The Flexibility of Employment is Important for Business Environment

Sedrak Asatryan (Concern-Dialog Law Firm, Managing Partner)

Suren Gomtsyan (Concern-Dialog Law Firm, Senior Lawyer)

Economists often criticize business environment in France, pointing that factories in the country are being closed as in France it is several times harder to fire an employee, than in the United Kingdom. Thus, the business has to move to other countries, where the legislation allows companies to be more effective and react flexibly to changes in the market - to hire new employees in the cases of growth and to fire them in the opposite situation. While in France, even if the economy grows, business has to think twice before hiring new employees, as when the growth slows down it will be difficult to fire them. It might seem paradoxical, but strict rules on the termination of employment agreements by the initiative of an employer affect adversely employment rate and limit new job creation. The situation can be changed if - like in Sweden - an employee is protected as a person, rather than as an employee.

At first glance Armenian labor legislation is attractive for business. Particularly, in the recent Global Competitiveness Reports of the World Economic Forum Armenia's best indicator in the ranking is related to the labor market efficiency - the 47th rank in the reports for 2009/10 and 2010/11 (among 133 and 139 countries respectively) and the 34th rank in the report for 2011/12 (the report includes 142 countries). In the recently published 2012/13 report Armenia is already ranked 30th among 144 countries.

Noticeably, Armenia has been assigned a rather high value on hiring and firing practices, which is surprising as high value means that employee termination rules are flexible and can be defined by employers. Meanwhile the Labor Code regulates the termination of employment relations exceptionally by mandatory rules and without giving the parties of an employment agreement any freedom in the regulation of their relations. After the amendments of the Labor Code in 2010 - which have toughened further the rules on the termination of employment by the initiative of employers, and the results of which should have been seen in the last year's report - the expectation was that Armenia would worsen its position in this indicator. However, according to the data of the authors of the 2011/12 and 2012/13 reports, Armenia has advanced in the ranking and has improved its position.

This strict approach of the labor legislation is to some extent justified in developing countries given the problems of their judicial systems. If there are concerns in relation to just court proceedings and the ability of the courts to assess objectively the legality of employment termination, the legislature has to set in the law all cases, where an employer can terminate employment agreement with an employee. But this approach brings also problems.

First, the reason that is used by an employer to fire its employees is often misrepresented and does not comply with the reality. As employers have only limited grounds for firing employees, they have to rely on those grounds that are relatively easy to apply. For example, irrespective of the real reason of being unsatisfied with an employee, the employer can apply two disciplinary measures for various reasons and as a third disciplinary measure terminate the employment contract with an employee. According to the current rules employment termination as a disciplinary measure can be applied only if an employee already has at least two effective disciplinary sanctions.

The second issue is that employment termination grounds are general and do not take into account the particularities of employment relations. Let consider the same example of disciplinary sanctions. An employee can be late twice from the work and be subject to disciplinary sanctions for each lateness. This will create grounds for firing if the employee is late again. On the other hand, an employee can seriously breach safety rules causing an accident. But if this is the first serious breach, the employer cannot as a disciplinary sanction dismiss the employee. The employment contract can be terminated only if similar situations will occur again. At the same time, there is no any practical difference between two separate disciplinary sanctions provided by the law - reprimand and severe reprimand.

These drawbacks of the labor legislation are more obvious for conscientious employers who are trying to comply with the labor legislation and do not use informal methods of influence on their employees. Some foreign investors describe the mentioned rules of the Labor Code, to put it mildly, as unreasonable solutions. Current rules on the dismissal of employees by the initiative of an employer create unequal competition conditions for employers who follow rules and for employers who use different methods for influencing on their employees - in favor of the latter. Under these circumstances it is not surprising that employees sometimes abuse their rights by presenting different claims to employers who conduct their activities strictly according to the requirements of the legislation. This, in its turn, creates corruption risks for the judiciary.

The demand for the reform from business and the evolutionary development of the judiciary together create an opportunity and necessity to reconsider the legislature's current approach. With the aim of improving business environment it is time to consider the gradual introduction of a certain flexibility in the employer-employee relations, and to provide the parties with an opportunity to be freer in the questions of terminating employment.

We strongly believe that reasonable flexibility is an important condition for ensuring jobs for employees.

DRAFT

The Law of the Republic of Armenia on Amending the Labor Code of the Republic of Armenia

Article 1. Add in Part 3 of Article 95 of the Labor Code of the Republic of Armenia of December 14, 2004 (hereinafter referred to as the "Code") new Clause 7 with the following content:

"7) with the head, deputies of the head, the chief accountant and the members of the collegial executive body of a legal entity irrespective of its organizational type.".

Article 2. Add in the Code new Article 101.1 with the following content:

"Article 101.1. An employment contract with the head, deputies of the head, the chief accountant and the members of the collegial executive body of a legal entity

In cases where an employment contract with the head, deputies of the head, the chief accountant and the members of the collegial executive body of a legal entity is made with a definite term, the term of that contract shall be set by the founding document of the legal entity or by the agreement of the parties.".

Article 3. Add Article 113 of the Code with new Part 4 with the following content:

"4. In addition to the grounds stated in Part 1 of this article, an employer can terminate the employment contract with an indefinite term with an employee:

1) by prior written notice about the termination of the employment contract by the employer's initiative, served not later than four months before the termination of the employment contract, if the employment contract does not specify a longer period of notice;

2) by paying a severance pay to an employee in the amount not less than four times the amount of the monthly average salary of that employee, if the employment contract does not specify a greater amount of severance pay.".

Article 4. Add in the Code new Article 113.1 with the following content:

"Article 113.1. Additional grounds for terminating employment contract with the head of a legal entity

1. In addition to the grounds specified in this Code, the employment contract with the head of a legal entity shall be terminated by the following grounds:

1) in the case of the early termination of the authorities of the head of a legal entity by the decision of the authorized body of that legal entity;

2) by other grounds specified in the employment contract.

2. If the employment contract with the head of a legal entity is terminated according to Clause 1 of Part 1 of this article in the absence of a fault in the actions (inaction) of the head of a legal entity, he (she) is entitled to a severance pay in the amount not less than three times the amount of his (her) monthly average salary, if the employment contract does not specify a greater amount of severance pay.

3. The provisions of this article shall be applicable to the heads of legal entities irrespective of their organizational types, with the exemption of the cases, where:

1) the head of the legal entity is the sole shareholder (founder) or member of that legal entity;

2) the management of the legal entity is conducted by a commercial organization (managing company) or by a sole proprietor (manager) according to an agreement.

4. The provisions of this article shall also be applicable to the members of the collegial executive body of a legal entity, if otherwise is not provided by the founding document of that legal entity.".

Article 5. This law shall enter into force on the tenth day following the day of its official publication.

1 Charents str., Office 207 Yerevan, 0025, Armenia

+374 60 27 88 88 +374 10 57 51 21

1 Charents str., Office 207 Yerevan, 0025, Armenia

+374 60 27 88 88 +374 10 57 51 21