CWS 3.0: January 25, 2012

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Europe: Less Regulation Ahead?

In response to criticism from many quarters regarding the volume of legislation originating from the European Union, the EU Industry and Enterprise Commission has pledged to make “smart regulation” a priority. The Commission’s strategy is based on three key actions:

  • Promoting the design and application of better regulation tools at the EU level, notably simplification, reduction of administrative burdens and impact assessment.
  • Working more closely with member states to ensure that better regulation principles are applied consistently throughout the EU by all regulators.
  • Reinforcing the constructive dialogue between stakeholders and all regulators at the EU and national levels.

While there has been some progress in cutting red tape, the progress has been neither extensive nor quick enough for many businesses struggling to cope with uncertain economic conditions. This has led some governments to take the initiative to reduce the legislative burden themselves. Among the more vigorous in this regard has been the U.K.

Cut the Red Tape

The British Chambers of Commerce have estimated that employment legislation has cost business £15.1 billion (US$22 billion) since 1997. Among them: the National Minimum Wage Act, the Working Time Regulations, the Maternity and Parental leave Regulations, the Part-Time Workers Regulations 2000, the Information and Consultation Directive, the Fixed Term Work Directive, Directives on Equal Treatment in Employment and Occupation and Race, as well as the Agency Work Directive. Many of these laws have their origins in the European Union.

The Conservative-Liberal Democrat coalition government, which took office in May 2010, has pledged to cut regulation and red tape affecting U.K. businesses. As part of its 2011 Budget, the government unveiled a plan aimed at creating “the right conditions for businesses to succeed, removing barriers that are preventing them from performing to their full potential,” including a reduction in burdensome regulations. Specific measures include the scrapping or changing of a number of planned employment regulations:

  • Since April 2010, workers in companies employing more than 250 staff have had a right to ask for time to study or train, on or off the job. The right was due to be extended to organizations with 250 or fewer staff from April 2011. However, following a consultation, the right was not extended.
  • The statutory right to request flexible working, which applies to parents of children under the age of 17 (or 18 for children with disabilities), was due to be extended to the parents of children under 18 from April 2011. This did not occur.
  • Under the Equality Act 2010, “dual discrimination” rules were due to come into effect in April 2011, allowing workers who believe they have been discriminated against because of two protected characteristics (age, sex, disability, race, sexual orientation, etc.) to bring a combined claim. The government will not now bring forward these rules.
  • The Equality Act introduced a requirement for businesses to take reasonable steps to prevent persistent harassment of their staff by third parties. The government regards this as unworkable, as employers “have no direct control” over such harassment, and will consult on removing the requirement.
  • The period employees must have been with an employer before they can claim unfair dismissal is to be raised from one to two years, from April 2012. Measures to speed up the employment tribunal process and tackle weak or baseless claims will also be introduced.

The government plans to publish a timetable for a further review of employment law over the course of the current parliament, aimed at reducing the estimated £1 billion annual burden for employers of complying with such laws.

Further, recognizing the particular burden that new regulation places on small businesses, the government now exempts businesses with fewer than 10 employees and “genuine” business start-ups from complying with virtually all new domestic legislation for three years as of April 1, 2011.

The government will also launch review of burdensome EU regulations and directives. In the employment field, it will seek to prevent: “costly and regressive amendments to the pregnant workers directive and costly revisions to the directive on national information and consultation, which is being reviewed by the European Commission. Further, it was announced that the Agency Work Directive would be subject to a review within a month of its implementation.

The U.K. employers’ confederation, the CBI, has welcomed the reduction in regulations affecting businesses and said that the government’s “commitment to reducing red tape will increase the amount of time that managers spend growing the business and creating jobs.”

The U.K. is not alone in its quest to ease regulatory burdens on businesses.

The Spanish government also seeks to banish employment laws. It hopes that cutting regulatory burdens will spur job creation and help the country escape from its economic crisis.

While trade unions and employers’ representatives had aimed to reach an agreement on possible changes by Jan. 13. Despite their failure to do so, the new center-right government has decided to push ahead without “broad consensus” and aims to produce a labor reform draft by early February.

Despite the reform efforts of the previous Socialist-led government, labor laws have remained too rigid, and the new prime minister, Mariano Rajoy, has said labor market reform is key to tackling the country’s painfully high unemployment rate of — over 21 percent — especially with the country expected to slip into recession by early 2012.

Too-rigid labor laws have resulted in real wage growth outpacing Spanish productivity growth, contributing to a steady climb in unit labor costs since the adoption of the euro. According to OECD estimates, Spain’s relative unit labor costs in manufacturing have increased by 25 percent between 1999 and 2010 — compare that to Germany, where unit labor costs have fallen by 7.2 percent over the same period.

Spanish employers would particularly welcome lower severance payments for permanent contracts with the hope that a lower level of employment protection legislation for workers on permanent contracts would help to create a more stable employment market.

The share of total employment based on temporary contracts in Spain has fallen from a previous high of 30 percent to 22 percent in the third quarter of 2011, but still remains significantly higher than the OECD average of 13 percent. The labor reform is likely to remove differences between permanent and temporary workers by creating a universally applicable contract to cover job benefits and severance pay. At the same time, the Spanish government has so far failed to meet the deadline for reviewing its agency temporary work legislation in accordance with the EU Agency Work Directive. Staffing agencies and users of contingent labor will be hoping that this item also gets addressed within the labor review.

The new government also wants to have greater wage flexibility within Spain’s collective wage bargaining framework which allows agreements at the company level to have more legal weight than those of regions or sectors when they involve disputes over salaries and incentives and other important employee issues. The government is keen to abolish the country’s wage-indexation system (linking wage awards to past inflation), which automatically adjusts salaries of three-quarters of Spanish wage-earners to national inflation levels.

The red-tape debate has also been a hot topic within other European countries.

Germany. The German government has identified five strategic action areas for reducing bureaucracy, including the labor market and self-employment. Lawmakers have set themselves the task of identifying and removing possible barriers in the labor market and to self-employment to make it easier to start businesses and create jobs. Thus far, however, they have presented few concrete examples of how they can achieve this.

Norway. In Norway, there has been a general debate over the country’s trade and cooperation agreements with the European Union. While Norway is not a member of the European Union, it follows EU laws and regulations as part of its membership of the European Economic Area (EEA). Accordingly, more than 6,000 EU laws have been included in Norwegian law, while its veto right has been discussed — but not exercised — 17 times, to the consternation of many Norwegians. Frustrations bubbled over last week when Norwegian unions organized a strike over the Agency Work Directive.

Fragile state. The European Union has been in a more fragile state in recent years, not least because of the weakening of the Euro and a destabilizing debt crisis. A more balanced regulatory agenda will be essential in persuading skeptical European citizens of the EU’s value and relevance, reducing unemployment and in allowing European businesses to remain competitive in the global marketplace. But whether such a change in culture can be successfully imposed on such a massive bureaucracy as the EU remains to be seen.

“The EU must win back the endorsement of its existence, which it has lost from many citizens and even from many parts of the economy,” said Dutch EU Commissioner Frits Bolkestein. “The loss of this endorsement stems from an almost all encompassing impression that Brussels legislates regardless of the people’s wishes and of long established traditions and cultures, constantly introduces rules and regulates things that could be regulated at least as well at the regional or national level.”

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