Policy Responses to New Forms of Work

Chapter 5. Fixed-term contracts

A number of countries reported recent policy discussions about growth in fixed-term and temporary employment. In most OECD countries (and all EU countries), individuals in fixed-term employment contracts generally have access to similar rights (i.e. in respect to employment protection rules) and benefits as comparable employees on open-ended contracts. However, this does not rule out the possibility of practical barriers to exerting these rights and accessing benefits for temporary workers on fixed-term contracts, and that their jobs might still be more precarious and of lower quality.

Some countries noted the potential of fixed-term contracts to act as a “stepping stone” to open-ended contracts (particularly for younger workers or the long-term unemployed) while allowing firms to meet temporary labour needs. However, countries also had concerns that successive fixed-term contracts could act as a trap, where an individual simply moves from one low-paid temporary position to the next. Hungary noted the potential for fixed-term contracts to contribute to labour market segmentation. Social and economic precariousness was a major concern, according to the Italian questionnaire response, including the risk that this trap may exclude or delay young people from certain aspects of adult life, such as accessing a mortgage.

Policy responses targeting the use of fixed-term contracts include:

• Restricting the use of fixed-term contracts;

• Implementing financial disincentives for fixed-term contracts; and

• Encouraging the use of open-ended contracts by enhancing flexibility or through financial incentives.

5.1. Restrictions on the use of fixed-term contracts

Many countries have attempted to limit the use of fixed-term contracts by placing restrictions on when and for how long firms can use them.

Within EU member states, EU directive 1999/70/EC already establishes some general principles and minimum requirements aimed at balancing flexibility in working time and security for workers. The directive applies a principle of non-discrimination, requiring that fixed-term workers be treated in a manner no less favourable than comparable permanent workers are. It also requires member states to take measures to prevent abuse, which can include requiring objective reasons for renewal of a fixed-term contract, imposing a maximum overall duration or imposing a maximum number of renewals.1 In implementing the EU directive, EU member states have had the freedom to choose which exact measures to take, with the result that there are significant variations across EU countries in regulations for fixed-term contracts.

A new Labour Code came into force in Lithuania in July 2017, expanding the variety of available employment contracts and introducing some changes to the regulations on fixed-term contracts.

“The new Labour Code expanded the diversity of employment contracts to satisfy the needs of the employees and employers, more flexible regulation of working hours and adaptation of the dismissal regulation to the market conditions” – Lithuanian questionnaire response

Changes to the regulations on fixed-term contracts included:

• Introducing the possibility to use fixed-term contracts for work of a permanent nature (as long as they do not account for more than 20 per cent of all contracts concluded by the firm);

• Doubling the rate of unemployment insurance contributions for fixed-term contracts compared to open-ended contracts;

• Decreasing the maximum overall duration for successive fixed-term contracts from five years to two years (with some exceptions); and

• Imposing a minimum notice period for work relationships of more than a year and providing for severance pay where the relationships of over two years.

In Japan, following the Action Plan for the Realization of Work Style Reform adopted in March 2017, the government said that it had amended the law, which included regulations to eliminate irrational inequalities in the working conditions of irregular workers (including fixed-term workers as well as part-time and dispatched workers) with respect to those of regular workers. In practice, this means that fixed-term workers are now entitled to equal treatment to regular workers with the same duties and same “scope of shift in duties and personnel positioning” (including opportunities for advancement/promotion). Employers are also now obliged to explain working conditions to fixed-term workers and, if they differ to those of regular workers, why this is.

A number of other countries also mentioned recent tightening of the restrictions around fixed-term contracts:

• Germany’s 2018 Coalition Deal included an agreement to limit the number of fixed-term contracts concluded without an objective reason per firm, and to reduce the maximum duration from 24 to 18 months (if an objective reason is provided, the maximum is five years).

• The Decreto Dignità in Italy, issued in July 2018, has introduced a rule that after 12 months it is only possible to renew the fixed-term contract if the firm provides specific justification. At the same time, the maximum overall duration of successive fixed-term contracts has been reduced to 24 months (from 36) and the maximum number of renewals has been reduced from five to four.

• Recent legal decisions by the Swiss Federal Supreme Court (in 2017) and the Swiss Federal Administrative Court (in 2016) have made it more difficult for firms to use multiple extensions of fixed-term contracts to avoid dismissal protection clauses.

• In 2018, the Portuguese Government negotiated new measures with social partners with the aims of decreasing excessive use of non-permanent contracts and increasing protection for fixed-term workers. The Parliament approved the draft law in general terms. The draft law is subject to further discussion and approval in specific terms.

By contrast, the Netherlands and Estonia have moved in the direction of loosening restrictions around the use of fixed-term contracts:

• The Dutch government’s 2017 coalition agreement (2017[14]) included measures to roll back some restrictions that had been implemented in 2015, such as reverting back to three years (from two years) the period after which consecutive fixed-term contracts are automatically converted into an open-ended contract.

• Estonia reported proposals to reduce restrictions on consecutive entry into and extension of fixed-term employment contracts as part of an attempt to make employment contracts more attractive relative to contracts for provision of services, thereby strengthening social and labour protection for workers.

While French law sets a maximum total duration (18 months) and number of renewals (twice) for fixed-term contracts, legal changes in September 2017 have given precedence to the maximum duration and number of renewals set within sectoral agreements, with the consequence that a shorter duration or higher number of renewals (or equally a longer duration and lower number of renewals) could be set, according to the specific requirements within each sector.

5.2. Financial disincentives for fixed-term contracts

Some countries have chosen to impose higher social contribution rates for fixed-term contracts, with the intention of making them more costly for employers relative to open-ended contracts. In this way, firms may be forced to internalise the total cost of using fixed-term contracts, including any negative externalities (e.g. in the form of more frequent unemployment benefit dependency).

Italy and Spain reported attempts to impose higher unemployment insurance contributions for fixed-term contracts. For instance, in Italy, an additional contribution of 1.2% was introduced for fixed-term contracts in 2012 to finance the universal unemployment benefit scheme for dependent workers (with the justification that workers in temporary jobs are more likely to become unemployed). The Decreto Dignità issued in July 2018 increases the additional contribution by 0.5% for each renewal of a fixed-term contract. In both Italy and Spain, there are also compensating rewards if the contract is converted into a permanent job.

Spain also mentioned a fight against very short-term contracts, “the use of which was said to have rocketed with the financial crisis, with contracts of under 7 days said to account for one in every four new contracts. They noted an increase in social contributions for contracts of under 5 days from 36% to 40% adopted in December 2018.

France also has penalties in terms of unemployment insurance contributions for a certain type of short-term contract in certain sectors. The inter-professional agreement on the reform of unemployment insurance (22 February 2018) opened a discussion about incentives to reduce short-term contracts, including employers’ contributions that better reflect the cost of unemployment insurance (through an experience rating system).

Similarly, in Portugal, proposed amendments, which would increase the social security contribution rate for fixed-term employment contracts when their share exceeds a certain threshold, have been submitted to Parliament.

5.3. Incentives to use open-ended contracts

Some countries have also attempted to encourage employers to hire on open-ended contracts by enhancing the flexibility associated with these contracts or by offering financial incentives.

As part of the 2017 coalition agreement, the Dutch government announced a package of measures to “shrink the gap” between open-ended and fixed-term employment contracts. Some of the measures were aimed at making standard employment contracts more flexible, e.g. reducing barriers to dismissal in cases of multiple grounds for dismissal, extending probationary periods (to five months) for new employees on open-ended contracts, reducing the entitlement to paid sick leave, and reducing firms’ unemployment insurance contributions for open-ended contracts.

“The aim is to prevent workers from being trapped in a ‘revolving door’ of fixed-term contracts” – 2017-2021 Dutch Coalition Agreement (2017[14])

In 2015 in Italy, a new type of open-ended contract with increased flexibility with respect to dismissal was introduced. A fiscal incentive accompanied this new contract: a three-year exemption from social security contributions for new open-ended contracts signed in 2015 (up to a maximum). The 2016 Stability Law maintained this financial incentive for 2016, but provided the exemption for two years only (and with a reduced maximum). In 2018, social contributions were halved for new open-end contracts for workers aged under 30 (35 in 2018). However, the recent Decreto Dignità has increased compensation for unfair dismissal in open-ended contracts and a September 2018 Constitutional Court ruling has given full discretion to judges to fix the specific amount between the minimum and the maximum fixed by the law. These two recent changes may have the effect of diminishing flexibility with respect to dismissal.

In 2017, France attempted to encourage employers to hire on open-ended contracts by facilitating dismissal procedures: an upper limit for unfair dismissal was set, the scope of fair dismissal was restricted, an easier collective dismissal procedure was created (rupture conventionnelle collective) and delays for dispute resolution were shortened.

Croatia and Portugal also mentioned financial incentives for employers that offer open-ended contracts to young workers and, in the case of Portugal, also to the long-term unemployed. In Croatia since 2014, a firm that that offers a young worker (under 30 years) an open-ended contract is exempted from paying part of the social contributions for that worker for a period of five years. Similarly, in Portugal, contributions are reduced for employers who sign permanent contracts with young first-time workers or long-term unemployed. The reductions were recently lowered but extended to a longer period and made portable from one employer to the next.

Note

← 1.  At the same time, the Canadian response cited a report on precarious work (Busby and Muthukumaran, 2016[3]), which suggests that temporary work does act as an important stepping stone towards full-time permanent employment. The report favours a “Flexicurity” policy approach, which tries to strengthen the social safety net (e.g. through retraining programmes and improved social protection) against volatile labour market conditions, and is critical of attempts to restrict the use of these contract types.