Committee considers the reform of the Employment Contracts Act

A tripartite committee has been appointed with the task of evaluating the need to reform Finland's Employment Contracts Act. This article provides the background to the setting-up of the committee, which is due to report by October 1997.

Following a proposal by the Finnish Ministry of Labour, the Council of State has appointed a committee, due to report by October 1997, with the task of evaluating the need to reform the Employment Contracts Act. The committee is to take into account developments that have taken place in society, working life, industry and commerce and legislation. During the course of its work, the committee will consider the status of different forms of employment, as well as the relations between employment and social and tax legislation. It will also assess developments that have taken place in collective bargaining, employment protection, equal pay and treatment, the increasing international dimensions of employment, and the need to promote job creation.

The cornerstone of Finnish labour legislation

The 1970 Employment Contracts Act prescribes issues vital to the employee, such as the drawing up of a contract of employment, the rights and duties of the employer and employee, the terms and conditions of employment, the grounds for termination of employment, and the procedure to be observed on termination. The central principle of the Act is to provide protection for the employee, and agreements cannot be made which are disadvantageous to the employee and thereby override its essential principles.

The Act provides minimum universal employment protection standards which apply to all employees in Finland regardless of whether or not they are covered by a collective agreement. The main objective of these universal standards is to ensure that those employees who are not covered by a collective agreement enjoy the minimum levels of payment, job security and job safety of those employed in organisations where collective agreements apply.

Pressure for reform of the Act

The Employment Contracts Act dates back to a period when the permanent nature of employment contracts and permanent employment were regarded as the normal state of affairs. Structural change accelerated by the increasing internationalisation of trade has emphasised the need for Finnish enterprises to be competitive. Labour market regulations have come under pressure to adapt to the rapidly changing environment in which companies operate. Increasing emphasis in society has also been placed on equality at work, family life, independent learning and the possibilities for economic participation.

Changes in the labour market have resulted in temporary and fixed-term employment and, in particular, part-time employment becoming more common in recent years. The trend appears to point to more and more employees being employed on short-term contracts, and careers being characterised by a series of alternating periods of unemployment and employment. Business is changing as subcontracting and networking between companies increases and new types of business have begun to emerge.

Furthermore, as a result of the economic recession, a debate has started in Finland on the flexibility of labour legislation. The work carried out by a "committee on the development of the labour market system" appointed by the Council of State revealed a need to examine the extent to which individual workplaces could be responsible for determining the terms of employment of their own employees.

(European Union (EU) legislation has not so far had any significant effects on Finnish labour legislation. Finland's key objective has been to secure the continuity and legitimacy of its system of collective bargaining. It is regarded as important in Finland that, where appropriate, exceptions based on national collective agreements to the obligations of EU regulations should be possible.)

The committee's background studies

The committee considering the reform of the Employment Contracts Act commissioned three background studies examining changes in employment structure, which were published on 13 May 1997. The results show that there has been a significant shift in employment from traditional manufacturing into services. There has also been a transfer from routine work into working methods requiring adaptability and versatility, as well as customer service skills.

The researchers claim that jobs obtained by unemployed people are mainly non-permanent and part-time. Consequently, market-dictated remunerated employment seems to be becoming more uncertain and unstable than before. Above all, "atypical" work poses the question of how to bring enough stability and certainty of continued income to the growing flexible labour force.

According to the studies, at the macro level the Employment Contracts Act does not have significant employment effects. Expectations placed on flexibility as a means of creating employment are seen as greatly exaggerated. The minimum wage set out in collective agreements is believed to have a certain negative impact on job creation but, on the other hand, it provides protection and Finland has committed itself to it.

The studies also suggest that, whilst small firms can create jobs, the number of jobs that would result would amount only to a few tens of thousands, and would not provide a major solution to the unemployment problem (unemployment in Finland still stands at over 400,000, or about 15.5%). The studies state that the movement towards flexibility will continue to increase as competition becomes more severe, and that flexibility is essential to improve competitiveness. At company level, the international trend is from "internal flexibility" towards "external flexibility"; this helps companies to predict problems in the future. The willingness of companies to invest in staff training may decline. Internationally, there are already examples of flexible labour forces acting as a barrier against trade fluctuations.

The studies also present the effects of deregulation on employment in different countries. However, these research data do not appear consistently to support the argument that the employment situation could be improved by means of deregulation. In its future deliberations, the committee will examine whether the present forms of employment regulation in Finland are adequate to maintain a balance between different employee groups - for example, between men and women, younger and older workers, or those in small and large companies.

The studies state that in order to obtain a true picture of the effects of employment regulation, it is necessary not only to consider individual forms of regulation on their own but also other factors, such as the effects of job security, different education systems, paternity and maternity leave and unemployment benefit provisions. According to the reports, all these factors affect the behaviour of companies and employees.

Social partners' views

The view of the Central Organisation of Finnish Trade Unions (SAK) is that deregulation will not improve the employment situation. The SAK believes that employers are not interested in reducing unemployment as such, but are more concerned with improving their own competitiveness.

The SAK argues that there is no data based on actual analytical research available on the effects of deregulation on employment. For instance, the evaluation of the impact of deregulatory changes on employment in New Zealand is clouded by the fact that at the time they were introduced there were also changes in the country's external environment that affected the manufacturing sector. SAK also argues that flexibility causes job polarisation, which in turn leads to a increasing inequality in society where those on high incomes become more prosperous at the expense of those at the bottom of the occupational hierarchy, and of unemployed people.

In contrast, the Confederation of Finnish Industry and Employers (TT), argues that increasing flexibility will improve the employment situation. The effects on job creation of increased flexibility may even be significant, provided that major changes in employment legislation are made to promote more deregulation and flexibility. Such reforms must include major changes in payment, working hours, annual holidays and many other issues. These measures must also apply to collective agreements, which TT believes often contain the most serious obstacles to employment.

The employers state that the Employment Contracts Act is the basic Act regulating this area, and that it should thus provide the major vehicle for reform. They believe that such reform is of the utmost urgency.


The Employment Contracts Act reform is regarded as one of the most important legislative reform projects of the present Government. The Government's official objective is to cut unemployment by half, and such an approach necessitates an objective evaluation of all possibilities.

The employers' views on the effects achieved through amendments to labour legislation differ significantly from those of the trade unions. It seems likely at the moment that the October 1997 deadline for the committee to report will be postponed. Even if the work were to be completed on time, the parliamentary proceedings will require time, and it is likely that the new Act will not come into force before 1999. There is a parliamentary election in that year, and that may hinder an agreed consensus.

In comparison with previous legislative reforms, Finland's current high unemployment rate provides the employers with a strong negotiating position during the committee's work. Examples from abroad have shown that there is likely to be a lively debate on whether deregulation is the cure for the employment situation in Finland, too. It is certain that this issue will result in much disagreement among the social partners. (Juha Hietanen, Ministry of Labour)

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