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How Employment Law Became a Factor for Investors in CEE

How Employment Law Became a Factor for Investors in CEE

Czech Republic
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Had one taken a look at the employment laws in, say, Germany or France in 1989 and compared them to the then Czechoslovak Labor Code, one would have been surprised: The law in formerly Socialist countries was so pro-employer that it looked like a capitalist law from the 1920s.

Protection of employees in matters such as unfair decisions by their superiors, dismissals, protection in the event of sickness, duration of vacation, and maximum working hours was a lot worse than in the EC countries at the time. And this is before we consider work safety, actual employee involvement in management, protection of privacy, non-discrimination, and so on. In practice, matters were even worse, as employees were often forced to accept contractual penalties, wage cuts, and other unjust actions because of a lack of information, a lack of courage, inefficient legal protection, or simply the need to keep their job.

Maybe because in theory the factories before were owned by the workers themselves, Czechoslovak (and Hungarian and Romanian) employees were not able to enjoy many of the privileges their colleagues in Western Europe had, such as the six weeks of vacation or 35-hour working weeks guaranteed in France or Germany. Moreover, trade unions – a former pillar of the communist regimes – had such a bad reputation that workers exited from them en masse. And although a few areas – such as energy, railways, and state administration – remained unionized, even in those there were extremely few collective disputes. Strikes, as important as they were in the 1980`s in Poland and later during the various national revolutions across Eastern Europe, were subsequently almost unheard of.

In addition, while social security charges for employers were higher in this part of the world than in Western European countries (even today in the Czech Republic today the rate is 34%, and in Slovakia even higher, compared to Germany’s 21%), with wages only one third of the average wages a few miles to the west, this was only a moderate cost.

For more than 20 years, Western trade unions tried to convince Czech employees to become as self-confident as their colleagues in the West. Only in a few instances, such as with Skoda Auto, did they find much success. 

This did not mean, however, that employees were defenseless, and in fact they often resolved their dissatisfaction with employers in unexpected ways. For instance, productivity is often lower than expected, even with much of the salary coming in variable parts – an indication of demotivation. Even though sickness was and is sanctioned financially, for instance, absences in Czech as well as Slovak companies remain higher than in the foreign parent companies, leading to such things as a “bonus for attendance” – a reward to employees simply for not calling in sick.

Company theft – a phenomenon much more common here than in Western Europe – is another way employees in this part of the world attempt to rebalance a perceived inequality. In interviews with employees accused of theft one often hears the internal justification: “They pay us so much less than in their Western parent companies, I was justified in making up for my low wages by simply taking this thing.”

The most obvious sign of bad labor relationships, of course, is high turnover in the workforce. Recent years have witnessed a high demand for skilled staff, and the Czech Republic, for instance, has unemployment levels below Germany. As a result, frustrated or dissatisfied employees who once may have sought the assistance of a trade union, works council, or state court (into which trust as to quality and speed is still very low), will often now simply leave the firm. Since 2004/2007 the possibility of working at a much–better-paid position in London, and since 2011 in Munich, is a realistic option and has lead to an undeniable brain drain, most visible in the hospitals all over the region.

On the other hand, employers cry for more flexibility in working relations, for instance to introduce so-called “working hours accounts,” allowing them to react faster to increases and decreases in demand, as they are used to in their German or US operations. New matters such as working from home that are not covered by the old laws have sprung up. Both employers and employees have to deal with the new digitalized economy, where the old eight-hour working day to be performed in a factory or an office is slowly but surely becoming a thing of the past. 

What will the countries in our region do in order to stay attractive to investors in the present situation? Although the wage cost advantage of the CEE countries is disappearing (albeit slowly), a qualified workforce will become even more scarce.

But couldn’t modern employment laws allowing for the flexibility needed in the 21st century, together with institutionalized mechanisms of solving conflicts between employers and their employees, become an advantage in the international race of CEE countries for competitiveness?

By Arthur Braun, Partner, bpv Braun Partners

This Article was originally published in Issue 3.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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