Personnel costs of having permanent workers

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Theoretical framework

Personnel costs of having permanent workers

In this chapter, personnel costs due to bad recruitments and absenteeism are explained. These are costs related to labor law, which means that they concern permanent workers in the company.

The cost of labor law

Coe et al. (2009) cite the following in their article:
“In many ways I think the regulations in Sweden make it good for the staffing industry. Because there are so many restrictions about employment in Sweden and there are employers which are afraid to employ because they know if they take this person into the company it´s very, very hard to get rid of the person if it doesn´t work. And that´s good for the staffing industry because then we can come in and give the customers the flexibility that is needed” (Coe et al., 2009, p. 65).
In another article by Addison and Teixeira (2003), this view that employment regulations negatively affects employers hiring decisions is supported. Here, it is stated that employment protection increases labor costs, as well as it gets more difficult to produce at the intended amount of output. In periods of declining demand from customers, it is hard for companies to terminate permanent employments because of the cost of changing employment and the restrictions in this area. Also, in terms of increasing demand, companies must consider if they can afford payment for additional workers in the future when the demand from customers are no longer rising. If they cannot afford this future expense, any additional workers should not be employed (Addison & Teixeira, 2003).
The EPA makes it very difficult to terminate an employment with dismissal. It is practically impossible to dismiss a worker in the event that the employee does not perform adequately or is inappropriate for the job. The reason for dismissal shall be deemed adequate and a valid reason is a serious activity such as grave neglection of one’s duties, criminal activity, and violence against property or serious substance abuse problems (Glavå, 2001).
An employer can terminate an employment due to shortage of work, but in that case they must follow the rules regarding order of priority (Glavå, 2001). This means that anyone cannot be included in the termination of employment when referring to shortage of work as the reason for it, even though it would be more profitable or efficient to terminate another employee than the ones who must go. The workers who lose their job in this way later have a priority right for any new employment in the company for the coming nine months after the termination, which means that the company cannot choose to employ whoever they wish before those previously employed persons have been offered the position (Öman, 2007).
Costs related to labor are often a major part of the total costs for a company, and it is many times difficult to predict those costs in advance. Therefore, companies seek alternative ways to permanent employment such as probationary employments or temporary employments. They do it to make sure that the right person is employed and to avoid costs related to permanent employments (Öman, 2007).

The cost of bad recruitments

Recruiting employees is costly for companies in terms of both money and time, and among the foremost of these costs are expenses and time for advertising, sampling, interviews, and training time for new workers. If the company successfully attracts the right person at the right time, performing the right task, this list of recruitment costs does not need to accelerate. However, the costs increase a lot at less successful recruitments and result in additional costs such as lower productivity, loss of customers, low morale and possible lawsuits. Replacing a bad recruit normally costs from 30% of an unskilled and newly entered worker´s annual salary to five times the salary of a manager (Hacker, 1997).
Öman supports this view in his article (2007) and states that the recruitment process takes a lot of time and resources, especially for small firms, and the payback from the investment is uncertain from the start. A newly employed person needs education and training to become effective, and as the time goes by a company will have changed in areas of technology and economic position, which requires continuous training and education. As employees becomes more skilled and receive more knowledge they will also be more attractive on the job market and to competitors (Öman, 2007).

The cost of absenteeism

According to Cascio and Boudreau (2008), absenteeism is when workers neither stay at work as scheduled, nor report that they cannot attend. The expression “scheduled” means that only circumstances when workers are supposed to be at work are included, and not situations as vacation or planned absents like visiting a doctor. Absenteeism of workers negatively affect a company, mainly due to the fact that this employee´s work is not being done at all, or done less well by another supplement worker. The most common reason why people are absent is sickness like a cold or the flu. Also other diseases as stomachache, headaches and back problems are common. Other reasons for absence that do not include personal diseases are family related issues like sick children, sickness due to stress or a low work mentality. The consequences of absenteeism are increasing costs for the company, and the main costs can be divided into four categories:

1. Direct costs, as wages and employment benefits.
2. Costs of managing problems due to absenteeism, such as operational issues of how the absence of a worker can be solved. These issues can be troubles with production, replacing the absent worker and introducing other workers to do the job instead. Also, observing the performances of the replaced workers to make sure that they perform the task correctly. If absenteeism refers to low work mentality, costs of counseling and discipline conversations must also be added.
3. Costs of replacing the absent worker with another employee, for example overtime expenses. Also, it might not be enough to just replacing one worker, so decisions regarding how many replacement workers that is proper to use must be considered.
4. Costs of reduced work output and lower quality of the work performed. These costs are due to less productive result from replacement workers, as well as shutdown of production and revision of work (Cascio & Boudreau, 2008).

The relevant employment rules in the EPA

In the previous chapter, personnel costs related to permanent workers are explained. Permanent workers are protected by the EPA. This chapter is therefore explaining the meaning of the EPA and the rules which mainly affect companies’ personnel costs.

Explanation of the EPA

The EPA was implemented in year 1982³ with the purpose to increase the security for employees concerning termination of employment, and is valid for all workers but with some exceptions. These exceptions are the owners’ family members, company executives, people working in their employer’s household and workers who are specially supported or in sheltered employments (Landsorganisationen⁴, 2009).
The EPA consists of many regulations that protect the workers. However, this thesis only focuses upon the following four different areas:

1. The time period of employment, §§ 4-6 EPA
2. Termination of employment; § 7 EPA, and dismissal; § 18 EPA
3. Order of priority in association with termination of employment, § 22 EPA
4. Re-employment, § 25 EPA

The time period of employment

According to the first section in § 4 EPA, the main rule is that all employments are permanent. However, exceptions to this rule allow companies to use fixed-term employment: for general fixed-term employment, for a temporary substitute employment, for a seasonal employment and when the employee has attained the age of 67 (§ 5 first section EPA). A general fixed-term employment and a temporary substitute employment will automatically become a permanent employment if the worker has been employed more than two years in a five year period (§ 5 second section EPA). An employer can also use a contract for probationary employment for no more than six months, and if the employer does not say that they want the employment to end, it will automatically transform to a permanent employment (§ 6 EPA).
According to Leviter and Muller (2007), a fixed-term employment is allowed when:

• “the work is only for a specific season or task, or a fixed-term contact is necessitated by the special nature of the job;
• the contract is for temporary substitute employment, a traineeship, or for employment during a vacation;
• the work is only for temporary periods of high workload (in this case, the contract may not exceed six months during any two-year period);
• the employee is currently receiving a pension, where the employee must retire upon his or her 67th birthday, or another agreed-upon age; or
• the contract is for the period pending the employee’s commencement of compulsory military service lasting for over three months” (Leviter & Muller, 2007, p. 1).

Employers may terminate probationary employments at any time (§ 6 third section EPA), and such termination must be informed to the employee two weeks in advance (§ 31 EPA). Additionally, the local union to which the employee belongs must be informed of this action. Both the employee and the union are entitled to consultation with the employer regarding the termination (§ 31 first section EPA).

Termination of employment⁵ and dismissal⁶

According to § 7 first section EPA, an employer cannot terminate an employment unless there is an objective ground. If the termination is due to personal reasons, it cannot be grounded on situations occurring further back than two months from the time of notice (§ 7 third section EPA). Illness for example, is not a valid ground for termination of employment unless the worker is so sick that he or she cannot perform any useful job at all, and the company has done everything they can to help the employee concerned through rehabilitation and adjustment in the work place. Chronic alcoholism is not either a valid reason for termination of employment, if the worker admits that the addiction is a disease. In that case, the conditions for the employer is the same as in case of disease, namely that the employer must provide help with rehabilitation and do whatever they can to help the worker with the addiction before a termination of employment can be valid (Glavå, 2001). If a worker has severely misbehaved in his obligations towards the employer there is a valid ground for dismissal (Eurofound, 2009).
Dismissal of an employee may be valid in some of the following circumstances:

• “serious incidents or threats of violence at the workplace;
• serious crimes against the employer’s property;
• sexual harassment of pupils, if at a school;
• activity disloyal to the employer; and
• participation in an illegal strike after orders to cease strike activity has been issued” (Leviter & Muller, 2007, p. 1).

Order of priority in association with termination of employment

According to § 22 EPA, rules regarding order of priority in case of termination of employment must be followed before the termination takes place. Furthermore, since this rule is only effective when employments are terminated due to shortage of work, it is not valid in cases of dismissal (§ 22 first section EPA). This rule implies that if worker A has been employed for a longer time in the company than worker B, worker A has priority to further employment. In other words: “Last-In-First-Out” (Below & Skogman, 2010).
There are however an exception to this rule which allow employers to exclude two workers from the priority orders. This means that these two have priority to further employment, independent of the duration of their employment. The requirement for companies to obtain this privilege is however that the total number of workers does not exceed ten. In other words, for companies with more than ten workers, this exception is not valid (§ 22 second section EPA).

Re-employment

In § 25 first section EPA it is stated that if a termination of employment occurred due to shortage of work, the employees concerned have preference for re-employment in the company where they were earlier employed. The requirement for this right is that the worker has been employed by the company for at least twelve months in the last three years, and also has adequate qualifications for the new work. This right to re-employment is valid from the time of employment termination notice, and lasts up to nine months after the employment was terminated (§ 25 EPA).
 

Advantages of using temporary agencies

Temporary workers are not included in the EPA, which means that companies can come around the EPA if hiring workers from a temporary agency instead of permanently employing workers. In this chapter, the benefits of using temporary agencies and its effects on personnel costs are therefore explained.

1 Introduction
1.1 Background
1.2 Problem discussion
1.3 Purpose
1.4 Delimitation
2 Method 
2.1 Research approach
2.2 Questionnaire
2.3 Data collection and analysis
2.4 Reliability,validity and generalizability
3 Theoretical framework 
3.1 Personnel costs of having permanent workers
3.2 The relevant employment rules in the EPA
3.3 Advantages of using temporary agencies
3.4 Drawbacks of using temporary agencies
3.5 Human resource accounting
4 Presentation of descriptive findings
4.1 The usage of temporary personnel over the years 2007-2009
4.2 The reason behind companies use of temporary personnel over the years 2007-2009
4.3 Offering a temporary worker a permanent position over the years 2007-2009
4.4 The proportion of temporary personnel in the work force over the years 2007-2009
4.5 Did the use of temporary agencies reduce personnel costs in year 2009?
4.6 What problems did the EPA create for the companies over the years 2007-2009?
4.7 Do you want the EPA to change?
4.8 Effects of the permanent workers
4.9 Opinions from the companies
5 Analysis
5.1 Personnel costs of having permanent workers .
5.2 The relevant employment rules in the EPA
5.3 Advantages of using temporary agencies
5.4 Drawbacks of using temporary agencies
5.5 Human resource accounting
6 Conclusion .
7 References
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Personnel costs – a study of how Swedish companies are affected by the Employment Protection Act and temporary agencies over the years 2007- 2009