on labor market standards.
Among those that have found evidence suggesting that EPL increases unemployment are Lazear (1990). The author argued that mandated severance pay seemed to increase unemployment rates. His estimates suggested that an increase from zero to three months of severance pay would raise the unemployment rate by 5.5 percent in the United States.
Lazear (1990) once again argues he has evidence suggesting that EPL reduces the employment-to-population ratio. In his article he claims that the best estimates suggest that moving from no required severance pay to three months of required severance pay to employees with ten years of service would reduce the employment-population ratio by about one percent. In the United States that would mean over a million jobs. Lazear argues that the young could bear a disproportionate amount of the burden.
To the contrary, Bertola and Bentolila (1990) found evidence supporting the idea that firing costs have a larger effect on firms’ propensity to fire than to hire, and therefore (slightly) increase average long-run employment.
Several authors have found that EPL has significant effects on wages. As stated by Lazear (1990), in a perfect labor market, severance payments can have no real effects as they can be undone by a properly designed labor contract. Leonardi and Pica (2006) found evidence supporting this claim. They suggest that in the case of Italy an EPL reform in 1990 had as effect to reduce entry wages by 6 percent, implying that firms tend to transfer the increase in the cost of firing (due to EPL) onto workers. In fact, in their study they find that 25 percent of the firing cost was shifted onto lower wages in the case of Italy.
Employment protection legislation
Employment protection legislation (EPL) consists of rules and procedures that limit how companies hire and fire employees (820 KB PDF). These rules can be enshrined in law but also in collective and individual labour contracts. The rationale of the legislation is to protect workers through a series of requirements that employers must respect when dismissing workers.
The EU has adopted a number of labour law directives that set minimum requirements for matters such as collective redundancies, information and consultation, fixed-term work and temporary work. All have implications for some elements of EPL. These EU directives form a common minimum level of protection for workers in all Member States. When implementing these directives, the Member States have to respect fundamental social rights.
Eurofound’s Network of European Correspondents has in recent months reported noteworthy developments in Member States related to EPL. Proposed changes in legislation relating to the termination of employment were mostly intended to liberalise or simplify the conditions or costs of dismissing or temporarily laying off employees. The exceptions to this trend were Germany and Latvia.
Grounds for dismissal and notice period
In the third quarter of 2013, the Court of Appeal in Luxembourg ruled that an employer can dismiss employees to safeguard the company’s competitiveness. Employers do not have to wait for serious financial difficulties or for the company to be in danger.
The new Croatian Labour Act amended the legitimate reasons for cancellation of a labour contract. Normal notice to terminate employment can now be given for unsatisfactory performance or behaviour during a probation period. It is no longer the case that an employer can only give notice for business or personal reasons if the affected worker cannot be placed in another vacancy or retrained for another task. Furthermore, if giving notice due to business reasons, an employer no longer has to consider whether a worker is disabled, and the obligation to observe all the so-called ‘social’ criteria has been completely abolished in cases where the employer gives notice for personal reasons.
The German Federal Labour Court has affirmed the principle that longer legal periods of notice apply to employees with long tenure. The court ruled that this does not constitute direct or indirect age discrimination. Even though in some cases this may discriminate against younger employees, it is justified by the need to give older employees better protection against dismissal.
Amendments to the Latvian labour law changed some legislation norms regarding employment status. Section 112 now explains in detail the procedure for declaration of employment termination. It specifies how to submit a notice of termination to the second party personally by means such as a written letter sent by post or by email. This additional detail improves the situation for both employees and employers because it introduces a clearly defined process.
Severance payments to employees, the statutory benefit that compensates a worker for loss of income due to the termination of employment, constitute a considerable part of employer’s redundancy costs. The regulation of severance pay is left to the discretion of the Member State.
In October 2014, the UK government proposed changes to redundancy regulations for highly paid executives in public-sector jobs. Under the new proposals, anyone who takes redundancy from the public sector, and then within a year takes a new job earning more than GBP 100,000 (€135,640 as at 24 February 2015) in the same part of the public sector, will have to repay all or part of their original redundancy package. The government proposes to take forward these measures through secondary legislation implemented no later than April 2016. The government response published in October 2014 sets out definitions and exemptions and how the scheme will operate in practice.
In Spain, financial services group BBVA suggested in November 2014 that severance payments linked to the dismissal of workers with open-ended contracts should be lower (in Spanish). BBVA explained that severance pay in Spain is too expensive for companies and that, if it were cheaper, this would encourage employers to sign more open-ended contracts and reduce the high proportion of fixed-term work contracts in the Spanish labour market. BBVA suggested that each employee should allocate approximately 2% of their total remuneration for the creation of a so-called dismissal fund to complement severance pay in case of dismissal. This fund would be owned by the employee and it should be possible to take it to another company if not dismissed, or use it once retired.
In the Netherlands, the new Dutch Act on Work and Security aims to simplify dismissal. The need for a dismissal permit from the public authorities will remain unless the employee concerned agrees to the dismissal. The employer will no longer be free to choose between dismissal through the Employee Insurance Agency (UWV) or dismissal by the cantonal court. Where dismissal is for financial reasons, the employer will need a UWV permit. In all other circumstances, the employer will have to make an application through the courts and there will be a possibility of appeal. The third important change is the overhaul of the present system of severance pay, using the concept of transition payment. Employees are entitled to one-sixth of their monthly pay for every six months of employment for the first 120 months and one-quarter of a month’s pay per six months thereafter. The maximum amount is capped at €75,000 or one year’s salary, whichever figure is higher. Some deviation from the maximum is allowed. Costs incurred by an employer to help an employee find other work or reduce the duration of their unemployment (including efforts to improve a worker’s employability) may be deducted from the transition payment. The Act on Work and Security passed the Lower House in February 2014 and came into force on 1 July 2014. Views on the new legislation are mixed. Critics doubt whether it will achieve its intended aim to strengthen the position of flexible workers. They fear that many employers will refrain from offering employees a new fixed-term contract if that would result in a permanent contract. Another criticism is that the system of dismissal law will be least as complex as it is now, if not even more so.
Temporary lay-offs and short-time work
Short-time working schemes offer the possibility of a temporary reduction in employees’ working hours and help avoid the need to suspend their employment. Often, the employee is entitled to financial compensation from social security fundsfor the payment lost.
The social partners in the Norwegian private sector, such as the Norwegian United Federation of Trade Unions (Fellesforbundet) and the Federation of Norwegian Industries (Norsk Industri), have been arguing in favour of reintroducing the previous regulations on temporary lay-offs. Temporary lay-offs are a temporary suspension of the employment contract. Employees are not dismissed, but are paid unemployment benefits beyond the period during which employers are obliged by law to continue paying their workers. The scheme is mainly based on collective agreements; in periods when the labour market is difficult, both trade unions and employers’ organisations want shorter periods during which employers must continue to pay wages and longer periods on unemployment benefits. The social partners’ view is that this will preserve jobs in the long run. Changes to the previous regulations came into effect on 1 January 2014, when the period during which the employer had to pay wages was extended from 10 to 20 days, making temporary lay-offs more costly for the employer. From January 2014, the maximum possible lay-off period was reduced from 30 to 26 weeks. When the government presented its 2015 budget proposals in October 2014, it said the new regulations would remain in force. It may be that the government does not think current labour market conditions demand a more generous shift of costs from the employer to the state. However, social partners on both sides fear that the new regulations may lead to the permanent dismissal of some employees.
In November 2014, the Czech government approved the introduction of a short-time working subsidy, which it refers to as ‘kurzarbeit’. The subsidy will be paid to employers – where they face external economic pressures – to help them retain employees while lowering their labour costs. Employers will pay 70% of salaries and the state 20%, while the workers concerned will take a 10% cut in pay. However, the Confederation of Industry of the Czech Republic (SP ČR) does not consider this version of kurzarbeit as motivating as the previous one. And the trade unions demanded that employees who are laid off should receive 90% of their average pay, with 45% paid by their employer and 45% by the government.
In November 2014, Luxembourg’s government adopted a bill amending the Labour Code following agreement in tripartite meetings between the government and the social partners (in French). The aim is to extend Luxembourg’s short-time work measure for a maximum of 10 calendar months for companies covered by an employment retention plan. These measures are extended until the end of 2016 for the steel sector. In other sectors, the measures expire at the end of 2015.