Slovakia has a new Labour Code

While there may not have been enough time to assess the full impact of Slovakia’s revamped Labour Code, the new legislation has already moved Slovakia into the group of 10 OECD countries with the most flexible labour codes.

The trade unions disagree with recent changes made to the Labour Code.The trade unions disagree with recent changes made to the Labour Code. (Source: TASR)

While there may not have been enough time to assess the full impact of Slovakia’s revamped Labour Code, the new legislation has already moved Slovakia into the group of 10 OECD countries with the most flexible labour codes.

The revision to the law, one of the most important pieces of legislation pursued by the government in 2011, introduced significant changes to a Labour Code that was last modified by the previous government of Robert Fico. It was adopted by the Slovak Parliament on July 13, and became effective on September 1.

“The legislation is more accommodating towards employees and their families, and it protects those who need it,” Prime Minister Iveta Radičová claimed.

The changes immediately attracted criticism from the head of the opposition party Smer, Robert Fico, who argued that they weakened the legal protection of working people “at a time when they need it most”.

Jozef Mihál, minister of labour, social affairs and family, welcomed the legislation as good news for Slovakia, forecasting that it would create tens of thousands of jobs.

“It sends a very strong signal to anyone considering investments [here, whether they are] in Slovakia, elsewhere in Europe, or anywhere in the world,” Mihál said after the final vote, as quoted by the SITA newswire.

Michal Páleník of the Employment Institute, an employment think tank, suggested that the Labour Code is important but only one part of a large and complex labour market.

“It can certainly help to create new jobs, but it is not a panacea for all the labour market’s ills,” Páleník told The Slovak Spectator.

Specifically, he continued, he does not believe the new legislation will have a transformative impact in ‘bad’ regions suffering from long-term unemployment.

“It will certainly help where the labour market already functions smoothly,” he said. “But in regions with huge unemployment, where people are clinging tooth and nail to their jobs and where an employer has an unchallenged monopoly, no labour code can help because there are different, informal rules in play, beyond the scope of such legislation.”

Employers have, on the whole, reacted positively to the new Labour Code. They certainly perceive it to be a step towards making the legislative framework governing relations between employers and employees more flexible.

Robert Kičina, the head of the Business Alliance of Slovakia, agreed with the government that the modifications will help create new jobs.

“It is enough to look at countries with [more] flexible labour codes, for example Switzerland, Denmark, Sweden, Great Britain, Australia, and New Zealand, to see that long-term unemployment has been kept at a lower level, around 6 percent, by such flexibility,” Kičina told The Slovak Spectator.

But employers also say that their expectations were originally higher and that there is still room for improvement.

“The final wording [of the legislation] does not solve all the requirements of employers and all the problems of the labour market,” Martin Hošták of the National Union of Employers (RÚZ) told The Slovak Spectator.

Meanwhile, trade unions are not disguising their dissatisfaction with the law, saying that employers will mostly use the new code to get rid of employees rather than hire new ones.

“Experience so far, based on signals from individual trade unions within the Confederation of the Trade Unions (KOZ), which received them from some companies and organisations, are that employers are using the new Labour Code as well as the crisis to bid farewell to employees or keep them in a state of uncertainty [about whether they will remain employed],” KOZ spokesperson Otto Ewiak told The Slovak Spectator.

The changes introduced by the amendment to the Labour Code include: cancellation of parallel entitlement to a layoff notice period and severance pay; longer periods for fixed-term employment, which can now be agreed for up to three years, with extensions or renewals allowed three times in a three-year period; a longer layoff notification period for employees with long service in the same job; and greater protection for mothers and pregnant women.

The amendment also restricts the voice of a small union within a workplace and sets a 3-percent limit on the profit margin for companies selling meal vouchers.

Furthermore, the revision removes a restriction on longer overtime hours; eases drawing of compensatory leave; sets lower premium payments for overtime work and allows for more night shifts; mandates a longer probationary period for managers; establishes five weeks of annual holiday for employees aged 33 and older; eliminates any special advantages held by state managers; and gives the go-ahead for employers to share one job among two or more employees. Six different minimum salary or wage levels are maintained in the Labour Code, based on the nature of each job and its qualifications. The amended code requires that at least 30 percent of employees in a particular firm must be members of a union for it to have the right to negotiate on their behalf.

The labour market is more flexible

According to the Financial Policy Institute, part of the Finance Ministry, the reform of the Labour Code improves the flexibility of the labour market. It makes temporary employment more flexible and reduces the strictness of rules when using temporary employees.

“The more flexible Labour Code should contribute to the creation of new jobs,” the institute wrote in late September. “It should have a positive impact, especially during periods of expansion.

Stricter regulation slows down flows in the labour market, which has a positive impact during periods of crisis, but in a time of economic growth it may limit the creation of jobs. Economies with more flexible employment protection experience bigger volatility in the labour market, and a greater drop in employment during recessions.”

Greater flexibility in the labour market should be especially beneficial for low-income groups, the institute argues. In particular, deprived groups, the young and less qualified people are worse off under higher levels of protection. Currently the unemployment rate of these groups in Slovakia ranks among the highest in the EU.

“The decline in the anticipated costs of firing these groups should increase the willingness of companies to employ more risky job applicants, in cases where there is a greater chance that the companies will have to get rid of them,” the institute wrote. “Thus the new Labour Code should improve the chances of young and low-qualified people getting a job.”

According to the institute’s calculations, the reform reduces the rigidity of the labour market, as measured by the so-called Employment Protection Legislation Index elaborated by the OECD, by 0.3 points to 1.94 points. Thus, compared with other countries, it will fall significantly below the OECD average of 2.24 percent to become the tenth lowest in the club of industrialised countries. But the institute points out that the data from other countries dates back to 2008.

Hošták, of the RÚZ, points out that neighbouring countries have not been idle either and are now making their labour codes more flexible too. This is currently true of the Czech Republic and Hungary, and means that Slovakia must continue to improve its competitiveness, said Hošták.
The trade unions warn that ‘flexible’ may also mean that employers can ‘flexibly’ get rid of their employees.

“It is necessary to look at the law in practice,” said Ewiak. “The provisions of the Labour Code that employers along with the cabinet pushed through are not a guarantee of higher employment; this is created by a complex of several economic and social factors.”

Pros and cons

The RÚZ said it perceives in a positive light those changes which have contributed to more flexible and transparent working relations. Here Hošták listed the cancellation of compulsory severance pay, and the introduction of the possibility to provide money instead of all or part of a layoff notice period; the extension of the possibility to use fixed-term employment; and the introduction of the so-called flexi-account, i.e. working-time accounts.

As well as these changes, the Federation of Employers’ Associations (AZZZ) also perceives as positive the change in philosophy for negotiations regarding labour conditions, where the Labour Code now allows, within collective bargaining but also as part of an agreement with an employees’ board, for working conditions to be adjusted in a way that differs from the regulations of the Labour Code.

“This places more stress on social dialogue, whereas before the focus was almost exclusively on wage growth,” Rastislav Machunka, vice-president of AZZZ, told The Slovak Spectator.

Markus Halt, spokesman of the German-Slovak Chamber of Commerce, also praises the greater flexibility ushered in by the revamped Labour Code.

“From the point of view of German investors in Slovakia the new Labour Code has brought more flexibility to the labour market which is crucial for attracting foreign investment,” Halt told The Slovak Spectator. “The legislative changes made by the previous government had lowered this flexibility and so decreased incentives for any expansion of employment.”

Halt listed some of the changes his chamber had long been hoping to see which were realised in the new Labour Code. These included flexi-accounts, which he said helped companies to deal with fluctuations in demand and made working times more flexible; and the introduction of a statutory basis for post-contractual non-competition clauses for managers and specialists, which have been common in Germany, Austria and even the Czech Republic since last year.

Jake Slegers, executive director of the American Chamber of Commerce in the Slovak Republic, or AmCham, said that a liberal labour policy is undoubtedly attractive to investors, though there is also a need for a certainty of stability in this area.

“If there is a liberal Labour Code in effect and it changes dramatically two years later, that is not a very strong incentive for foreign investors either,” Slegers told The Slovak Spectator, referring to changes adopted by the previous cabinet of Robert Fico. “Our members view the new Labour Code as a mostly positive development. There are issues where they feel the government may have gone a little bit further, and that might still be re-opened, but the general feeling is positive.”

Halt adds that the declared aims of the new Labour Code are to increase flexibility in the labour market and to reduce costs for employers in order to stimulate employment. In many cases, he claims, these ambitions have been realised by the amendment.

“However, it seems questionable that at the same moment they were implemented these cost reductions were partially cancelled out by increasing the holiday entitlement for younger employees and tightening minimum wage requirements,” said Halt, who still sees room for improvement. “Some unfriendly rigidities in the labour market remain.”

Halt outlines a few further problems that he sees in the revamped Labour Code. He argues that it could be improved by including measures to release employees once they reach pension age – in Germany and Austria employment automatically ends with entry into pension age – and that the failure to include such measures will result in lower employment chances for the young. He also feels that the level of wage compensation that court proceedings are allowed to award is too high under the new rules; due to the long proceeding periods in Slovakia, this could in practice lead to unjustifiably high severance payments. The necessary announcement period for vacation closedowns, currently set at six months, is too high for companies to react sufficiently flexibly to changes in demand, states Halt.

Hošták of RÚZ and Machunka of AZZZ argue that minimum wage regulations are a persisting problem. The latter also criticises the condition that the termination of a disabled person’s contract must be agreed with that employee, which he perceives as a significant barrier to employing such people.

KOZ does not see any positive changes in the new Labour Code, but reported that it has made it easier, for example, for employers to force employees to work more overtime. Signals that the new Labour Code is being abused come most often from clothing and textile companies, KOZ said, but also from the manufacturing and engineering industries.

“Also, we at KOZ receive e-mails describing practices by some employers who force their employees to work during holidays without extra payment, or in extended shifts which are unsupported by the Labour Code, but at the threat of being sacked,” said Ewiak. “This is difficult to prove because people are really scared of losing their jobs. Many of them have previous bad experiences. Even when they turned to the trade unions they failed to wait for a proper solution due to the weak enforceability of the law in Slovakia.”

Ewiak points to other changes that he sees as likely to have a negative impact. One of the most damaging, he argues, is the requirement that at least 30 percent of employees in a particular firm must be members of a union for it to have the right to negotiate on their behalf.

“Many entrepreneurs and employers hinder the start-up of trade unions, as well as their operation, by invoking the article about the need to declare a minimum of 30 percent membership out of all employees in a company,” said Ewiak.

Ewiak also attacks the new possibility of ‘chaining’ fixed-term employment contracts, i.e. extending or re-negotiating fixed-term contracts for up to three years, an extension from the previous two.

“Employers have used this tactic in the past, and they will do so again in the future: saving costs on employee benefits and providing decent education through the use of fixed-term employment contracts,” argues Ewiak. “If they needed experienced and qualified people, they would not have fought so stubbornly for this article in the Labour Code.”

More information about Slovak business environment you can find in our Investment Advisory Guide.

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