European Foundation for the Improvement of Living and Working Conditions

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1 European Foundation for the Improvement of Living and Working Conditions Pacts for employment and competitiveness: case studies Danfoss Abstract Introduction Employment pacts at Danfoss Contents of the agreement Effects of the agreement Evaluation This report is available in electronic format only and has not been subjected to the standard Foundation editorial procedures Wyattville Road, Loughlinstown, Dublin 18, Ireland. - Tel: (+353 1) Fax: / postmaster@eurofound.eu.int - website:

2 ABSTRACT This case study involves Danfoss, a light engineering company that employs some 8,000 people in Denmark in functions such as production, manufacturing, R&D, administration and sales. Over time, the company has negotiated four interrelated agreements concerning wage systems, flexible working time, a variable working week and white-collar status. None of the agreements contain either explicit undertakings to maintain a certain minimum amount of labour or binding provisions about employment security. However, viewed as an interrelated framework for regulating work relations, the four agreements contain mechanisms and arrangements that may provide certain benefits to both management and employees in terms of 'enhanced competitiveness' and 'employment protection'. The company benefits through greater productivity, a reduction in overtime payments and the need to hire temporary workers, and increased worker attachment to the company. The key benefits for employees are increased job security during slack periods (via variable working), greater autonomy for shop-floor workers, a flexitime system and white-collar status for manual workers. The main disadvantages - for employees is the loss of overtime payments and for the company is the extra cost attached to white-collar status. INTRODUCTION Danfoss, which was established in 1933, is one of Denmark's largest industrial groups with an annual turnover of 14 billion DKK and 20,000 workers worldwide. In Denmark, Danfoss employs about 8,000 people across production, manufacturing, R&D, administration and sales functions. Danfoss produces high-tech mechanical and electronic components which are used in several industrial branches, such as thermostatic devices, fittings, plumbing controls, hydraulics, balancing valves, compressors for refrigeration systems, refrigeration controls, air condition and heating and water controls. Danfoss today consists of ten autonomous divisions, in which specific groups of products are developed, manufactured and sold ( Although Danfoss has numerous production facilities on the five continents, three plants in the southern part of Jutland still constitute the entire company's backbone of production. In our examination of local agreements aimed at integrating 'employment protection' and 'improved competitiveness', we focus exclusively on local agreements covering blue-collar workers employed at these three production sites. The four agreements at Danfoss were negotiated by the central co-operation committee. This is a body made up of management representatives and shop stewards from the trade unions at Danfoss. EMPLOYMENT PACTS AT DANFOSS During our interviews and research at Danfoss we have not been able to find any single local collective agreement which specifically aims at integrating and striking a balance between employment protection and improved competitiveness. However, the Danfoss case displays a cluster of several related local collective agreements, which overall resemble what could be termed an employment pact. 1

3 Pacts for employment and competitiveness: case studies During the 1990s several local agreements between management and labour have been negotiated at Danfoss. These have been aimed at integrating potentially conflicting objectives such as improved competitiveness and improved job security for Danfoss' employees. Although these agreements do not oblige Danfoss to maintain a specific amount of jobs or a set level of employment, these local agreements have been able to create more favourable framework conditions for the organisation of production. Also, these local agreements have contributed to improved job security for the majority of employees in the production/manufacturing sections of the company. This cluster of local agreements predominantly consists of four interrelated local agreements, which were negotiated during the early and mid-1990s: Wage System 90 (LØNFORM-90 - a local productivity oriented wage system, from 1991); local agreement concerning flexible working time (from 1976 and renewed in 1997); local framework agreement concerning a variable working week (from 1997); local agreement concerning conditions of employment (job security/dismissals, from 1997). CONTENT OF THE AGREEMENTS Wage System 90 For several decades, production and pay at Danfoss were regulated by a piecework payment system (akkord-løn). However, this was substituted in 1991 by the Wage System 90. This new system can be characterised as a productivity stimulating wage system, built on the basis of incentive structures that aim to induce workers to be more productive via more autonomous working. In general, the new wage system rewards employees for reaching predefined production standards jointly set by management and employee representatives. Regarding the intentions behind the introduction of WageSysten 90, Danfoss stated the following: 'The social partners at Danfoss agree that it is able to further the productivity of the company, its global competitiveness and thereby secure employment and improved working conditions for employees at Danfoss. The new wage system aims at creating a common wage system for all employee groups at Danfoss which in the long term replaces the Piecework Payment System and enables Danfoss to adjust to changed methods for production and world market conditions.' (Danfoss, 1991) 2

4 Danfoss The agreement contains three important components, which aim at enhancing Danfoss' productivity and competitiveness. 1.A basic structure for locally determined minimum wages - through which all groups of employees are paid according to their professional skills and qualifications. In order to rank different employee groups and determine their basic wages, the Wage System 90 takes into consideration the complexity of work, work experience and specific educational backgrounds of each employee. The specific level of basic wages within this fundamental part of the wage system has to be settled by a joint committee; 2. An assessment of employee qualifications - which triggers off additional payment to the individual employee according to his/her ability to apply and utilise personal qualifications in connection with job knowledge, work efforts, quality of products, flexibility, initiative and planning; 3. A result oriented wage pool (resultatløn) - which depends on the results achieved by employees. According to the personnel director, the intention behind this pool is to create incentives for a more 'result oriented attitude among the employees and reward those results, which further the goal achievements of the production section/the company'. The allocation of the wage pool has to take place on the basis of predefined result parameters, which contribute to the goal achievement of specific production departments. These predefined result-oriented parameters have to be measurable in quantitative terms and must apply for a specific period of time. They have to be unanimously defined and developed in co-operation between management and employee representatives. WAGE SYSTEM 90 (LØNFORM 90) Table 1 Result wage is a concept through which a part of the wage varies according to the achieved or improved results within a production sector at Danfoss. Result wage is more than just a share of the salary. Result wage is also a means for: improving the productivity of the company and achieving results which are beneficial both to customers, Danfoss as well as the employees; creating motivation and commitment among the employees; and creating a better communication in relation to the principles of the company and the results which are pursued. Result wage is measured on basis of success criteria that are crucial to the efficiency and competitiveness of the company. These success criteria encompass elements such as: compliance with predefined schedules of delivery; quality management; reduction of costs; machinery utilisation rates; and productivity. 3

5 Pacts for employment and competitiveness: case studies Two developments were attached to the implementation of Wage System 90: the first was the introduction of a high degree of worker autonomy; the second was that employees within production became functionally flexible. Thus, the way of organising production at Danfoss has very little to do with Fordism. On the contrary, Danfoss' products require employees with relatively broad range of skills who have to be able to substitute for one another in different job functions, so that time taken off by some employees does not lead to idle production lines and reduced capacity. Local agreement on flexible working time A local agreement signed in 1976, covering flexible working time, still forms the basis for the organisation of work. This agreement allows Danfoss to adjust its production flow according to market demands. Danfoss' employees also benefit from being able to gain influence over their work schedules. The agreement leaves employees with considerable scope over how overtime work and surplus hours can be 'cashed'. They can be taken either as direct economic compensation (overtime payment) or in the form more time off from normal work schedules. Local framework agreement on a variable working week In May 1997 a new local agreement concerning flexible working time was concluded by the central co-operation committee at Danfoss. Compared to the 1976 agreement, the new framework agreement concerning a variable working week expanded the range of flexitime working hours, which can be accummulated/owed by Danfoss' employees. Instead of having a range of deviation of 47 flexitime hours (i.e. +37/-10 flexitime working hours), the new framework agreement more than doubled this span and raised it to 100 hours (i.e.+85/-15 hours). A second new element within the framework agreement on variable working time is that the 'normal daily working time' may be expanded from 8 hours to a maximum of 10 hours per day. Unlike the 1976 agreement on flexible working time, which applies to all production units, the 1997 agreement on variable working week can be utilised selectively in different production units/departments in line with external market demand. In this sense, the framework agreement rests on a more collective basis. It is aimed at 'groups of employees' working in production units which encounter demands for increased production capacity. The new framework agreement cannot be seen as an arrangement which replaces the previous agreement on flexible working time. Quite the contrary: the framework agreement on variable working week must be viewed as a supplementary/substituting instrument. The provisions of the framework agreement were negotiated in Danfoss' central co-operation committee (hovedsamarbejdsudvalg), which management and employee representatives from all production units participate in. To be able to apply the provisions of the framework agreement actively within a specific production unit, management needs to enter specific negotiations with the employee side and acquire the acceptance of shop stewards/employee representatives (tillidsmand) at the local production level. 4

6 Danfoss LOCAL FRAMEWORK AGREEMENT ON A VARIABLE WORKING WEEK Table 2 Intentions: The wishes of our customers demand from us a more adequate allocation of resources within production. In order to attain this flexibility and simultaneously contribute to the highest level of employment, the parties (management and employees) at Danfoss have agreed that the local production units may choose to deviate from ordinary working time provisions. Also, the local production units may choose to work during weekends and hold displaced breaks. Local agreements are signed between management, employees end local shop stewards. Framework for flexible working time : At local level within a Danfoss production unit, the weekly working time may vary between a maximum of 45 hours and a minimum of 30 hours per week. The flexitime system is used for regulating the hour balance status which is not allowed to surpass +85 and -15 working hours. The maximum work day may not surpass 10 hours and the maximum work week may include 5 weekdays. The local agreements may run for different periods of time, but have to stop within 12 months. When the local agreement expires or when somebody leaves the company, the individual working hour status of each employee has to live up to the limits defined by the framework agreement. The use of time saved up has to be settled with the supervisor/management and may be exchanged into shorter daily working time or whole days/weeks off from work. Time saved up cannot be used during sickness absence. When local agreements are concluded, the partners have to pay attention to personal concerns of the employees, such as health, child care, transport, etc. Payment/remuneration: Saved up time cannot be cashed in as overtime payment. Weekend shifts: The partners agree to utilise the provisions within the national sector agreement concerning weekend work. Breaks: In order to make full use of the hours of a work day and use these for production purposes, displaced breaks can be used in order to secure an optimal usage of the production facilities. Employees who have their breaks displaced in comparison to normal standards, will be remunerated according to the relevant provisions within the national sector collective agreement. Date of initiation: 1 May In contrast to the agreement on flexible working time, the framework agreement has to be viewed primarily as an arrangement which is beneficial to Danfoss' management for the improvement of competitiveness. Provided employees agree to work under the provisions of the new agreement, they accept the possibility of longer working days and longer working weeks. This is the concession that the employee side made in order to secure and maintain existing rates of employment. This agreement allows more work to be carried out without increasing the workforce during peak production periods. The overtime work involved in achieving this cannot be cashed in as 'overtime payment' (overtidsbe-taling). Instead, the amount of surplus hours has to be exchanged for time off at a later stage. This allows the company to have more work carried out without having to pay costly additional wages. The agreement therefore promotes competitiveness. The agreement also contains certain advantages for employees. During demand slumps, a group of employees has the option of reducing their work hours thereby retaining employment. 5

7 Pacts for employment and competitiveness: case studies In the above way, the agreement clearly promotes both competitiveness and employment. Flexible working time is seen as a way to attain both parties' goals. By expanding the flexitime deviations the production capacity at Danfoss' manufacturing departments can be adjusted and expanded even more than under the 1976 agreement, and this enables the company to get large quantities of products produced within short periods of time. The reason why Danfoss has chosen a temporal flexibility strategy (instead of one of numerical flexibility) is related to the company's requirements for highly skilled employees. Given the fact that it takes time to train new employees and provide them with the necessary skills, relying on numerical flexibility is not feasible. Local agreement on white-collar status Another local agreement concerning conditions of employment (see Table 3) was bargained simultaneously with the framework agreement on variable working week. The local agreement on conditions of employment provides for longer notice periods (opsigelsesvarsler) for manual employees in the event of dismissal, bringing their conditions into line with those for salaried employees. It contains some significant advantages for the employees and has to be interpreted as a concession by management in order to encourage employees to accept the framework agreement on variable working week. Hence, obvious linkages exist between the two agreements. LOCAL AGREEMENT ON WHITE-COLLAR STATUS Table 3 In order to provide conditions of employment for all employees under the national collective agreement for Manufacturing Industry, the parties at Danfoss agree that all employees within production shall be employed on the terms laid down in the following agreement. Dismissals : During the first 9 months of an employment relationship the provisions of the national sector agreement constitute the guidelines regarding notice periods. After 9 months of employment the notice periods defined in 2 within the Act on Salaried Employees enter into force on both parties. Thus, legal access to the provisions on notice periods defined by the Act on Salaried Employees are only available after 9 months of service. Date of initiation: 1 May 1997 EFFECTS OF THE AGREEMENTS The local agreement on white-collar status opens up far better notice periods than those in the provisions defined by the national sector agreement. The crucial difference between the two agreements has to do with the notice periods which Danfoss employees are entitled to after attaining nine months of seniority. Seen from a management perspective, the agreement on white-collar status may turn out to be burdensome. In a situation where major redundancies are on the agenda, it will be relatively expensive to lay off employees, who have a right to at least 30 days notice. In Autumn 1998 and Winter 1999, due to stagnation in sales and decreasing numbers of orders/contracts, Danfoss was forced to turn to minor redundancies. According to our interviews, these redundancies have been costly to Danfoss. The reason is that many of these redundancies involved employees who had already gained 6

8 Danfoss white-collar status by the time when they were laid off. The agreement on 'white-collar status' therefore has certain elements attached to it which, in connection to redundancies, have been costly. However, the agreement does not apply to newly recruited workers. One of the consequences of granting white-collar status to certain groups, while not conceding it to others, is that peripheral workers become even less attached to their place of work. Contrary to obtaining favourable notice periods, the peripheral labour force is more vulnerable to fluctuations in production, increasing the vulnerability of peripheral workers. This pattern of a 'dual' labour force can be identified at Danfoss. On one hand, Danfoss aims at maintaining a highly skilled functionally and temporally flexible (Jørgensen et al, 1990) core labour force, which can be utilised in situations where increases in demand and production capacity suddenly appear. Sustained by the agreements on flexitime, a variable working week and white-collar status, this core labour force is expected to be able to work intensively during peak periods and take time off from work once these sudden peak situations level out again. By keeping such a functionally and temporally flexible workforce intact and granting it relatively favourable conditions of employment, Danfoss is able to meet demands in peak periods without exposing this group to numerical flexibility. On the other hand, Danfoss also maintains a peripheral labour force which can be utilised during periods where sudden production demands cannot be sustained by ordinary overtime work and intensive flexibility. Peripheral workers are seldom employed for more than a couple of months and therefore never attain the favourable conditions of employment that are granted to core workers. They can generally be characterised as a numerically flexible workforce that can be utilised during peak periods where the core labour force, despite the use of temporal flexibility, is unable to meet demand. EVALUATION This case study reveals four interrelated agreements concerning wage systems, flexible working time, a variable working week and white-collar status. None of the agreements contain either explicit undertakings to maintain a certain minimum amount of labour, or binding provisions about employment security during slumps. However, viewed as an interrelated framework for regulating work relations, the four agreements contain mechanisms and arrangements which may provide certain benefits to both management and employees in terms of 'enhanced competitiveness' and 'employment protection'. Table 4 displays these benefits and shows how they are connected to each of the four agreements. 7

9 Pacts for employment and competitiveness: case studies ADVANTAGES FOR EMPLOYERS AND EMPLOYEES RELATED TO LOCAL AGREEMENTS Table 4 Wage System 90 Flexitime (individual) Variable working week (collective) White-collar status Advantages for the employees Promotes autonomy at the shop floor. Allows time off during hours, days and weeks mainly chosen by the employee individually Increases the job security during slump periods. Increases job protection for core workers. Advantages for the employers Promotes productivity. May be used when extra work is needed/in demands. Might save overtime payment depending on the individual choice of the employee. Allows more work to be carried out by the same work force during peak periods. Reduces the need for temporary recruitment and dismissals. Saves overtime pay /remuneration. Strengthens the attachment of the core workers to the company. Promotes stability. There are essentially two disadvantages attached to the agreements. Firstly, the framework agreement on the variable working week involves a loss of overtime payments. Secondly, the agreement on white-collar status is costly to the company in situations where it is forced to lay off large numbers of employees. Having signed the agreement regarding white-collar status, the management obliges itself to keep employees who otherwise would have been fired either overnight or within a short period of time. H. Knidsen, J. Lind, O. R. Sørensen For more information about Foundation research on this subject, please contact: Camilla Galli da Bino Information Liaison Officer Telephone: (353 1) Fax: (353 1) gdb@eurofound.eu.int The European Foundation for the Improvement of Living and Working Conditions is a tripartite EU body, whose role is to provide key actors in social policy making with findings, knowledge and advice drawn from comparative research. The Foundation was established in 1975 by Council Regulation EEC No 1365/75 of May