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The Human Factor

Alexia Hengl gives a brief glance at some of the human issues that come into play when a company goes global.

Worldwide, the discussion about national and supranational employment policies, along with the flexibility of labour markets have always been crucial whenever economic growth is discussed. During these years of slow economic growth (and in some countries, recession) and severe financial crisis, many policy-makers focused on the fallout from the stringent Employment Protection Level (EPL) in labour market performances and productivity growth; it turned in to one of the hottest issues on the political agenda.

In the last decade many countries adopted and/or proposed new employment legislation in an attempt to stimulate recovery and thus help national businesses gain global competitiveness. Germany, Italy, Spain, Belgium, Australia and the UK, to mention a few, were persuaded that an over-regulated labour market hinders freedom and confidence in enterprises (especially small and micro ones) and deters them from hiring workers and participating in social and economic growth. They have started to simplify cumbersome employment laws, sometimes by weakening workers’ protection, sometimes by lowering dismissal costs and reducing legal liability risks for dismissing employees.

Any incubatee following the development of an entrepreneurial project, sooner or later will have to hire people to help grow the business.  Therefore, accurate information about the specifics and risks associated with local employment laws is a critical service incubators need to provide to their tenants and client companies. This is even more true in the case of the entrepreneur who wants to go international, or participate in a soft-landing project where he or she will have to deal with a totally new and unknown labour market. At such a time, failure to recognize fundamental differences in foreign legal frameworks could be a significant disadvantage leading to serious economic loss.

A broad overview has been laid out here, and will possibly provide a route map for incubator managers to guide incubatees who are thinking of branching out beyond their native shores.

Most business-minded people probably already know that labour regulations differ greatly between the United States and Europe. Indeed, when hiring someone in the US it is common to simply submit the candidate an offer letter. But in Europe, as a rule, a comprehensive and clearly drawn-up employment contract is required. In some countries like Turkey, Brazil, Cyprus, Slovak Republic and Italy a written employment contract is not always mandatory, whereas in Croatia, Denmark, Estonia, Greece, Russia, Slovenia and Spain a written contract must be signed. Finland, Germany, Sweden, UK and the Netherlands do not set any statutory provision with regards to employment contracts’ formalities: nevertheless the employer has to provide the employee at least the main terms of the employment agreements such as the type of work to be performed, working hours, remuneration and dismissal notice period - in writing.

Entrepreneurs should, in any case, be aware that even if not forbidden, the conclusion of a solely oral employment agreement can imply legal consequences as a result of the country’s legal framework. In Belgium, for example, the absence of a written contract implies the employee is considered to be hired for an indefinite period; in Romania the employer can be sanctioned with a fine; and in Hungary the employee who has not received a written employment agreement is entitled to claim it as invalid within the set deadline - i.e. thirty days from the starting date.

Whether or not the legislation of your country requires a written contract, it is always preferable to sign a written employment contract drawn up by a local employment lawyer or an international specialized professional, keeping in mind that in countries where codification is the rule (i.e. France, Italy, Germany and Belgium) non-defined, misclassified or missing contractual terms and clauses will be, under certain conditions, automatically be replaced by current laws and statutes. In these countries, moreover, statutes and collective bargaining agreements could also replace unlawful clauses and terms included in the signed employment contract. On the contrary, countries with a common-law legal system, such as the United Kingdom, require a much more detailed employment contract, where the terms of the agreement are scrupulously listed.

In the US, with the exception of Montana, the at-will-presumption applies to all employment relationships, while in Europe (with some differences among member countries) the employment-at-will does not exist. Employment relationships are more regulated and, generally, more stringent employment protection level (EPL) and pro-employee labour laws are in force. The US employment-at-will, in its unamended form, allows the employer to dismiss the employee and the employee to leave a job at any time for any reason (or with no reason) without incurring in any legal sanction or liability. The employer will be legally liable only in cases where the dismissal is deemed to be discriminatory or retaliatory. On the contrary, in the EU and in most countries worldwide, the law allows employers to dismiss an employee only if there is substantial ground and remedies are provided against unfair dismissal.

Generally when dismissal is deemed possible without just cause, the payment of (a very diversified) severance pay-out is laid out. In Argentina,for example, a statutory severance is provided for in the case of dismissal without just cause. In Brazil, an indefinite employment contract could terminate both at the will of the employee or the employer, but the discharged employee will receive a severance payment: in case the employee is arbitrarily dismissed without cause, the employer will be fined as per the rule of law. Under the Austrian law, severance payments ranging from two to twelve months’ salary are established in favour of employees, depending on the years of service (between three and 25 years) and whose employment date commenced prior to 1 January, 2003.  Employees with less than 3 years’ tenure and claiming summary dismissal are not entitled to any severance pay-out. For employees hired as of 1st January 2003 statutory severance compensation is possible only via a dedicated state-run fund.

Outside the US, a minimum statutory notice periods or payments in lieu of notice are the norm. In France the notice period varies between one and three months depending on the employee’s status. In Australia, minimum notice periods are defined by law and range from one week to five weeks, based on the length of tenure and the age of the employee. In Germany, statutory notice periods are anything between four weeks and seven months.

In countries such as the Netherlands, government approval is required for termination and employers (in this case, the entrepreneur) can be subject to unfair or wrongful dismissal claims. Austria and Germany require employers to notify the works council (if present) of the intended termination.

Specific exceptions to the general rule, requiring a just cause for dismissal, are commonly provided by national statutes during the probationary period, allowing companies to dismiss employees at any time, for any reason. In some countries (Germany, Australia, United Kingdom and Italy being a few) longer probationary periods are recognized in favour of small and micro enterprises in order to avoid the economic loss and uncertainty, in case an unfair dismissal claim is lodged.

Apart from specific cases, employers have to be aware that, in Europe, any changes of the employment contract generally requires employee consent, and that under certain circumstances, for example, in cases of vested rights or acquired rights, it is not possible to modify the terms of the contract even with the consent of the employee. For this reason it is crucial a comprehensive compliant employment contract is signed at the start of the employment relationship.

It also is of utmost importance for entrepreneurs and incubator consultants to identify the correct applicable form of agreement under national legislation, for each employment and/or professional collaboration. Indeed, in case of misclassification, the validity of the contract could be impugned in courts and cause severe financial losses to the entrepreneur.

However formality is not everything; substance matters as well.

The formal definition of a collaborator, as a self-employed or independent contractor does not automatically hinder the relevant agreement to be defined as an employment relationship after judicial scrutiny. For example,  the newly adopted reform of the labour market in Italy (Law n. 92 of 28 June 2012) establishes that independent collaborators (meaning professionals or self-employed persons with a VAT number) are considered, under certain conditions unless proven otherwise, as indefinite contract employees of the company, in case two out of the following conditions apply:

  • The contract lasts more than eight months per solar year

  • More than 80 percent of the worker’s income derives from this contract (so called monocommittenza)

  • The collaborator has a permanent working station at the company’s premises.

With such a variety and complexity of legal frameworks and provisions it is crucial to get the mix right. A general outline of an employment contract’s elements within the European Union can be found in Directive 91/533/EEC that requires employers to provide employees with, at least, the following information:

“(a) the identities of the parties;

(b) the place of work; where there is no fixed or main place of work, the principle that the employee is employed at various places and the registered place of business or, where appropriate, the domicile of the employer;

(c) (i) the title, grade, nature or category of the work for which the employee is employed; or

     (ii) a brief specification or description of the work;

(d) the date of commencement of the contract or employment relationship;

(e) in the case of a temporary contract or employment relationship, the expected duration thereof;

(f) the amount of paid leave to which the employee is entitled or, where this cannot be indicated when the information is given, the procedures for allocating and determining such leave;

(g) the length of the periods of notice to be observed by the employer and the employee should their contract or employment relationship be terminated or, where this cannot be indicated when the information is given, the method for determining such periods of notice;

(h) the initial basic amount, the other component elements and the frequency of payment of the remuneration to which the employee is entitled;

(i) the length of the employee's normal working day or week;

(j) where appropriate;

   (i) the collective agreements governing the employee's conditions of work;  or

(ii) in the case of collective agreements concluded outside the business by special joint bodies or        institutions, the name of the competent body or joint institution within which the agreements were concluded.”

The Directive also establishes that the aforementioned may be given “in the form of a reference to the laws, regulations and administrative or statutory provisions or collective agreements governing those particular points”.

It is crucial to understand that the Directive has a set of minimum requirements to be transposed by Member States, and that including only the bare essentials  in an employment contract could be viewed as  drafting a non-compliant employment agreement under the applicable national law; thus implying severe consequences for concerned employers. National legislation, collective agreements and  every regulatory provision in force in the country where the employment relationship has to be, or is established, must be taken into consideration. Employers should seek legal advice from an employment lawyer before handing out contracts to potential employees.

The bottom line - by all means grow your business, branch out, and create employment… but always seek professional advice before asking someone to work for you!! Especially if you're planning on operating outside home turf.
Published on 14-10-2012 12:10 by David Tee. 1323 page views

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