Government prepares labour reforms demanded by EC, ECB and IMF

Labour reforms demanded by the European Commission, the European Central Bank and the International Monetary Fund are being prepared by the Portuguese government. Unemployment benefits, severance pay, individual dismissals, working-time flexibility, wage-setting and company-level agreements are the subject of change, with draft legislation expected to go before parliament in the first quarter 2012. The government has announced it will go further than asked.


The Portuguese government, the centre–right coalition of the Social Democratic Party (PSD) and the conservative Popular Party (CDS), which came into power on 21 June 2011, has the considerable task of meeting the deadlines set out in the Memorandum of Understanding (211Kb PDF) agreed with the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) on 17 May 2011. Some of the major labour market reforms asked for in the Memorandum have to be prepared by the end of 2011. They include changes to:

  • the coverage, amount and duration of unemployment benefits;
  • the system of severance payments;
  • rules governing individual dismissal;
  • working-time arrangements and wage-setting;
  • collective agreements between works councils and companies.

Further reforms are intended regarding the collective bargaining system, but those are planned for the second half of 2012.

Changes to unemployment benefits

The Memorandum has demanded changes to the coverage, amount and duration of unemployment benefits in order to reduce ‘the risk of long-term unemployment, and [strengthen] social safety nets’. These must be drawn up by the last quarter 2011, and adopted by the government in the first quarter 2012.

They include:

  • reducing the maximum duration of unemployment insurance benefits to no more than 18 months;
  • capping unemployment benefits at 2.5 times the IAS social support index (a reference value which is updated annually) instead of the present level, which is triple the index figure;
  • tapering off benefits after six months of unemployment;
  • reducing the contributory period necessary to access unemployment insurance from 15 months to 12;
  • extending the eligibility for unemployment insurance to clearly defined categories of self-employed workers.

While the first three measures greatly reduce the duration and the amount of the benefits, the next two ensure that more people will be eligible for them, including the self-employed and part-time workers on a low income. According to the Memorandum, the ‘reform will not affect those who are already unemployed, and will not reduce rights already accrued by employees’.

Changes to employment regulations

Reducing severance pay

The government has been asked to submit legislation to parliament by the end of July 2011 reforming severance payments for new employees. The reforms will be in line with the March 2011 tripartite agreement (in Portuguese, 157.95Kb PDF) on employment and competitiveness signed by all the social partners, with the exception of the General Confederation of Portuguese Workers (CGTP) (PT1105019I). The system of severance pay will be revised firstly for new contracts. In the case of open-ended contracts the reform will reduce the basis for calculating payments, from 30 to 10 days per year of tenure (with 10 additional days to be paid by an employer-financed fund).

The basis of calculating severance payments for fixed-term contracts will be reduced from 36 to 10 days, per year of tenure, for contracts shorter than six months, and from 24 to 10 days for longer contracts (with 10 additional days to be paid by an employer-financed fund).

These reforms are more drastic than those set out in the March 2011 tripartite agreement. The agreement, for instance, had called for the basis of the calculations for severance pay to be reduced from 30 days to 20 days per year of tenure, while the Memorandum reduces it from 30 days to 10 days. The Memorandum also demands two measures not provided for in the tripartite agreement. One is that severance pay entitlements for current employees will have to align with that of new employees. Draft legislation for this has to be prepared by the first quarter of 2012. The second is a proposal aiming to align the level of severance pay with the EU average. Draft legislation for this will be prepared by the third quarter of 2012.

Individual dismissals

The Memorandum asks the government to prepare reforms to the law on individual dismissal by the last quarter 2011. This will make it easier for employers to sack workers for unsuitability, ‘even without the introduction of new technologies or other changes to the workplace’. The Memorandum also adds that a new reason for dismissal can be added ‘where the worker has agreed, with the employer, specific delivery objectives and does not fulfil them, for reasons deriving exclusively from the workers’ responsibility’. Draft legislation on this has to be submitted by the first quarter 2012.

Working-time flexibility and labour costs reduction

The Memorandum envisages that, in line with the Tripartite Agreement, draft legislation will be submitted to parliament regarding working-time arrangements and short-time working schemes in cases of industrial crisis. This will ease the requirements employers have to fulfil to introduce and extend these measures.

The Memorandum also demands that the minimum additional pay for overtime established in the Labour Code has to be reduced to a maximum of 50% (at present employees are paid 50% extra for the first hour of overtime worked, 75% extra for additional hours, and 100% for overtime during holidays). It also wants an end to compensatory time off, equal to 25% of overtime hours worked. However, it admits that collective agreements may revise these norms, upwards or downwards.

The Memorandum also states that the minimum wage can be increased only if justified by economic and labour market developments and agreed in the framework of the review of parliament’s legislative programme. These views on labour costs are echoed in the demands related to the 2012 Budget, which must be presented by October 2011, and which must include ‘a budget-neutral recalibration of the tax system, with a view to lower labour costs and boost competitiveness’.

Decentralisation of industrial relations system

There are major implications in the Memorandum for Portugal’s industrial relations system. Draft legislation will have to be submitted to parliament by the first quarter 2012 on the:

  • definition of criteria for the extension of collective agreements, including the representativeness of the negotiating organisations (to be assessed by ‘both quantitative and qualitative’ indicators) and how the extension will affect the competitive position of non-affiliated firms;
  • further reduction of the length of survival of collective agreements that have expired and not been renewed;
  • further decentralisation of bargaining, with the purpose of helping to align pay with productivity at company level.

The Memorandum also demands the implementation of commitments in the tripartite agreement to allow:

  • works councils to negotiate functional and geographical mobility conditions and working-time arrangements;
  • the creation of a Labour Relations Centre which can give help and advice to parties involved in negotiations;
  • the lowering of a firm’s size-threshold, so that works councils can conclude firm-level agreements with companies of 250 employees;
  • the inclusion of conditions, in sectoral collective agreements, under which works councils can conclude firm-level agreements without the delegation of unions.


These reforms, envisaged independently of the Portuguese government, are a huge and complex task that will raise various tensions, even in respect of those measures resulting from the tripartite agreement such as the reduction of severance pay and the possibility of works councils negotiating collective agreements. The controversy is expected to increase with the publication of the draft legislation diminishing labour or social rights or even trade union prerogatives.

Furthermore, the government has promised to go further than the Memorandum and, in its first Bill, set an additional surcharge on personal income tax affecting Christmas bonuses, a measure not required by the Memorandum. Another measure not envisaged by the Memorandum is the idea, included in the government’s Programme of government (in Portuguese, 833Kb PDF), of changing Labour Code provisions in order to create a ‘single contract’ model for new employees that undermines the distinction between fixed-term and open-ended contracts. It is not clear how the government will handle the planning of the measures demanded by the Memorandum if its own approach is ‘to be more Catholic than the Pope’.

Maria da Paz Campos Lima, Dinâmia

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