Controversial new labour code comes into force

On 1 August 2012, the new labour code launched by Portugal’s centre-right wing coalition government came into force, bringing with it radical changes in labour relations. Changes included new rules to make it easier for companies to dismiss workers, reductions in severance pay, a reduction by 50% in overtime payments, a cut in paid holiday entitlement, and the abolition of four public holidays. The new code also imposed restrictions on collective bargaining.

Background

Between 2003 and 2009 significant changes were introduced in labour legislation in Portugal which resulted in a weakening of some of the strict employment protection policies.

The Labour Code 2009, launched by the Socialist Party (PS) government, introduced more labour market flexibility about working time rules in particular, but also in dismissal procedures (PT0811019I).

Reform of unemployment protection in 2006 by the PS government introduced stronger measures to encourage the unemployed back into work, and this was followed up with additional measures in 2010 that reduced unemployment benefit provisions (PT1005029I).

When the centre-right wing coalition government, formed by the Social Democratic Party (PSD) and the People’s Party (CDS-PP), came to power in June 2011, it launched a new package of radical labour market reforms.

These changes were mostly in response to the the commitments laid out in the Memorandum of Understanding agreed with the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) on 17 May 2011 (PT1107039I). In Portugal, as in other countries where these agencies have been asked to help underpin public finances damaged by the global economic crisis, the three organisations are known informally as the Troika.

Changes pushed through despite opposition

The key changes required by the Memorandum of Understanding were set out in a report put together by Portugal’s Economic and Social Council, Compromise on growth, competitiveness and employment (in Portuguese, 606Kb PDF). The report was signed by the government and all the social partners with the exception of the General Confederation of Portuguese Workers (CGTP) (PT1201049I).

The CGTP launched several protests against the proposed package, including holding a general strike on 22 March 2012. Nevertheless, the PSD/CDS coalition went forward with the labour reform with external support from the Troika and internal support from many other social partners.

The first step was to change the unemployment insurance regime. The Law no. 64/2012 (in Portuguese, 191Kb PDF) came into force on 1 April 2012. It reduced the maximum amount of unemployment insurance by a third, from three times to twice the social support index (IAS); the maximum length of time the benefit could be paid was reduced from 900 to 540 days.

The second step was to revise the 2009 Labour Code. On 18 June 2012, following approval from parliament, President Anibal Cavaco Silva confirmed the passing of a new labour code. Parliamentary left-wing parties – with the exception of the Socialist Party – and a number of labour law experts claimed the new law raised constitutional issues and should be assessed by the Constitutional Court, but their protests were ignored.

Law No. 23/2012 (in Portuguese, 220Kb PDF), setting out the new labour code, came into force on 1 August 2012. It introduced far-reaching changes in the flexibility of working time, dismissals, severance pay, holidays, annual leave, overtime, and collective bargaining.

Key changes to the code

The main changes introduced by the new law include:

  • reduction of severance pay to make individual and collective dismissals easier;
  • extension of the concepts of unsuitability and extinction of work positions in labour law, in order to make individual dismissals easier;
  • increased work flexibility through the creation of working time ‘banks’, and by making individual agreements possible between workers and employers for overtime pay rates – previously set by collective agreements;
  • halving overtime payments;
  • the abolition of a scheme which entitled employees with good attendance records to an extra three days’ annual holiday;
  • the abolition of four public holidays;

These measures are mandatory, and collective agreements cannot define more favourable conditions than those prescribed by the law for the next two years.

Dismissals of workers

The new code also changes the rules on individual dismissals, creating two new dismissal mechanisms agreed in the Memorandum of Understanding by extending, as already mentioned, the concepts of ‘unsuitability’ and ‘extinction of work positions’ in Portugal’s labour laws.

The Memorandum envisaged that:

...individual dismissals linked to the unsuitability of the worker should become possible even without the introduction of new technologies or other changes to the workplace.

It suggested that a new reason for dismissal could be created when a worker had agreed to help their employer achieve certain objectives but had not done so, particularly where a worker’s performance resulted in continued reduction of productivity or quality, repeated breakdowns, or risks to the safety and health of the worker or others.

Where jobs disappeared, the Memorandum suggested that:

…individual dismissals linked to the extinction of work positions should not necessarily follow a pre-defined seniority order, if more than one worker is assigned to identical functions.

Instead, the employer ought to be able to establish relevant and non- discriminatory alternative criteria, in line with the procedure already in place in Portugal’s labour laws for collective dismissals.

The new labour code implements these suggestions, and also the Memorandum’s recommendation that employers should not be obliged to offer a transfer to another suitable position when dismissing a worker for either of these redefined reasons.

The Memorandum also recommended the redefinition of ‘just cause’ as part of the reform of reasons for fair dismissal, but this and other radical measures were not included in the new code, possibly because such changes would have required a revision of the Portuguese Constitution and its definition of unfair dismissal.

Severance pay, under the 2009 labour code, was set at one month’s wages for every year of service with no maximum limit, and with a minimum severance payment of three months’ salary. The code also allowed for further seniority payments.

The new code follows the Memorandum’s May 2011 version (406Kb PDF) and reduces severance pay to 20 days’ pay per year of service, eliminates the three month minimum, and caps it at a maximum of either 12 months’ pay or no more than 240 times the minimum wage. The new regulations apply in all cases where employees are entitled to severance pay, whether redundancy is individual or part of collective dismissals.

The coalition government also announced that later in the year it would bring in further changes in line with the December 2011 version of the Memorandum (814Kb PDF) to align severance pay with the EU average – in other words, paying between eight and 12 days’ pay per year of work.

Commentary

The reformulation of the labour code and unemployment insurance follow the Memorandum of Understanding recommendations, extending the grounds for individual dismissal and substantially reducing severance pay. The reforms therefore reduce the monetary costs of individual and collective dismissals.

Collective agreements cannot change this, not even in relation to severance pay. The new code increases flexibility, but reduces job security by reducing unemployment benefit and its duration, and by reducing workers’ hourly wages through holiday cuts without compensation. The changes also make it possible for employers to create individual working time ‘banks’ for their workers and reduce their overtime pay.

This shift in unemployment protection and labour regulation might exacerbate the social crisis that is already underway. Since austerity measures were introduced, unemployment and recession have escalated.

Furthermore, the Labour Code imposes restrictions on collective bargaining, stipulating that for the next two years collective bargaining cannot negotiate more favourable terms – a ruling that is without precedent in the history of democratic Portugal.

Maria da Paz Campos Lima, Dinâmia

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