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Well-meaning law paving road to labour misery, say experts

Slovakia's new Labour Code, approved by parliament in July, may have the unintended result of putting even more people out of work, analysts and business leaders say.
The new legislation, which replaces the country's 1960s-era labour laws, offers all part-time employees the same job security and benefits enjoyed by full-time workers. By doing so, labour experts claim, the Code makes labour more expensive, and could lead companies to shed jobs or force employees to accept unofficial contracts with even less security, both resulting in higher unemployment.
Slovakia's unemployment rate is the highest on the continent, and has remained stubbornly above 18% virtually since the Dzurinda government took power in 1998. Several Slovak districts face jobless rates of over 30%.

Slovakia's new Labour Code, approved by parliament in July, may have the unintended result of putting even more people out of work, analysts and business leaders say.

The new legislation, which replaces the country's 1960s-era labour laws, offers all part-time employees the same job security and benefits enjoyed by full-time workers. By doing so, labour experts claim, the Code makes labour more expensive, and could lead companies to shed jobs or force employees to accept unofficial contracts with even less security, both resulting in higher unemployment.

Slovakia's unemployment rate is the highest on the continent, and has remained stubbornly above 18% virtually since the Dzurinda government took power in 1998. Several Slovak districts face jobless rates of over 30%.

"The idea [of employees having equal job benefits] is a good one, but is being implemented at the wrong time when employers are not able to bear an additional burden," said Peter Ondruška, advisor to Peter Gajdoš, vice-president of the Confederation of Trade Unions (KOZ), a labour umbrella group.

Best intentions

The Labour Code is the main piece of legislation governing employer-employee relations. Slovakia's new Code, to take effect from April next year, introduces two major changes to past rules. First, every business with more than five employees will be required to have a work council (consisting of a single employee representative in companies with less than 20 workers), elected by company employees. Work councils must be consulted on every labour-related issue, although they do not have the bargaining power in wage negotiations that trade unions enjoy.

In the second major change, the new Code abolishes the most common form of part-time contract - the dohoda o pracovnej einnosti (work agreement - DPC) - for all but student workers. This form of contract is particularly common among small and medium-sized enterprises (SMEs) because, unlike standard full-time contracts, it does not oblige employers to pay the minimum wage or holiday benefits to their workers, nor does it require firms to pay the state the equivalent of 38.5% of each employee's gross wage in social benefits premiums. According to Labour Ministry statistics, almost two thirds of SME employees work under DPC contracts.

Both changes in the Labour Code were meant to enhance employee protection, explained Mária Buchtová, head of the Labour Ministry's job contracts unit. "We are aligning our legislation with that of the European Union, taking on its directives as well those of the UN's International Labour Organisation," said Buchtová. She added that the ministry had felt that DPC contracts were widely abused in the country by employers trying to escape their duties to full-time employees.

But improving workers' job security, in making labour more expensive to employers, is seen by many experts as a mistake. Even trade unionists question the benefits of the new law, with KOZ's Ondruška explaining: "Employers are not able to pay all those payroll taxes at the moment, and to tell the truth, I expect that in perhaps two years this stipulation [concerning DPC agreements] will have to be looked at again and changed back to the way it is now."

Róbert Prega, a macroeconomics analyst at Tatra banka, agreed. "It [the new Labour Code] will not change the basic problem [of the labour market]: high unemployment. On the contrary, one can expect that some jobs will disappear as a result of higher labour costs," said Prega. He added that healthcare and social security reform would be of greater assistance since they would allow premium payments to be cut and thus reduce the costs of labour.

International finance organisations are of the same opinion. "[Slovakia's] high payroll premiums (the highest in the OECD) are creating a wedge between labour costs and wages, and discouraging the creation of new jobs, at least in the formal sector," reads the International Monetary Fund's July report on Slovakia. The World Bank 's draft report from June this year adds that poorer regions may be suffering the most from payroll premiums.

On the other hand, medium-sized businesses, both Slovak and foreign-owned, are not greatly alarmed by the upcoming legislation changes. Many in the IT sector, for instance, use DPC agreements with students only. "This change will not affect us in any significant way," said Eva Styková, an accountant at the Slovak branch of US software giant Oracle. Of the local branch's 60 employees, six have DPC contracts, but all are students, Styková said. And while there is no work council at the company, its managers talk to their employees regularly, she added. "Perhaps we don't call it that, but here it works like [a work council]."

Jana Kekčeková, an accountant with cable systems construction company Netlab International, said that if pressed, the firm would simply replace its DPC contracts with another part-time agreement with no payroll premium requirements - the dohoda o vykonaní práce (DVP). However, this job agreement, unlike the DPC, requires more paperwork, and each firm has to make sure it is a one-off type job with a definite result at the end of the contract. Fines of up to one million crowns may await companies found guilty of abusing the agreement.

Another way for companies to meet the requirements of the new Labour Code yet keep labour costs under control is to hire workers from professional personnel companies. These firms officially employ workers and deal with all the paperwork, but then contract them out to interested parties, such as Coca-Cola Beverages Slovakia.

Its HR manager, Jana Holstýnová, said she found this an optimal solution. "We lease workers from third parties such as personnel agencies, who then deal with all contract-related problems themselves," she said. Slovakia's branch of Coca-Cola employs around 100 workers in its local production plant, with a further 25-30 employees added in the peak seasons, such as Christmas or Easter. As far as worker councils are concerned, Holstýnová said Coca-Cola would adjust to the new rules. "It's all about good communication [between employers and employees], so I don't see it as a problem for us," she said.

In the end, it is small local companies rather than mid-sized businesses with foreign capital behind them that may suffer the most. Jozef Hosmaj, the head of the Regional Advisory and Information Centre in Považská Bystrica, works with many entrepreneurs in north-central Slovakia.

"Employers are not in any situation to take on even more obligations on account of their workers, as labour is too expensive even now," he said. "Sure, some employees are now in a disadvantageous position, but they make voluntary decisions to sign these contracts [and thus give up some job benefits]. I can't imagine what entrepreneurs will do if they aren't able to use these [DPC] job contracts."

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