The lack of structural reforms, amongst others within the labour market, resulted in the recent crash of the Croatian credit rating. Yet, since February 2012, under the leadership of Prime Minister, Mr. Zoran Milanovic the Croatian Government has been considering the modification of the employment law with a purpose to ease the investments and provide more flexible “hiring” and “firing” regulation. The changes are expected to be enacted soon, until the first half-year.  

Historical overview

The first Employment Act in Croatia after its independence was adopted in 1995 and for that time it established a modern employment system. The changes of the Employment Act that followed did not respond the situation on the labour market. The most extensive changes to the Employment Act in 2009 were related to the European workers' participation, which changes did not significantly affect the labour relations in Croatia. Yet, these changes also included the amendments on working time regulations which to great extent restricted the possibility of overtime work, redistribution of working hours and thus even prevented the employers in further developing of business. The current Minister of Labour and Pension System, Mr. Mirando Mrsic announced the comprehensive changes to the employment law which would be sent into the Government procedure soon.

The prolonged application of the collective agreements

The Croatian Government started with changes of the employment law in July 2012 in a rather peculiar way: by adopting the Law on Criteria for Participation in Tripartite Authorities and Representative for Collective Bargaining. By this Law, the Government intended to resolve the issue of prolonged application of collective agreements without a need of immediate change of the Employment Act.

According to the provisions of the Employment Act, there was an obvious discrepancy between the time for which the collective agreements have been concluded and the prolonged application of their provisions. Whereas the parties may terminate collective agreement concluded for both indefinite as well as definite period of time, according to the statutory provisions of the Employment Act on prolonged application of the collective agreements, contractual provisions of the collective agreements defining rights and obligations from employment are binding upon the parties for an indefinite period of time or until conclusion of the new one.

Because there was no time limit in respect to prolonged application of the provisions of already expired collective agreements, this solution enabled the parties to a collective agreement to obstruct the conclusion of the new one after the expiry and thus keep the unfavourable provisions of the expired collective agreement binding upon them for an indefinite period of time.

This issue becomes even more essential by taking into considering already extensively exercised Government's authority to extend the application of existing branch collective agreements to all the employers engaged in respective branch of business (so called extended application of collective agreements). By such unfavourable provision a great number of employers were subject to application of already expired branch collective agreements, without even having been a party to them before their expiry.

In order to overcome this for the shaken Croatian economy obviously aggravating state, the mandatory provision of the Law on Criteria for Participation in Tripartite Authorities and Representative for Collective Bargaining limits the application of the expired collective agreements to maximum three months following their expiry. Such a solution restrains the parties to a collective agreement from the attitude that might lead to infinite negotiations preceding conclusion of the new collective agreement as well as facilitates adjustment to the economic reality in the long term favouring both employers and employees.

Simultaneously, at the date of entering into force of the Law on Criteria for Participation in Tripartite Authorities and Representative for Collective Bargaining, the provision on prolonged application of the collective agreement regulated by the Employment Act was cancelled. 

Employment contract for definite period of time

The Employment Act regulates the employment contract for definitive period of time as a contract that may only be concluded exceptionally and which termination is predetermined by objective reasons justified by a deadline, execution of a specific activity or occurrence of a particular matter. The employment contract for definite period of time cannot be concluded for a period longer than three years. Only in exceptional cases, such as in case of a need for replacement of an absent employee or due to some other objective reasons provided for by the law or collective agreement, the employment contract concluded for a definitive period of time may last for more than three years. Should the employee continue to work even after expiry of the period for which the employment contract has been concluded, it shall be considered that an employee concluded employment contract for an indefinite period of time. The employee shall have the same rights regardless of whether he/she concluded a contract for definite or indefinite period of time with the exception that the employment contract concluded for a definite period of time may be regularly terminated only if such a termination has been explicitly agreed upon the parties in the employment agreement.

In order to make the hiring of employees more flexible and friendly to the employers, the employment contract for definite period of time regulated by the Employment Act is planned to be replaced by the new type of the employment contract. As the Government explains the idea is to make a “hybrid contract” which should cover employment for both definitive as well as indefinite period of time. The main idea is that the employer and employee conclude a single contract, which provides for the employment to go through three stages. The rights and social securities of the employees shall depend on the length of the service. Thus, the initial period should be considered as a probation period during which the employer shall be entitled to terminate the employment contract without a valid cause. In the second phase the rights of the employee shall increase whereas in the third phase of employment a possibility of termination shall be minimised.

As this idea is still in status nascendi and subject to discussions, it is impossible to envisage the final legal framework and its possible effects on Croatian employment market.

Severance pay

The institute of the severance pay is regulated in the Employment Act. In case the employer terminates the employment contract after two-years of service, with the exception if the termination has been effected due to employee's misconduct, an employee has the right to severance pay in the amount dependant on the length of service that is previous continuous employment with the employer. Severance pay for each year of employment with the same employer shall not be agreed upon or determined in the amount that is lower than one-third of the average monthly salary earned by the employee in a period of three months preceding termination of the employment contract. Unless otherwise provided for by the law, collective agreement, employment by-law or employment contract, the agreed amount of severance pay shall not exceed six average monthly salaries earned by the employee within the three months period preceding termination of the employment contract.

In order to reduce employment costs related to termination, the Association of Employers have outlined a need for change of the regulation on minimum severance pay by excluding such a regulation from the Employment Act. The Association of Employers suggested that the regulation on minimum severance pay instead of being regulated in the Employment Act to be introduced in the collective agreements. Pursuant to available but still unofficial information, the changes to the severance pay are to be expected in the close future. The Government announced the possibility of severance pay reduction but also the establishment of the state severance pay fund which would help the companies having liquidity issues by paying a part of the severance pay. Given the sensitivity of the issues and ongoing discussions with the trade union representatives, the Minister of Labour and Pension System Mr. Mrsic is for the time being unwilling to publicly discuss this issue in more details. It is only known that the new model should facilitate employers at conducting business activities and at the same time protect the acquired rights by the employees.

Conclusion

In the upcoming time we will inevitably be witnessing the changes to the Croatian employment law, which have been recently thoroughly and systematically discussed in the general public but also between the employment experts. The recent downgrade of Croatia suggests that the changes should tend to ease dosing business and inevitably liberate procedure of hiring and firing the employees. What kind of changes are to be adopted and to which extent remains yet to be seen.