Italian labor laws are (righteously) under attack right now. Basically, a company can hire people with three main types of job contracts:
- Project-based contract: it defines a project that the employee (which is not really an employee but rather more of a contractor) will have to work on, with defined objectives and milestones. The compensation and the way it’s paid can also be defined arbitrarily.
- Permanent contract: the employee is hired permanently and given a monthly compensation.
- Fixed-term contract: the employee is hired for a defined period of time and given a monthly compensation (this is almost the same as permanent contract).
There are a number of other weird contracts, but they apply to specific sectors and are not interesting right now. The key topic here is that all job contracts in Italy, unless you’re a freelancer with a EU VAT ID, are strictly regulated by labor laws. This kind of approach comes from decades of social unrest and fights by workers and unions.
Project-based contracts have been introduced only ten years or so ago, and have completely disrupted the job market. Such contracts are much easier and cheaper for employers and in turn give less guarantees to workers. Permanent contracts are precisely designed to protect workers, which in general is a good idea, but in reality it turned into a mess in Italy. I’ll spare you the details, suffice it to say that project-based contracts are at one end of the scale, while permanent and fixed-term contracts are at the other, causing all sort of trouble and even more social unrest. The vast majority of new workers, typically graduates, are hired with project-based contracts that can be terminated at any moment and give them less benefits. Another aspect that is being widely discussed right now is that if the employer has more than 15 permanent contract employees, then they cannot be terminated without a good reason (the law defining what a good reason is – not doing a good job is not a good reason). This causes problems when companies plan to lay off many workers, even if they can no longer afford to pay them. That in turn is causing more and more project-based contracts to be used (many of them stretching labor law beyond its limits) because they give employers more flexibility – or rather more freedom to fire workers (everything gets down to that). But I’m getting off-track.
So what should a startup do? How should new employees be hired?
The problem with project-based contracts is they must define a project and its objectives. In a startup, pretty much all employees do a variety of things, from programming to… emptying trash cans. If you hire someone with a project-based contract, she is prevented from doing anything but what’s in the contract. In reality no one really cares, but still it’s something that breaks the law to some extent and could cause problems. As you can see, this is totally unflexible and unagile.
On the other hand, permanent contracts, while allowing almost complete flexibility for the actual work the employee will perform, due to social insurance and taxes are much more expensive (roughly 1.5x compared to project-based contracts), thus would seem unaffordable for a cash-constrained startup – or any small business in general.
Is that even true?
The points to considers are multiple. Firstly, a bad hire is disastrous for a startup, no matter the type of contract. Secondly, startups surely need flexibility, but also need to make employees feel at home and to retain them. A project-based contract goes against both those principles. The answer is that – probably – a permanent contract is much better, even if it costs a bit more.
In an ideal Italy, project-based contacts would not exist, and permanent and fixed-term contracts would cost less while providing the same level of protection for the workers. The key point currently under discussion is the 15-employees thing, which is insane, because the outcome is that growing businesses either hire with project-based contracts or via body-rental companies, precisely because they don’t want to cross the 15 employees threshold. A rule that was meant to protect workers is actually causing them harm, preventing growth and causing social unrest. In a small startup that doesn’t really matter, but now the project-based contract thing is so rooted in the job market that it seems the only way to hire people in small businesses.
Well, it’s not, and it causes more harm than good if you depend on your employees, their loyalty, happiness and thus productivity, which are vital for a tech startup.