EMCC European Monitoring Centre on Change

Lithuania: ERM Comparative Analytical Report on ‘Public policy and support for restructuring in SMEs’

  • Observatory: EMCC
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  • Published on: 13 May 2013



About
Country:
Lithuania
Author:
Inga Blaziene, Rasa Zabarauskaite
Institution:

Disclaimer: This information is made available as a service to the public but has not been edited by the European Foundation for the Improvement of Living and Working Conditions. The content is the responsibility of the authors.

In Lithuania, there are actually no measures specifically designed for SMEs and/or their employees undergoing restructuring. Moreover, large enterprises appear to be in a more favourable situation in terms of policy and support for restructuring, compared to SMEs. Although there have been several projects implemented with involvement of the social partners and aimed at initiating greater visibility of restructuring processes, we can nonetheless say that the social partners, in general, continue to play quite a minor role in anticipating and managing restructuring in Lithuania.

QUESTIONNAIRE

Prior to the analysis, it is important to note that the term restructuring is generally not widely used in Lithuania. Furthermore, restructuring is understood in quite narrow terms in Lithuania.

The Law on Restructuring of Enterprises of the Republic of Lithuania (LRE) which came into force in 2001 defines restructuring of an enterprise as ‘change of the type of economic activities, upgrading of the production, rationalisation of work, sale of the enterprise assets or a part thereof, acquisition of assets of other enterprises through their merger or division, implementation of technical, economic and organisational measures intended to restore solvency of the enterprise, change in the amount of the enterprise’s liabilities to its creditors and deadlines for their discharge’. It is also noteworthy that restructuring in Lithuania is usually understood as a negative phenomenon which is, as a rule, associated with insolvent enterprises and a way to avoid bankruptcy.

In this report, we adhere to the broader definition of restructuring as used in the European Union.

Part 1: Overall policy context

As it was mentioned above, the term ‘restructuring’ is not very popular, and is usually contemplated in a very narrow sense in Lithuania. Therefore, with regard to public or policy debate, we should say that there was very little debate about the restructuring of enterprises as such in Lithuania’s public space both in the pre- and post-crisis periods. Moreover, no public or policy debate on the specific challenges for SMEs and/or their employees in restructuring is, or has ever been, in place in the country. In certain periods, a somewhat greater emphasis was placed on one or another aspect of restructuring, but this was not seen as debate on restructuring in terms of public or policy debate.

1.1. Has there been public or policy debate on the specific challenges for SMEs and/or their employees in restructuring before the global recession of 2008/09? Please specify, for example:• If so, since when (e.g. up to 3 years before, 3-10 years before, longer), at which level (national, regional, sectoral, all of them) and in which form (‘real’ policy debate mirrored in policy documents or rather public debate mirrored in media, or both)?• Which policy areas (for example, SME policy, entrepreneurship policy, employment policy, social policy, regional policy etc.) were involved? Particularly: Does SME policy specifically deal with restructuring? Does ‘restructuring policy’ specifically deal with SME issues?• Did the public and policy discussions deal with restructuring as such or were specific types or phases of restructuring covered?• Which were the issues/contents that have been discussed? Which specific characteristics of SMEs in restructuring were considered in this context? Was the specific case of SMEs as subcontractors a topic for discussions?• Did the discussions rather deal with the enterprise perspective or with the employee perspective or both?

With regard to the aspects of restructuring most often covered by public or policy debate before the global recession of 2008/09, the following issues are worthwhile mentioning:

  • changes in employment structure due to reduced employment in agriculture and manufacturing, and employment growth in the service sector;
  • SMEs and entrepreneurship development;
  • protection of employees in case of restructuring;
  • legislation related to collective redundancies;
  • legislation related to enterprise bankruptcy and restructuring;
  • lifelong learning policy;
  • active labour market policy.

As it was mentioned before, public or policy debate held in all of the above-listed areas did not single out the specific challenges for SMEs and/or their employees, rather covering large, small and medium enterprises together.

Change in employment structure and SMEs and entrepreneurship development

Before reinstatement of independence in 1990, the Lithuanian economy was exhibiting a high share of individuals employed in the manufacturing and agricultural sectors (at that time approximately 50% of the employed were engaged in manufacturing and agriculture, and approximately 50% in the services). Cardinal changes in the situation appeared after the reinstatement of independence: employment dropped dramatically in agriculture and manufacturing and started growing in the service sector. In addition, changes in the structure of employment ensued in Lithuania from the socalled Russian crisis in 1998. Currently, approximately 25% of the employed are engaged in the manufacturing and agricultural sectors and approximately 75% in the services.

Such dramatic economic transformations were directly related both to restructuring in small and medium enterprises, and to straight effects on their employees. These changes raised broad public discussion in various periods of the country’s economic development, looking for ways how to mitigate negative implications of the changes for the national economic development and employment. One of the most frequently debated measures (especially at national level) was support for small and medium businesses, and entrepreneurship development.

Protection of employees in case of restructuring

The new Labour Code (LC) of the Republic of Lithuania was adopted in 2002 (effective from 1 January 2003) after being drafted for a number of years and discussed exhaustively by the social partners and representatives of national authorities in respect of every article of the Code. The Labour Code provides for a number of articles fairly strictly regulating dismissal of employees (including in case of restructuring). For example, the Labour Code contains an article stipulating that ‘1) changes of the owner of an enterprise, the subordination, founder or name thereof; 2) any merger by forming new enterprises, division by forming new enterprises, division by acquisition or merger by acquisition; 3) transfer of enterprise’s business or any part thereof may not be a legitimate reason to terminate employment relations’.

Legislation related to collective redundancies

The Procedure of Collective Dismissal and Prevention Thereof (further – Procedure) was first approved in Lithuania on 30 May 2000 by the Order No. 61 of the Minister of Social Security and Labour and afterwards addressed in the aforementioned Labour Code in 2002.

After long discussions among social partners and public authorities legislation related to collective redundancies was amended in 2008 by:

  • supplementing the Labour Code by the Article No 1301 ‘Redundancy of a Group of Employees’ and
  • adapting the ‘Specification of the Procedure for Giving Notices of Intended Group Redundancies to the Territorial Labour Exchange’.

The aforementioned amendments/supplements provided for the better protection of interests of employees in case of collective redundancy.

Legislation related to enterprise bankruptcy and restructuring

Economic restructuring and structural changes necessitated the drafting and adoption of enterprise bankruptcy and restructuring legislation.

Both – the Enterprise Bankruptcy Law and Law on Restructuring of Enterprises - were adopted in Lithuania in March 2001. We can say that the Enterprise Bankruptcy Law has been functioning quite successfully, while the Law on Restructuring of Enterprises has actually been ineffective. From 2001 to 2008, restructuring proceedings were initiated only in 38 enterprises and restructuring was completed in as few as five enterprises, as compared to 9,000 bankruptcy proceedings instituted in the same period.

The number of enterprises in bankruptcy and restructuring has greatly increased after the onset of the global recession in 2008/09. In order to improve the existing situation and create adequate conditions for enterprises in hardship to avoid bankruptcy, the Law of the Republic of Lithuania Amending the Law on Restructuring of Enterprises was adopted in 2010. This law allowed for more independence for enterprises, concurrently making it easier for them to change business strategy and restore solvency.

Lifelong learning policy

Although Lithuanian population’s education level is one of the highest in the EU, Lithuania continues to be at the bottom of the ranking list by the rate of lifelong learning in the EU (for example, the lifelong learning rate in the age group 25-64 was 4% in Lithuania in 2010; lower values of this indicator were observed only in Bulgaria, Greece, Hungary, Romania and Slovakia. The EU-27 average was 9.1% in 2010).

In Lithuania, there have been ongoing debates that higher participation of the working-age population in lifelong learning would contribute to better adaptation of employees to continuous market changes, reduction of unemployment and ensuring employment rates in the country.

With a view to the aforesaid objectives, in 2004 the Strategy for Assuring Lifelong Learning was elaborated and approved in Lithuania with the participation of social partners; the strategy was renewed in 2008.

Active labour market policy

In Lithuania, active labour market policy measures (ALMPM) have been traditionally attracting exceptionally great attention and raising great expectations.

In 2006, after long-lasting debates and discussions, the social partners at the Tripartite Council of the Republic of Lithuania (LRTT) agreed to the Law on Support for Employment, which was fundamentally amended in 2008 with a view to getting it better adapted to the existing economic and labour market needs. The Law provided for a number of ALMPMs designated not only to unemployed people but, inter alia, to employees of the enterprises facing economic hardship and working-age workers notified of pending redundancies.

1.2. Did the global economic and financial crisis of 2008/09 cause any change in focus of the above (for example, increased/decreased focus on SMEs and their employees in restructuring, change in policy areas or issues covered)?

We can say that focus on enterprises and their employees in restructuring increased after the global crisis of 2008/09, but SMEs were not singled out and remained within the group of other enterprises in the context of restructuring.

As it was mentioned above, the increased number of enterprises in bankruptcy and restructuring was followed by the adoption of relevant amendments to the Law on Restructuring of Enterprises and the Law on Support for Employment (for more details see Chapter 1.1), and by a significant increase in the initiatives to facilitate the development of small and medium business and entrepreneurship in general.

In the light of the crisis, the social partners have been very intensely and widely debating over liberalisation of the Labour Code. In order to improve business environment and enhance creation of new jobs, employers have been regularly emphasising the need to liberalise labour law and submitting various proposals concerning the amendments to the Labour Code.

1.3. Are social partners or employers’ and employees’ organisations involved in public and policy debate on restructuring in SMEs?• If so, which (types of) organisations and at which levels?• What are their opinions, perspectives, recommendations?• Did they succeed in convincing governments or public authorities at various levels of their viewpoints?

In general, the social partners can be said not to be involved in public and policy debate on restructuring in SMEs. The ARENAS project was implemented in Lithuania in 2009 with a view to encouraging the social partners, national authorities and other stakeholders to share their experience in anticipating and managing restructuring. As a continuation of the project, in 2011 the Lithuanian social partners implemented another project together with their colleagues in Finland, Latvia and Estonia with an aim to exchange experience between Finland and the Baltic States in anticipating restructuring. Unfortunately, none of these two projects had any special emphasis on restructuring in SMEs.

Part 2: Support instruments

2.1. Please provide an overall assessment about how accessible and suitable public and social partner based restructuring support for companies in general are for SMEs or their employees.• Do SMEs and/or their employees generally have access to the available instruments and are these suitable for their specific needs in restructuring?• Are there specific (types of) instruments (for example, targeting specific types or phases of restructuring, offered at specific administrative levels) that are more/less accessible and suitable for SMEs and/or their employees that for larger firms? If so, why?

As it was mentioned above, there are no restructuring support measures in Lithuania that are suited to SMEs only – actually the same public- and social partner-based restructuring support is equally accessible to large, small and medium-sized enterprises.

The key instruments that can be used by enterprises and their employees undergoing restructuring include the following:

  • measures and tools used for anticipating restructuring (foresights and forecasting instruments focusing on economics and employment, various labour market and employment development surveys, etc.);
  • enterprise bankruptcy and restructuring procedures as defined in the Enterprise Bankruptcy Law and the Law on Restructuring of Enterprises;
  • employment protection measures as defined in the Labour Code of the Republic of Lithuania;
  • collective redundancies procedures as defined in legislation related to collective redundancies;
  • support of the European Globalisation Adjustment Fund;
  • ALMPM;
  • Guarantee fund for employees of enterprises in bankruptcy or bankrupt enterprises;
  • unemployment social insurance schemes, etc.

Looking objectively at the measures available in Lithuania in case of restructuring, we should note that large enterprises generally appear to be in a more favourable situation from this aspect than do small enterprises. For example, only comparatively large enterprises are eligible to claim support from the European Globalisation Adjustment Fund; in large enterprises in restructuring, the Lithuanian public employment service – the Lithuanian Labour Exchange (LDB) – may (and often do) set up the so called ‘mini labour exchanges’, which provide employees in restructuring with on-site labour market information and consultation services; etc.

Moreover, speaking about social partner based restructuring support it is noteworthy that, in case of restructuring in enterprises with strong trade unions and effective social dialogue in place, the trade unions considerably contribute to the management of restructuring processes. As for availability of existing instruments for SMEs, strong trade unions, as a rule, function only in large enterprises in Lithuania. Therefore, large enterprises again appear to be in a more favourable situation compared to SMEs.

This applies also in case of information and consultation of employees prior to taking a decision on the reorganisation of the enterprise. According to the Labour Code of the Republic of Lithuania, ‘Prior to taking a decision on the reorganisation of the enterprise […], the employer must inform the employees’ representatives and hold consultations with them about the reasons for such a decision, the legal, economic and social implications for the employees, as well as about any measures envisaged to avoid or mitigate the expected consequences’. However, ‘in the absence of employees’ representatives in the undertaking’, the employer must only ‘inform the employees in advance directly or at a general staff meeting about the date of the execution of decisions taken, the reasons for such decisions, their legal, economic and social implications, as well as about any measures envisaged in respect of employees’. As in most SMEs there are no employees’ representatives, consultations regarding restructuring even do not take place in theses enterprises.

2.2. Do there exist specific public or social partner based support instruments explicitly targeting at SMEs and/or their employees in restructuring? Please specify, for example:

Again, as it was mentioned above, there are actually no specific instruments in Lithuania targeting SMEs only. The only known measure designed for SMEs undergoing restructuring is a possibility to write off or defer some part of debts these enterprises owe to Lithuanian state institutions.

The Scheme for Providing State Support to Small- and Medium-Sized Enterprises in Restructuring (the Scheme) was approved in Lithuania by Order No. VA-81/1B-365/V-255 of 28 June 2011. The Scheme defines the requirements to be complied with by the state support institutions in the Republic of Lithuania when providing state support to SMEs in restructuring in Lithuania. State support under the aforesaid Scheme is to be rendered by 1 July 2013.

• If so, by whom are they offered (public vs. social partners/ employers’/ employees’ organisations) and at which administrative levels (national, regional)?

In accordance with the aforementioned Scheme, support to SMEs may be offered by state institutions involved in the restructuring process of enterprises, namely by:

  • County’s State Tax Inspectorate;
  • Territorial Customs Office;
  • Board of the State Social Insurance Fund under the Ministry of Social Security and Labour (SADM) and its territorial units;
  • Other public administration entities.

• Are the activities of different support service providers coordinated? If so, how and how well does this work?

Though the Scheme stipulates the institutions from which support for SMEs can be sought, it does not identify the state institution to supervise the provision of support under the Scheme. The state institutions listed in the Scheme usually avoid these functions, for they are administering tax collection rather than the provision of support. That is why a problem of coordination of support under the Scheme is often encountered.

• Which phases of restructuring do they target?

The Scheme targets the management phase of restructuring.

• Which types of restructuring do they target?

The Scheme targets SMEs in financial hardship that are not capable of performing their obligations and reducing losses. In other words, such enterprises would have to stop their business activities and go bankrupt unless creditors’ support is provided.

In accordance with the Scheme, SMEs are eligible to state support if they meet at least one of the criteria below:

  • in the case of a limited liability SME, where more than half of its registered capital has disappeared and more than one quarter of that capital has been lost over the preceding twelve months;
  • in the case of an unlimited liability SME, where more than half of its capital as shown in the enterprise’s accounts has disappeared and more than one quarter of that capital has been lost over the preceding twelve months;
  • SMEs are subject to insolvency proceedings under the Enterprise Bankruptcy Law.

• Do they target SMEs in general, or specific size classes, sectors, regions, legal forms, roles (for example, as subcontractors) etc.? Do they target employees of SMEs in restructuring?

The Scheme targets SMEs (enterprises having less than 250 employees) that have state institutions among their creditors. In addition, the Scheme stipulates groups of enterprises that are not eligible to being provided support: an enterprise in restructuring shall not be a budgetary institution, political party, religious community and/or society, trade union, banking institution, central and other credit union, other lending agency, insurance and/or reinsurance undertaking, management company, investment company with variable capital, closed-ended investment company and intermediary of public trading in securities.

• What type of support do they provide? What specific challenges for SMEs in restructuring do they address?

In accordance with the Scheme, the state can offer the following instruments to SMEs in financial difficulties:

  • Extend a time limit for the fulfilment of creditor’s claims or any part thereof;
  • Waive their claims fully or in part;
  • Replace financial liabilities by another type (that is, agree to the payment of debts in assets and/or shares of a SME).

• Is there some information about how well they are known among SMEs and their advisors and about how they are generally assessed by the SME sector? What are their strengths and weaknesses? Are there recommendations for improvement?

Unfortunately, there is no information giving grounds to assess the level of awareness of these measures among SMEs and how are they generally assessed by the SME sector. Unofficial data suggest that enterprises in restructuring are not well informed on the possibilities to have debts to state institutions deferred or written off. In addition, state institutions themselves are often not eager to write off such debts for enterprises. We see the availability of the Scheme for enterprises indebted to state institutions only as a weakness of the Scheme.

Part 3: Good Practice

Name of the instrument in national language and English

Vocational training of the unemployed and working age employees notified on pending dismissals.

Justification for selecting this measure as Good Practice

As it was mentioned above, there actually are no measures in Lithuania targeting SMEs or their employees in restructuring. The absolute majority of instruments for anticipating and/or managing restructuring may be equally applied to enterprises of whatsoever size and their employees. With regard to recently implemented measures, we see vocational training of the unemployed and working age employees notified on pending dismissals as one of the instruments that are likely to effectively contribute to the management of restructuring.

We selected this measure as Good Practice for its initial aim to facilitate labour market integration of the unemployed. However, after launching the measure, it turned out that about 90% of persons involved in this measure are employees notified on pending dismissals (that is, usually employees from enterprises in restructuring) rather than unemployed people. Such a situation was determined by employers’ usually trusting more and preferring working people who were exposed to losing jobs for objective reasons rather than unemployed ones.

If this measure gains popularity among employers, it will be a perfect opportunity for employees in restructuring to adapt to changes in the labour market smoother and faster without losing their skills. In addition, the measure would reduce economic and social costs of restructuring processes.

Date of launch of the instrument and end date (if applicable)

The measure was approved by the Parliament of the Republic of Lithuania (LRS) in November 2011, launched on 1 January 2012.

Initiator/administrator (organisation)

Initiator – the SADM; administrator – the LDB.

Other involved actors and their roles

  • unemployed and working age employees notified on pending dismissals;
  • employers employing unemployed and individuals who were notified of pending dismissal;
  • vocational training institutions organising and providing vocational training.

Source of funding

Vocational training of the unemployed and working age employees notified on pending dismissal might be funded (depending on the situation in the country and availability of resources) from the following sources:

  • Employment Fund;
  • National Budget;
  • EU Structural Funds and European Globalisation Adjustment Fund;
  • Employers’ resources;
  • Other sources.

Target group/eligibility/coverage

The unemployed and those notified of pending dismissals.

Phase of restructuring targeted

Management of restructuring.

Type of restructuring targeted

All types of restructuring where employees are (going to be) dismissed – internal restructuring, bankruptcy/closure, etc.

Purpose/content/characteristics/description of services provided

Vocational training of the unemployed and working age employees notified on pending dismissal is organised on the conditions specified in the trilateral agreement. The agreement is signed between an unemployed/notified person, labour exchange and employer (depending on the situation – it might be current employer or another employer). Usually the training courses are fully or in part paid by the labour exchange. The labour exchange also pays a benefit for the person during the vocational training. The unemployed/notified individual for whom vocational training is organised is able to choose the place of training – vocational training institution or employer’s premises. According to the agreement, after completion of vocational training the employer would be obliged to employ and maintain a job for a person so employed for a minimum period of one year and the person so employed would be obliged to work for the employer for a minimum period of half a year.

Outcome of the instrument (e.g. number of beneficiaries, effects)

Implementation of the measure actually started only in March 2012 after adoption of all the necessary secondary legislation. According to the Lithuanian Labour Exchange, in March 2012 the number of beneficiaries under vocational training programmes totalled 61 or 1.3% of all persons referred to ALMP measures during that month, of which roughly 90% were persons notified of pending dismissal.

Strengths/success factors of the measure

As the measure gains momentum, it is expected to contribute to:

  • More effective use of training funds;
  • Creating better conditions for the unemployed and/or employees notified of pending dismissal to get employed right after completion of the vocational training programme;
  • Better flexibility of services provided by the Lithuanian Labour Exchange;
  • As the measure not only targets unemployed but also the employees notified on dismissals, it provides possibility for these persons to find a job before becoming unemployed.

Weaknesses/bottlenecks of the measure

So far, we can identify the following main weaknesses/bottlenecks of the measure:

  • Low coverage;
  • Relatively high measure implementation costs (the average participation cost is about LTL 6,900 (€ 2,000) per person;
  • There is a poor linkage between the funding of service providers and outcomes of their activities/quality of services.

Monitoring/evaluation of the instrument

No.

Weblink

www.ldb.lt

Information sources used for filling this section

Law on Support for Employment

Efficiency Evaluation of Employment Promotion Measures Financed by the ESF. Summary of Evaluation Report. ProBaltic Consulting, 2011.

Commentary

Having in mind that restructuring as such has been attracting little attention in Lithuania in general, and the process of restructuring is understood in a rather narrow sense, it is quite logical that there actually are no instruments in the country specifically targeting SMEs undergoing restructuring and/or their employees (with the sole exception described in section 2.2).

Although the practice described in Chapter 3 is not specifically targeting SMEs and/or their employees, today it is one of the very few measures that can realistically contribute to support for Lithuania’s employees in restructuring.

Inga Blaziene, Rasa Zabarauskaite, Institute of Labour and Social Research

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