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Italy: ‘Dignity Decree’ introduces new restrictions on fixed-term contracts

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Newly enacted legislation in Italy limits fixed-term contracts, increases indemnities for unfair dismissal and addresses relocation of international business outside Italy. By enacting the so-called ‘Dignity Decree’, which entered into force on 14 July 2018, the newly elected Italian Government took significant steps to reverse changes to the law on fixed-term contracts, partially liberalised by its predecessors. The Decree has also increased the indemnities payable to employees in cases of unfair dismissal and introduced sanctions for companies that relocate or make employees redundant after having received state aid. The main legislative changes introduced by the Dignity Decree are set out below.

Fixed-term contracts

Fixed-term contracts can last for a total of up to 24 months (the previous maximum length was 36 months). In particular, an employee can be hired with no requirement on the employer to indicate a specific justification for using a fixed-term contract if the contract is for a maximum of 12 months. Within the 12-month period extensions to the contract term do not need to be justified. After the first 12-month period has passed, the contract can be extended for up to a further 12 months provided that reasons for extending the fixed term exist and are indicated in the contract:

  • The fixed-term contract meets temporary and objective needs, unrelated to the ordinary activity of the organisation or meets a need to replace other employees.
  • The fixed-term contract meets needs connected to temporary, significant and unpredictable peaks in ordinary business activity.

The number of lawful extensions within the overall 24-month period is reduced from five to four. If there is a fifth extension, the contract becomes permanent.

A fixed-term contract can only be renewed if the above conditions are met. These limitations on the use of fixed-term contracts apply not only to contracts signed after the entry into force of the Decree, but also to renewals and extensions of contracts that were in force at that moment.

The above provisions are also extended to temporary agency workers (i.e. those working under what are known as ‘contratti di somministrazione’). They apply to fixed-term employment contracts signed between the worker and the agency but  do not apply to the contract signed between the host company and the agency, which is free from these constraints.

Indemnity for unfair dismissal for employees hired since 7 March 2015

The indemnity payable for unfair dismissal for employees hired since 7 March 2015 has been increased. The minimum indemnity passes from four to six months’ salary while the maximum indemnity is increased from 24 to 36 months’ salary. The calculation mechanism remains unchanged (i.e. two months’ salary for each year of service). These amendments will mean an immediate increase in the minimum indemnity that can be ordered by judges (from four to six months’ salary), but they will not have an immediate impact on the maximum indemnity that can be ordered, because a sanction of 36 months’ salary can only be granted to employees with at least 18 years of service (they also have to have been hired since March 2015).

Additional social security contributions

Social security contributions for fixed-term contracts have been increased. The additional contribution for fixed-term contracts is increased by 0.5% for each renewal of the fixed-term contract. This also applies to agency workers.

Limits on relocation and sanctions

The Decree introduces sanctions for organisations that have received state aid and relocate their economic activity, or part of it, to a country outside the European Union within five years from the date when they stopped receiving state aid. The sanction is between two and four times the amount received as state aid, in addition to the obligation to return the aid received.

Organisations that operate in Italy and have received state aid to carry out productive investments in a certain area that move their activity out of the incentivised area (or part of it) within the following five years also lose their right to that aid. The aid received must be returned and is subject to interest.

Finally, companies that have received state aid that required an evaluation of the employment impact of the aid that reduce their workforce by over 10% within five years lose their right to that aid. In this case the amount to be returned is proportionate to the reduction of the level of the workforce. If the workforce is reduced by more than 50% the full amount must be repaid.

Next steps

The Decree must be converted into law within 60 days to remain effective and is subject to amendments by Parliament.

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