Outsourcing in the Baltics: employment law basics
As the repercussions from the global financial downturn continue to impact on sales and growth, companies have made significant cost savings to maintain profit margins. The Baltic States are particularly attractive to European corporates by virtue of their lower wage costs, geographical proximity, a highly educated workforce and language skills. After enduring a very difficult recession, the Baltic region set a growth agenda and has boosted exports of non-transport services by approximately 20 per cent since 2009 as foreign companies outsourced back offices and other functions across the region. Estonia’s economy outpaced the rest of the European Union last year, expanding 7.6 per cent, while Lithuania grew 5.9 per cent and Latvia at 5.4 per cent compared to France at 1.7 per cent and even Germany at three per cent.
Needless to say, the relocation of operations to the Baltic region – whether it be to Estonia, Lithuania or Latvia – involves, inter-alia, setting up and maintaining new employment structures and schemes. This requires a thorough knowledge and application of local employment law, which in each state contains a number of mandatory provisions, essential to the effective outsourcing of operations.
Estonia has received much praise for its innovative environment, particularly within the IT sector. Companies such as Skype have left a strong footprint in the country and the international community. Estonia’s favourable tax regime, balanced budget and small foreign debt have ensured it plays host to a vast number of international technology companies such as Skype, Microsoft, Playtech, Ericsson and Nortal. Initiatives such as FinanceEstonia and MedicineEstonia have also been launched to improve the regulatory, tax and immigration environment in Estonia even further with the aim to attract investment and skilled labour.
In 2009, Estonia adopted a new labour law called the Employment Contracts Act. The law, which aims to create flexibility and security in employment relations, has been subject to criticism by the trade unions and various political parties for its employer-friendliness and straightforward application of the Freedom of Contract Principle.
Dismissal procedures have been made easier to allow for more flexibility by reducing notice periods and compensation paid by the employer. For example, employers are only required to pay a uniform one month’s compensation upon dismissal and stipulate notice periods ranging from 15 days to 90 days depending on the years of service. To ease the financial burden of redundancies for the employer, compensation is shared by the employer and the Estonian Unemployment Insurance Fund. Compensation on wrongful termination is limited usually to three months’ salary and no re-institution is available for the employees.
While these measures may sound harsh, such flexibility for employers has had an equally positive effect as the employers have not been “afraid” to recruit staff when the economic outlook for the company has improved.
Latvia was hit especially hard by the economic recession of 2008. It has nevertheless demonstrated a strong will and an ability to overcome the crisis by introducing strict budget consolidation measures. The Latvian economy has since stabilised and is currently experiencing the fastest growth rate among all EU countries. During the first quarter or 2012, Latvian GDP grew by 6.9 per cent and the forecast for 2012 is four per cent. Latvia’s unemployment rate, which reached a record level of 17.3 per cent in March of 2010, has dropped to 11.6 per cent as of July 2012. Due to the high number of skilled workers combined with the relatively low labour costs, Latvia is an attractive destination for international companies for setting up their Baltic headquarters, service centres as well as back office functions (e.g. SEB Bank).
The currently effective Labour Law has been in force for more than a decade and has been amended on a number of occasions in order to implement various EU directives. Generally, the law itself, as well as the courts, may be regarded as employee-protective. The mandatory provisions of the Latvian Labour Law may not be opted out by the parties to the employment contracts.
Although the unionisation rate in Latvia is rather low (predominantly in blue collar sectors like energy, transportation and manufacturing), trade unions have considerable power granted by the Labour Law as well as influence on the overall political and economic situation in the country through participation in the National Trilateral Cooperation Council. This is a forum where consensus between the government, trade unions and Confederation of the Employers is sought.
In most cases, the consent of the trade union is required in order to terminate employment with a trade union member and, moreover, the trade union is not obliged to give reasons for its refusal to grant consent. In the case of a refusal the employer is entitled to file a claim in the courts on termination of employment but salary should be paid to the employee during the whole period of any litigation.
The standard rule is that all employment contracts should be entered into for an unlimited duration. Fixed-term employment is allowed only in certain cases expressly set out by the Labour Law. This includes the replacement of absent employees, seasonal work as well as short-term increases in workload.
Provisions regarding termination of employment are also particularly employee-friendly. During the probation period (a maximum of three months), both the employer and employee may terminate the employment with three days’ notice without giving any reasons. Thereafter, the maximum termination notice period for employees is one month. Employers are prohibited from terminating employment without a cause. Depending on the reason for termination, the notice period ranges from immediate termination (intoxication at work) up to one month (redundancy). In the case that employment is terminated due to reasons not related to the employee‘s conduct, severance compensation is to be paid ranging from one up to four average monthly salaries (depending on seniority with the company). In the case of unfair dismissal, employees are entitled to receive compensation equal to the average earnings for the whole period of litigation, as well as claim reinstatement in the previous position.
Strong people skills, exceptional geographic location and low labour costs – the second lowest in Europe in 2011 according to Eurostat – have allowed Lithuania to become an extremely popular destination for call centre outsourcing and setting up other business operations such as IT and communications and related-technology companies. Investment projects in business services in Lithuania peaked in 2008 and continued in 2009–2010 from companies such as Barclays Bank, Computer Sciences Corporation, Western Union and others. The Lithuanian government has set a strategic goal to become the leading Northern Europe service hub by the year 2015.
When outsourcing to Lithuania, foreign investors should take into consideration the statutory provisions regulating the hiring and firing processes. The Lithuanian Labour Code, amended in 2010, allows concluding fixed-term employment contracts with employees who are employed for newly created permanent positions (some restrictions apply, applicable till 31 July 2015). Generally, employment contracts must be made in writing and are required to comply with the standard form established by the law. The employer may establish a probation period of a maximum of three months. An employment contract of indefinite duration may be terminated by either party by providing notice and complying with relevant legal procedures. The contract may be terminated by several means, including mutual consent of the parties or at the initiative of one party. An employee is not required to give reasons for his/her resignation; however, the employer cannot terminate an employment contract without a valid reason. Furthermore, termination of an employee on the initiative of the employer is subject to written notice and payment of compensation calculated on the employee’s length of service.
The most common mistake that foreign employers make is a failure to abide by the mandatory provisions regulating the field of employment. Certain provisions of the Lithuanian Labour Code are obligatory and it is not possible to negotiate on terms that are less favourable than established in the law. Given that outsourcing usually requires work in shifts and night work, foreign employers should be aware of the applicable work and rest time regulations. Lithuanian employment laws allow setting up 24/7 business operations by approving summary working time regulations, where employees work in shifts and their working hours may be accounted during a set period (up to one year). The summary working time regulations may be introduced in a company only having regard to the opinion of the employees’ representatives. Overtime and night work shall be compensated at a rate of 1.5.The on-duty time is limited to one day per week and its hours are restricted.
About the Authors
Dace Silava-Tomsone, Sven Papp and Zilvinas Kvietkus are, respectively, Managing Partner, Partner and Partner at Raidla Lejins & Norcous, one of the largest law firms in the Baltics and Belarus and a member of Ius Laboris, the world’s largest human resources law firm alliance.