the selection of provisions in a labour contract: an ... · the selection of provisions in a labour...

The Selection of Provisions in a Labour Contract:

An Empirical Investigation of the French Case..

Christian Bessy+ and Daniel Szpiro++

January 2008

Preliminary draft

Abstract

Reforms to labour law have been proposed in France; focusing on the duality of contracts and the high cost of separation. But, many common features of the legal regulation of an employment relationship have attracted less attention, although they are to be found in many contracts with possible litigation, as for instance the possibility for the employer to reduce the mobility of the employee or to prevent them to retain certain intangible assets. The aim of this paper is to contribute to these discussions by providing some insights on the actual use of employment contracts, starting with a quantitative description of the practice of contracts in France, and then going further with some explanations of why some provisions exist and in which case they are expected to be found.

The cost of devising provisions seems to be a deterrent to implement a non-simple contract for small firms. For the other firms, the main result is that technology, the process of production, or the type of job cannot be considered as the only causes of the specificity of a contract. In many cases, the bargaining process is relevant and is sensitive to the state of the micro labour market. Surprisingly, even the contract characterized by a performance pay mechanism is prone to the bargaining power of the parties.

. J.E.L.: J410, K31, J53, J83, K12 Keywords: Employment Contracts, Flexibility, Intangible Assets, Incentives + IDHE, ENS-Cachan, C.N.R.S. ++ University of Lille 1 & Clersé- C.N.R.S.

RÉSUMÉ Le choix des clauses du contrat de travail :

une étude empirique du cas français.

Des réformes de la législation du travail ont été proposées en France, en mettant l'accent sur la dichotomie des contrats et le coût élevé de séparation. Mais de nombreuses caractéristiques communes de la réglementation juridique de la relation de travail ont attiré moins d'attention, même si elles se trouvent dans de nombreux contrats avec d'éventuels litiges, comme par exemple la possibilité pour l'employeur de réduire la mobilité de l'employé ou de les prévenir de conserver certains actifs incorporels. L'objectif de cette étude est de contribuer à ces débats en donnant un aperçu sur l'utilisation effective des contrats de travail, à partir d'une description quantitative de la pratique des contrats en France, et d’estimer les raisons pour lesquelles certaines dispositions existent et dans quelles circonstances elles devraient être trouvées. Les clauses spécifiques ne sont pas souvent retenues dans les contrats des petites entreprises, probablement du fait du coût d’élaboration d’un contrat complexe. Plus globalement, le résultat principal est que la technologie, le processus de production ou le type d'emploi ne peuvent pas être considérées comme les seules causes de la spécificité d'un contrat. Dans de nombreux cas, le processus de négociation pèse et est sensible à l'état du marché du travail au niveau désagrégé.

J.E.L.: J410, K31, J53, J83, K12 Mots clefs: Contrat de travail, Flexibilité, Actif immatériel, Incitations, Négociations

_________________________________________________________________________________

CONTENTS

1. THE THEORIES OF EMPLOYMENT CONTRACTS 4 1.1 INVESTMENT AND EMPLOYMENT CONTRACTING 4 1.2 COMPLETENESS 4 1.3 NEGOTIATION 5 1.4 FLEXIBILITY AND RISK SHARING 6 1.5 DIRECT WORK INCENTIVES 7

2. DIVERSITY AND COHERENCE OF LABOUR RELATIONS 8 2.1 THE FRENCH EMPLOYMENT CONTRACT LAW 8 2.2 THE DATASET 10 2.3 A TYPOLOGY OF FRENCH CONTRACTS 11

3. THE DETERMINANTS OF THE PROVISIONS IN A CONTRACT 13

CONCLUSION 19

APPENDIX: THE DATA 20

The Selection of Provisions in a Labour Contract p 3

INTRODUCTION

Many reforms to labour law have been proposed in France; the main trend is represented by Blanchard

& Tirole (2003) and Cahuc P & Kramarz F (2004) who stress the existing dichotomy of French

contracts divided between short term and unspecified term contract, and advocate the creation of a

unique contract whatever the duration, attached with regular increase in severance pay according to

tenure time, and some kind of experience rating for the taxation of the firm. The spirit of the de

Virville (2004) report is to propose some new contracts such as the 'project contract' which is an

extension of the existing short term contract to a longer span, to be decided by the firm.

In most cases, these proposals focus on the high cost of firing an employee on the French labour

market, which consists in a direct cost to be paid directly or through the length of delays in the

separation process, and the risk of litigation cost.

But, many common features of the legal regulation of an employment relationship have attracted less

attention, although they are to be found in many contracts with possible litigation, as for instance the

possibility for the employer to reduce the mobility of the employee or to prevent them to retain certain

intangible assets. Formal warranties are sometimes wanted by using covenants not to compete or

provisions where the employee is to grant back intellectual property rights. Are these kinds of clauses

to be restricted? Or, if not, should the employer have to pay some compensation?

The aim of this paper is to contribute to these discussions by providing some insights on the actual use

of employment contracts, starting with a quantitative description of the practice of contracts in France

(for a description of the evolution of contracts on the three last decades, see Bessy 2007), and then

going further with some explanations of why some provisions exist and in which case they are

expected to be found. In doing so, we would like to give an empirical assessment on the one hand of

the structural reasons of the form of the contract, and on the other hand of the contingencies due to the

bargaining that prevails in a context of high unemployment which can lead to clauses less favourable

to the employee.

The first section presents the main theories that address the question of the diversity of labour

contracts. Section 2 will present the database, the actual characteristics of French contracts, and a way

to summarize this diversity into broad categories. Section 3 will examine empirically the determinants

of the main provisions of employment contract and the last section will conclude and summarize this

study.


1. THE THEORIES OF EMPLOYMENT CONTRACTS

The analysis of contractual choices has been the subject of an abundant economic literature over the

past three decades (see Masten, 1999). Some part of the literature emphasizes the incomplete nature of

contracts, due to the parties' impossibility of foreseeing all possible contingencies and the high cost of

court action. Another part stresses the use of a contract as a lock-in device that enhances investment

and prevents the risk of a hold up (in particular) by the employee. But, beyond this literature, one must

not forget the labour management dimension: risk sharing, flexibility, control, and incentives appear in

any work relation and will transpire in the contract itself. These different features of a contract do not

refer to a comprehensive theory of employment contract, and only partial mechanisms can be found in

the literature.

1.1 INVESTMENT AND EMPLOYMENT CONTRACTING

When investment or turn-over cost is an important feature of work management, there is a wedge

between the pay an employee is willing to work for and the maximum wage the employer can afford.

Hence the need for the firm to have a sufficient duration of the labour relation, or other provisions to

recover the benefit of the investment. Otherwise the employee can successfully bargain and hold-up

the investment by asking for a better payment after the initial contract and the investment are carried

out (Williamson, 1985). In that situation, the contract has to be more precise and less prone to

renegotiation (Malcomson, 1997). In case of an investment in non specific human capital, either the

worker should pay for it, as Becker (1964) suggests, or some restrictions to the mobility of the

workforce are to be imposed through initial contracting, as for instance limitation to get a job in the

same industry during the relationship or after separating from the firm (covenants not to compete).

Where feasible, the abandonment of intellectual property or of clientele is a way to focus the contract

on the prevention of a hold-up from the employee, or even to allow a hold-up by the firm (Hart, 1995).

These provisions related directly to the investment act also as an incentive to stay in the firm by

making a separation more costly to the employee; hence effort in work is promoted because of the

depreciation of non-specific human capital in case the employee is out of its present job.

1.2 COMPLETENESS

In writing a contract, it would be too costly to imagine every contingency, so the nature of what is

decided to be settled is an open question. Of course, some mentions must be in the contract, by virtue

of the law or collective agreements, but many contracts go beyond the minimum scope, in order to

carry out a special relationship. The degree of completeness of a contract depends on several

parameters, as described below.


- Where reputation is important, explicit rules can be limited. Implicit contracts can prevail (Klein,

1996) and the employment contract shrinks to the minimum provisions. (But, such a statement is

difficult to check empirically.)

- The neo-institutional literature, based on the economy of transaction costs, highlights the importance

of “menu” cost (Williamson, 1985). It consists in the cost of writing the desired provisions and the

knowledge and ability to explicit a contract compatible with the existing law.

This menu cost is to be balanced with the gain expected to be generated by the provisions of the

contract, which depends on the nature of the job (e.g. intellectual property provisions are certainly

more useful for a computer scientist than for a mechanical blue collar) or industry.

Insofar as the menu cost is a fixed cost, an investment that can be reused in several instances when a

firm hires a new employee in the same kind of position, it is expected to find more easily some

completeness of contracts in big firms where the initial cost can be recovered through multiple uses.

- The contract is also to be written with provisions that allow a judge to check the specifications of

what is expected of each party. Hence, only unambiguous and verifiable clauses are meaningful to

write down.

- When the aim is to build a long-term relationship, writing a precise contract can be

counterproductive insofar as working conditions will evolve through time in order to adjust to new

economic or technological conditions (Goldberg, 1976; MacNeil, 1978). Agreement between the

parties should be based less on a detailed specification of obligations than on a general framework

defining the process of adjustment of the terms of agreement over time; that is, a set of constituent

rules framing future interactions. In this perspective, 'complete contracts' can only apply to short-term

relationships based on largely unspecified resources and fairly stable expectations concerning possible

points of dispute for which the courts are considered competent.

1.3 NEGOTIATION

The theories of negotiation apply usually to wage bargaining, but a wage can be regarded as a hedonic

price, where the quality of the job enters as a component of a desired service provided by the

employee. This is a way to come closer to the neoclassical theory with its emphasis on utility

maximizing, which does not stop to the wage per se but also takes into account the disutility of

working time and condition, and cannot be subsumed to a mere number of hours. Hence, one should

consider labour bargaining as a complete set of negotiations on both the characteristics of a job and the

price of it.

The result of a negotiation depends on the bargaining power of each side in the Nash equilibrium, and

on several other factors:


- the elasticity of the employer profit with regard to working conditions (see for instance the

arguments on flexibility developed below), which is expected to vary across industries and depends

on technology1,

- the “taste” of workers, their preference for the present (but that is beyond the possibility of

observation).

- the alternative possibilities available to the job seeker, usually represented globally through the

unemployment rate, or the vacancy ratio.

Trade unions can play a part in negotiations, enhancing the power of employees. But, for the labour

contract, bargaining would mean dealing with outsiders and in most cases trade unions will not seek to

interact directly at that stage (exceptions being the close shop industries, which are very rare in

France). This can correspond to the dichotomy between the sake of outsiders and insiders for the trade

union, but it can also be a requirement of the candidate to a job who considers his chance of being

employed is lowered when a trade union interferes with the process of hiring. In that case, the only

way the trade union can have a bargaining power is not through individual contract but through

general disposition negotiated for every contract.

1.4 FLEXIBILITY AND RISK SHARING

Flexibility is inherent to the employee who follows an authority that assigns tasks (although within

certain limits) and can impose sanctions. This model evolved due to the legal framework limiting the

employer's disciplinary power (the so-called Auroux laws of 1982), and to changes in customs that

challenge hierarchical authority and promote greater autonomy of workers.

Economic activity is risky by nature, and the employment contract -as opposed to a professional/client

relationship- is a way to share risks which promotes the security of the employee (Morin, 2005;

Malcomson, 1999). The employment contract is an efficient way to transfer risks from risk adverse

employees to less risk adverse entrepreneur (Azariadis, 1975); since the worker-consumer has a desire

to smooth consumption, but the financial system is thwarted with asymmetric information about the

willingness or the capacity to have revenue, which prevents an optimal inter-temporal transfer of

wealth. The firm is assumed less risk adverse and can act as an insurer against economic fluctuation

for its employees.

Although these general ideas still hold as general point of view on employment contract, they cannot

explain why during the last decades, macroeconomic regulation of the Fordist kind has receded,

leading to less protection of the wage earner (Supiot A, 1999; Morin M L, 2005), notably through the

development of a dual labour market with a still high level of security for the mainstream worker (as

the theory goes) and another fringe of the market characterized by short-term contracts or agency jobs.

1 for the latter, a reverse causality is also possible, running for instance from a lenient labour market to the use of a technology involving strain to the employee.


One way to understand this evolution is to consider that technology needs more versatility to run it,

with an increase in capital intensity in most industries that demands less low skilled operating labour

and an increase in maintenance and repair work, which needs more prompt availability.

Another possibility that would also lead to more flexibility is that an increase in competition and in the

demands of consumers has lead to the present state of a mobile workforce needed by firms to keep in

touch with the market.

However, technology and consumer demands are not the only explanations of labour flexibility. Even

if it were true that the consumer is more versatile and wants more flexibility to purchase whatever it

likes whenever he wants to, there are other ways to meet that challenge. These include an increase in

the stock of finished products, a more sophisticated pricing schedule that moves through time the

demand of consumer -as is done in the transportation services, particularly airways, or electricity or

the telecom services-, or even a lag in providing the demand (remember last time you asked for your

plumber?).

The present trend of just in time production and lean stock at every stage of the production process can

be viewed as an economic phenomenon that goes beyond a technical change. The high level of

unemployment has reduced the bargaining power of the candidate to a job, who can no longer afford

to shun flexible conditions of work; and this is a cause which is to be taken into account in the

development of flexibility (Delsart, 2004).

1.5 DIRECT WORK INCENTIVES

It is useful to distinguish indirect forms of incentive, any provision that makes firing or quit more

detrimental to the employee (e.g. abandonment of intangible property rights, restriction to mobility),

from direct incentives in the sense that they act when the employment relation carries on. The former

acts as a threat to the worker so that she has an incentive to stay and work with the firm, it is a discrete

device. The latter acts smoothly as an incentive for the worker to set his effort according to his utility

in a continuum of effort levels.

Performance pay can be an effective incentive scheme if there is little adverse effect on the

productivity of other workers, e.g. when it does not preclude cooperation when needed. Of course, a

second caveat is that the implementation of such a scheme is feasible only where the performance

itself can be measured at a reasonable cost. Some other kind of incentive scheme can be implemented

where performance pay is not appropriate: task attributions, targeting productivity (Holmstrom &

Milgrom, 1994).

Empirically, it is expected that only some kind of jobs would be amenable to a performance pay, and

that the economic environment of the labour market should not interfere with this technical decision.

For instance, commercial jobs fit these requirements, provided there is some clear delimitation of

customer geography, in order that an employee would not impair the productivity of a colleague.


Also, this type incentive with its objective requirements needs a sufficiently developed information

and management system, which might be implemented at a reasonable cost only in large firms.

All these theories pertain to an employment contract, but as it has been seen cannot really be bounded

into a single global framework to labour relations. The role of each explanation is related to one aspect

of work, whereas a theory of employment contract should be able to encompass the interaction

between these items. Unfortunately, this is not the case, so we will empirically have to try to explain

the diversity of employment relations without reference to a single theory.

2. DIVERSITY AND COHERENCE OF LABOUR RELATIONS

Before presenting the choice of variables related to the provisions in a contract, it is useful to present

shortly the main characteristics of French labour law, in particular, the different principles or

rationales that are at the heart of the French legal system, and its recent evolution. Then, the results of

the employment contract typology are developed.

2.1 THE FRENCH EMPLOYMENT CONTRACT LAW

a) The main principles

In a standard contract, each one enjoys a degree of contractual freedom, as inherited from the French

Civil Code in which the rental of services is referred to, which entails the prior concept of equality of

the parties. The contract entails a set of provisions agreed by each party, and it can introduce clauses

of variation depending on expected contingencies, and mechanisms for rewarding individual

performance. It is in this sense that we can refer to a market model in labour relations. In this

framework, the perpetuation of the relationship is not necessarily an objective, although it is often a

characteristic of a labour relation.

However, due to the de facto inequality between the parties, legislation (at the turn of the 19th and 20th

century) has been designed to protect the worker. The model that has inspired the definition of the

employment contract based on a relationship of subordination is the relationship of authority described

by Williamson (1985) and modelled by Simon (1951).

By contrast to other Anglo-Saxon countries, this employer’s ability to design the labour conditions has

been counterbalanced by a strong protection of the employee in matter of a breach of the contract,

especially in collective dismissals. This protection, firstly gained by the way of collective bargaining,

has been reinforced by the state intervention at the end of the 1960s and the beginning of the 1970s

(although the administrative control of economic dismissal was abolished in 1986).


Generally, in France the contract is subordinated to industries agreement when available, and mainly

to an extensive labour law (more than a thousand pages wide; maybe as a result, trade unions play a

minor role as compared to the Anglo-Saxon countries in defining a work relationship). Until recently

(the late eighties and early nineties), most (individual) employment contracts in France were

interpreted by jurists as a passive agreement, in the same way as a subscription contract, i.e. without

negotiation by the buyer2. Employment relations negotiated by both parties were exceptions. Le

recours à l’écrit n’est d’ailleurs pas obligatoire pour reconnaître la validité d’un contrat à durée

indéterminée.

b) Recent evolution

This legal conception of the employment contract evolved in France under the impact of at least two

factors.

First, the arrival of European Union law with, in particular, the directive of 14 October 1991 relative to

the employer's obligation to inform the employee of the conditions applicable to the employment

contract or relationship. Apart from providing better protection for employees, by granting them the

right to individual information, this obligation should allow for greater transparency of the labour

market since the individual can compare more properly jobs when applying to several firms.

Second, there was a switch in judicial precedents in the late eighties and early nineties, concerning

amendment to the employment contract. The employer's power is now limited insofar as any

amendment on an essential element in the employment contract has to be explicitly approved by the

employee (Waquet, 1999). Claiming to protect employees, legal precedents reaffirm the contract

mechanism and the value of initial commitments, in an economic configuration nonetheless marked by

a strong demand for flexibility in employment relationships3.

So this new rationale leads to a contract with renegotiation until either there is a mutual agreement to

alter terms or the contract is properly terminated. This is a strong difference with the US regime of

Employment at will, which does not oblige to any renegotiation. In order to get some freedom of

action, the French employers seek to introduce explicit clauses of flexibility. In a parallel way, the

legal precedents have constrained the writing of this kind of clauses and also other ones such as

covenants not to compete or the length of trial period, even if these clauses are already codified by

collective agreements (Bessy, 2004)

2 The French notion is the ‘contrat d’adhésion’, or subscription contract. For a recent discussion of this doctrinal notion see Chazal (2004) and Ghestin (2000). The latter points out the protection of the employees’ agreement, which are in position of inferiority by way of constraint or ignorance. These legal warrantees permitting a correct and fair contractual procedure must be distinguished from those which favour an objectively fair result according to a distributive point of view. 3 These decisions are based on Article 1134 of the Civil Code that specifies the precedence of initial commitments in the main terms of the employment contract.


Thus, these two legal factors have resulted in more formal commitments and therefore in an increase

in written contracts in recent years, but without reducing the variety of such contracts as regards

employment conditions and the role of the written document.

Although the Law literature treats extensively of the French employment contracts, Supiot (1999)

stresses our lack of knowledge about the extent to which new cases are significant of a new trend in

the history of labour relations, namely an emphasis on flexibility and risk taking for the employee, or

whether these discussions are only about an epiphenomenon.

It is in the perspective of analysing the practices concerning the drafting of employment 'contracts', in

relation to firms' manpower management methods, that we compiled a data base of contracts.

2.2 THE DATASET

The database consists of a total of 308 contracts, signed in the past eight years (1997-2004), that come

from over 200 firms in various sectors. Data on the characteristics of the firm and the job is also

available. A coding grid is implemented in order to make comparable the information from each

contract4. (For more details on the characteristics of our database and on its representativeness, the

reader is referred to the appendix.)

Based on this codification a large number of dummy variables relevant to our research agenda are

constructed (although not exhausting all the information). In a first stage, they are grouped within four

sets respectively relating to the 'definition of employment conditions' (qualification, flexibility of work

conditions), to the ‘employee's subordination' (control of work, reasons of dismissal), to the 'protection

of immaterial assets' (cession of DP -DPI and list of customers-, restrictions to mobility,

confidentiality) and to the 'employee's individual accountability' (performance pay, responsibility).

Based on these, the second stage is to build synthetic indicators by adding the dummy variables of

each group (see appendix, table 5). This is a way to have an idea on intensities of a particular

dimension and, in some cases, to solve problems of distinction between information in contracts with

similar meanings.

Another group of variables relates to the characteristics of jobs (level in the hierarchy, type, etc.) and

firms (size, trade union presence, etc.) referred to in the contract. This information is used as control

variables in our econometric analysis in section 4.

4 This work also draws on a series of interviews in firms and with legal experts, which furthered our understanding of the objectives of the people who draft employment contracts and their anticipation of possible disputes. This research owes a great deal to an initial exploratory survey on the possibilities of constructing an employment contract data base, undertaken for a report financed by the French Ministry of Research (Bernardi et al., 2003).


2.3 A TYPOLOGY OF FRENCH CONTRACTS

Based on the variables presented above, we have elaborated a typology and retained a partition into

four classes (see appendix). The classes are presented by increasing order of complexity of the

contractual structure, in the sense of the multiplication of guarantees sought, especially by the

employer, on the different aspects of the employment relationship.

Class 1: Simple contracts

(160 contracts)

This class, which represents over half the number of contracts, is characterized by an extreme

weakness of 'contractual guarantees' by the employer, especially regarding the flexibility of working

conditions. It is in this class that the job occupied by the employee is usually defined in terms of the

qualification as defined by the collective status, and in which little mention is made of standards

framing the execution of work. The individualization of the employment relationship is also minimal

here.

Class 2: Performance wage and restrictions to worker mobility

(60 contracts)

Although characterized by a certain degree of weakness of the 'contractual structure', this class differs

from the preceding one in that performance pay is common. Restrictions to worker mobility and

geographical flexibility are also important. But, like the precedent class the qualification of the job is

less often specified through an explicit definition of its content.

Class 3: Flexibility and control of the employee

(53 contracts)

The contracts in this class are characterized by a high level of flexibility of working hours and work

content. The content of the 'contract' is most often marked by the mentions of work control devices

and the references to dismissal for serious misconduct5.

Compared to the preceding two classes, all these characteristics attest that the employers want more

guarantees and use the formal means of the contract to ensure highly flexible working conditions and

close control of the employee's work. The large number of flexibility clauses, especially as regards

5 A comparison of some of these 'contracts' with the associated company rules (French Règlement Intérieur) shows that the former simply copy the clauses of the latter. With this type of formulation the employer acts as if the employee had made a contractual commitment, whereas the employee is simply obliged, by law, to comply with the company rules. This suggests that certain 'clauses' may be considered illicit by the court, although that does not reduce their threatening effect before the dispute has been declared.


working hours, can be related to the high number of part-time contracts (55%, against 32% for the

complete sample)6.

Notice that this kind of legal warrantees is a way for the employer to facilitate the dismissal of

employees (although the adequacy of the motive of dismissal can be controlled by the judge in case of

litigation).

Class 4: Protection of intangible assets

(35 contracts)

The last class encompasses contracts with extended information. It is characterized by firms that

systematically seek to guarantee protection of their intangible assets (human resources, clientele and

technological assets) and geographic mobility, in particular with a very strong requirement to do

business trips in the context of outside assignments. It is also in this class that responsibility clauses

(e.g. performance clauses, obligation to contract insurance for civil liability) are over-represented. We

can assume this kind of clause is coherent with workers strongly encouraged to act autonomously in

order to meet customers’ needs.

6 As regards working hours, part-time labour regulations (Art. 214.3 of the Labour Code, 20 December 1993 Act) stipulate that employers have obligations of form and, in particular, have to introduce a clause providing for the conditions of changes to the distribution of working hours.


Table 1: Mean of active variables, by typological class

Active variables Total (308)

Class1 (160)

Class2 (60)

Class3 (53)

Class4 (35)

Definition of employment conditions Qualification only*

Job Flexibility

Temporal flexibility

Geographic flexibility

0.49

0.53

1.62

0.94

0.64

0.27

1.21

0.57

0.73

0.17

1.18

1.24

0.11

1.10

2.58

1.09

0.29

1.07

1.95

1.99

The employee’s subordination to the firm Normative devices of work monitoring

Préqualification of dismisall reasons

0.40

0.43

0.04

0.18

0.04

0.23

1.24

0.89

0.66

0.88

Protection of the firm’s immaterial assets

Worker mobility restrictions

Confidentiality

Grant back to the employer IPRs and list of customers

1.08

1.36

0.25

0.59

0.98

0.09

1.91

1.58

0.46

0.71

1.41

0.01

3.34

2.97

1.47

Employee’s individual accountability

Performanace pay

responsability

0.29

0.36

0.00

0.06

1.04

0.48

0.19

0.49

0.63

1.49

Reading: in line 2, column 2, ‘0.27’ means that the average value of the indicator of ‘job flexibility’ is 0.27 for all the contracts belonging to class 1. * this variable is a dummy variable (see appendix).

3. THE DETERMINANTS OF THE PROVISIONS IN A CONTRACT

The previous section has highlighted the diversity of employment contracts, and the possibility to sum

up this variety into four broad classes of contracts. The question is now to understand what the origin

of the choice of a contract is.

Maybe the existence of a variety of contracts is similar to the choice of firm incorporation as a way to

foster economic efficiency by providing the right sort of dispositions for the type of jobs or industries

(Barthélémy J, Cette G & Verkindt P.Y, 2005). The theoretical section has presented some arguments

related to economic rationality linked to the type of jobs, but we would like to know if these

“technical” reasons are the main ones in the choice of a employment contract, as opposed to a possible

scope to be filled by negotiation, where the provisions of a contract can vary for the same job

according to the bargaining power of the parties at the time of the deal.


The statistical basis of the analysis is a multinomial non-ordered logistic regression, where the

reference is the “simple” kind of contract (the more numerous), so that every comment on a type of

contract will be understood as opposed to this one. Variables are chosen to stay in the model when

they are significantly different from zero at the 5% threshold, and in case of multiple dummies

describing one variable (for instance the year or type of jobs) when at least one dummy is significant.

Some determinants never appear as significant. Year dummies were introduced in order to take into

account some part of the changing economic environment (along with some measures of the state of

the labour market); fortunately they were estimated as not statistically significant, which is a (small)

sign of stability of the model. Also, although the gender is known to influence the wage level even for

similar apparent human capital, it is not important for the choice of a contract. More surprisingly, the

span of the contract (short term or undetermined) does not relate to the choice of a contract.

The results presented in table 2 show that the probability of a “flexibility and control” type of contracts

is increased with a part time job (due to French legislation that requires more information for the

variability of schedules with part-time jobs), a firm of medium size (100 to 500); it is decreased when

the vacancy ratio is high, where the firm is small (under 100) and when a trade union is present in the

firm.

The “performance wage and restriction to mobility” type of contracts is more likely when the vacancy

ratio is low, and less likely when the size of the firm is small (under 100).

The “protection of intangible assets” contracts does not depend on the state of the labour market (the

vacancy ratio) or the size of the firm, it is less likely with part time job (which can mean that part-time

employees are less likely to get sensitive jobs within the firm) and when a trade union is present in the

firm.

The theoretical implications are as follow.

* Investment and prevention of a hold up

The "protection of intangible assets” type of contract corresponds to the prevention of a hold up, as

described by Malcomson (1997). A direct test of the theory would imply to have the knowledge about

the investment sunk into the employee. However, we can indirectly have an idea about the difference

in investment, without knowing the amount per se; since we expect that the type of jobs or the various

industries are heterogeneous with regard to what should be protected. Therefore, the variables

describing the jobs or the industries are expected to be relevant for the decision to implement this kind

of contract (versus a simple contract), even if we cannot tell which job or industry are really most

prone to protection. But that does not appear to be the case since these variables are not significant. On

the contrary, disrespectful of this argument, the bargaining power as reflected by the presence of trade


unions decreases significantly the probability of this contract (from a descriptive point of view, the

level of trade union representation in firms in this class is only 22% against 41%). Although the

conditions of the labour market as measured by the vacancy ratio is not significant, it has also a

negative sign which could correspond to the same bargaining explanation. However, an important

caveat must be kept in mind: the size of the database is too small to consider more details in the type

of job.

* Completeness and menu cost

The theoretical notion of completeness is by nature quite vast, and cannot easily be apprehended

through actual facts or mentions in the contract. In this analysis, it was not endeavoured to build a

comprehensive scale of completeness of labour contracts, since no quantitative count of provisions

would be helpful, considering some mentions are “hard” contractual provisions while others are more

of an informative nature, i.e. referring to or being redundant with other devices of the labour relation

(law, collective agreement, firm rules and regulations). But the descriptive analysis clearly highlights

the differences between the “simple” contract and the other types that incorporate many more specific

provisions. That is the proxy for completeness that is now analysed.

There is some support for the theory of transaction or menu cost (Williamson, 1985) as an explanation

of the incompleteness of contract: a big size of the firm is significantly important for the

implementation (and existence) of advanced contracts. This is especially the case for the "flexibility &

control" kind of contract for which probability increases with the size of the firm; from a descriptive

point of view, the share of very large firms (over 500 employees) is over represented (68%, against

52% for the whole sample). That is to be expected since the management expertise in organising

flexibility and the implementation of controls involves a content of information and an organisation

which is difficult to build, although it is less costly to run once the architecture of the flow of

information is settled, and that means that this fixed investment is more profitable when shared on a

big scale of production.

The same result obtains for the "performance wage and restriction to mobility" kind, which is less

common in small firms. The "protection of intangible assets" seems to correspond to a demand that is

strong enough to be implemented even in small firms, and there is no size effect in that case. Maybe

the rationale is that in a small firm, for instance in the information technology industry, an individual

can take away a large lump of the intangible asset of the firm when he quits, whereas in a big firm a

separation with a hold-up would results more likely in the disappearance of only a small part of the

global knowledge.

Anyway, the main result is that “simple” contract is more likely to be found in small firms, which is

compatible with a menu cost being a fixed investment.


* Completeness and the horizon of the employment relation

The idea that a long term contract entails fewer provisions due to the probability or the need to

renegotiate (as proposed by Goldberg, 1976 or MacNeil, 1978) gets no support from our estimations.

One can distinguish short term vs. unspecified term contract, which is not bounded by a short ending

(although there is no such thing as a long term contract in labour legislation, apart for the public sector

not represented in this study). But, empirically the kind of horizon does not play any role (the variable

is excluded for lack of significance) and this contradicts the theory mentioned above: completeness

does not depend on the specification of the length of the contract.

* Negotiation

The bargaining power is taken into account through two proxies: the conditions prevailing in the

specific labour market, as reflected by the vacancy ratio (for each of the 17 types of job and years of

the contract) and the existence of a trade union representative in the firm7. A high vacancy ratio or the

existence of a trade union should allow the employee to get more easily a contract without many

provisions restricting the way (s)he does his job, or restricting what (s)he is allowed to do after

quitting the firm. It must also be kept in mind that trade unions are not exogenous: they depend on the

employees inside the firm, on the history of conflicts, etc. In some cases, the characteristics of

employees and jobs will not be prone to trade unionism, for instance where independence of mind is

important as in creative or research jobs.

These two variables do play a significant role: they do lower the probability of the contracts which are

not “simple”, i.e. those that carry more provisions restricting the way the employee can handle his

work by its own.

The vacancy ratio lowers significantly the probability to have a “flexibility and control” or a

“performance wage and restriction to mobility” contract; however the “protection of intangible assets”

contract is not altered significantly (although the sign of the coefficient is negative) by the situation of

the labour market, which might be interpreted as a high stake involved in these assets which have to be

protected even if it means facing difficulties in finding an employee.

The “flexibility and control” or more surprisingly the “protection of intangible assets” contracts are

deterred by the existence of trade unions in the firm. This contrasts with for the “performance wage

and restriction to mobility” contract that is not sensitive to trade unions, maybe this can be interpreted

by considering that a performance wage is not reckoned as a negative feature by most of the

employees.

* Flexibility

The "flexibility & control of the employee" type of contract can be attached to technological features,

if we believe the prevailing wisdom that there is a compelling push to have nowadays flexibility at the

7 Another variable, Turn-over by industry, was not significant when the vacancy ratio is in the model.


firm level. But, once again the type of job or the industry is not relevant, which is a result more

sympathetic to alternative explanation of the drift to flexible work. Indeed, the vacancy ratio decreases

the probability of that contract, as well as the presence of a trade union (from a descriptive point of

view, these contracts are found in firm with a low level of trade unionism: 25% against 41% for the

whole sample). Hence, “flexibility and control” has more to do with the bargaining power than with

the demands of technology or the consumer8, and this is a way to consider that flexibility is not the

only way to have a competitive technology (the theoretical part mentioned alternatives to flexibility:

pricing differently, postponement of delivery, or stock management).

* Direct work incentives

The "performance wage and restriction to mobility" is not so much linked to the peculiarity of the job

as to the state of the labour market. The type of job or the industry is not relevant (but this may be due

to the limited size of the database, since this variable takes many degrees of freedom because only a

sufficiently disaggregated level of jobs makes some sense), whereas a low vacancy ratio increases

strongly the probability of that contract (the sign of the presence of a trade union is similar, but the

coefficient is not significant).

That type of contract is less probable in small firm, which might reflect the organization sophistication

necessary to implement it, or these firms the direct control of the manager who do not need a

contractual device to check the work.

8 Another feature of that type of contract is the importance of part time jobs in that category; which relates to French law which requires in part time jobs flexibility of schedules to be written in the contract (also, of course, multiple schedules are more feasible in case of part time jobs).


Table 2: Estimation results (reference is the “simple”contract)

Type of contract Variable Estimate Standard

error Pr > ChiSq

flexibility & control 0.1742 0.4345 0.6885

performance wage and restriction to mobility 0.1981 0.4864 0.6838

protection of intangible assets

Intercept

-2.0211* 0.6878 0.0033

flexibility & control -1.5325* 0.7664 0.0455

performance wage and restriction to mobility -3.1677* 0.8823 0.0003


vacancy ratio

-0.9452 0.9944 0.3418

flexibility & control 0.5576* 0.1664 0.0008

performance wage and restriction to mobility -0.2842 0.2326 0.2217


Part time

-0.9912* 0.4085 0.0153

flexibility & control -1.3240* 0.2938 <.0001

performance wage and restriction to mobility -0.9651* 0.3744 0.0099


small (<100)

-0.6963 0.3925 0.0760

flexibility & control 0.7709* 0.2697 0.0043



large (≥500)

0.7097 0.3975 0.0742

flexibility & control -1.0215* 0.2832 0.0003

performance wage and restriction to mobility -0.1826 0.3114 0.5575


Existence of Trade union

-1.4857* 0.4241 0.0005

flexibility & control -0.00809 0.2276 0.9716



trade union unknown

0.0808 0.3421 0.8133


CONCLUSION

Variety is the spice of labour relations, as can be readily perceived by the large number of different

provisions written in the contracts in our database; nevertheless all these different ways of drafting an

employment contract can be summarized in four main categories: the simple contract that is minimal

in mentioning provision, the flexibility type of contract, the performance pay contract and lastly the

contract focused on the protection of intangible assets.

Although an extensive literature has been developed generally on contracts, less is to be found about

the specificity of the labour contract from an economic perspective. The main theoretical ideas relate

to the question of incentives, the possibilities of a hold up of investment after a contract is settled if no

proper provisions are written, or the technological possibilities to assess work and the demands of

technology for flexibility and other form of provisions or constraints that bear on the employee.

However, the basic theory of bargaining, which is extensively referred to for the negotiation of wages,

can easily be transposed to the provisions in a contract, with reference to the hedonic price literature.

The main result of the econometric analysis of the determinants of the choice of a contract is that

technology, the process of production, or the type of job cannot be considered as the only cause of the

peculiarity of a contract. In many cases, the bargaining process is relevant and is sensitive to the state

of the micro labour market. Economic rationale plays a part beyond the push of technology, and there

is not always an “imperative” way to regulate labour relations. Also, the “menu” cost of devising the

provisions, or the ability to check the implementation of provisions, or the perspective of a legal

assessment by a judge, seem a deterrent to implement a non-simple contract for small firms.

Surprisingly, even the contract characterized by a performance pay is prone to the bargaining power of

the parties (as proxied by a vacancy ratio).

Although the database is relatively small -a few hundred contracts-, which implies that some

phenomenon may not be estimated in a significant way even if they could perhaps be found on a

grander scale, its novelty provides some useful insights on the importance of economic and bargaining

aspects of the choice of what is written in a labour contract.


APPENDIX: THE DATA

The database consists of 308 employment contracts from 217 firms, in various sectors of activity,

located in France, signed between 1997 and 2004.

Below are presented the way the data has been collected, the codification of the provisions in the

contracts, the representativeness of this data along with some characteristics of jobs and firms; the

description of the variables related to the situation of the labour market, and the last item gives some

details on the typology of contracts.

* Collection of data

The documents collected are either contractual agreement or written statement on 'employment

conditions'. The contracts come from six main sources. Initially the objective was to collect

employment contracts from managers of firms in order to obtain precise information on the

environment of the contract: the company's HR management policy and its practices in drawing up

contracts. However, this was such an unwieldy task that we decided to diversify our sources, so that

contracts collected directly from employers finally accounted for only 33.4% of the sample. Contracts

obtained from a legal firm (15.9%) or trade unions (7.8%) can introduce a bias since they were taken

from case files and therefore concerned disputes. Yet these most often concern only one clause. The

collection of 'contracts' from employees (27.6%) via networks of friends and family helped to expand

the data base, as did contracts obtained from the labour inspection office (15.2%), most of which

corresponds to part-time contracts in the framework of the government measure to reduce social

charges – a measure cancelled by the so-called Aubry law on the 35-hour working week, passed in

2000. Notice that this law represents the main change in French labour law during our period of

observation. As our observation show (especially interviews with HR managers), not only did

collective negotiation about reduced working time result in amendments to the employment contract,

and those amendments also led to a explicit writing of unlimited-term contracts, especially by

introducing standard clauses corresponding to the working times opted for by the employee.

* Codification of contracts

Not all the provisions in the 'contracts' are contractual by nature. Sometimes they are simply a

reminder of the rules defined by the employee's collective status (industry agreement); others may

refer to advantages that the employer sees not as obligations but simply as a piece of information. It

can happen that a provision is not licit (that is, not always validated a posteriori by the judicial


system), which can mean that even illicit clauses have a threatening effect when incorporated into the

contract; but we have not attempted to define what is an obligation or a piece of information, a licit or

an illicit clause; that is for the courts to decide.

Many contracts are standard ones that refer to a class of employee; only a restricted number are written

in a personalized way that attests the negotiation of clauses or particular advantages.

* Representativeness

Our data is about the contracts signed since 1997 and up to 2004. We know that the characteristics of

the stock can be different from the inflow, with in the latter case a tendency to less protection; for

instance for the exhaustive data coming from the French administrations, less than 1/3 of hiring are

with unspecified tenure (Dares DMMO 2004), whereas 3/4 of the stock of employees is under

unspecified tenure contracts (INSEE EE). In our dataset, the proportion is 82%; in this dimension, it is

closer to a stock than to a flow (unfortunately we have no access to other exhaustive characteristics of

new jobs as opposed to a stock).

One difference between the dataset and the population of jobs in France is in the size distribution of

firms: 3/4 of recent contracts come from medium or large firms (≥ 100 employees) in this database

against 1/3 for the employment in private sector. Also, part-time jobs are over-represented (32% for

new contracts, against 17% in INSEE employment survey, 2000). From the point of view of broad

industries (16 levels), Agriculture, forestry, fishing is not represented and Financial activities &

Education, health and social work were respectively over or under-represented, but the weighting

scheme (by 36 type of industries) that is applied prior to our analysis naturally counteract that

shortcoming. At the more detailed 36 level, some industries are not present, which leads to differences

in weights9; but altogether the industries are fairly well balanced as can be seen in table 3.

9 These are: Manufacture of domestic equipment; Building of ships and boats, manufacture of railway locomotives, rolling stock; Mining and quarrying except energy producing materials, manufacturing of other non-metallic mineral products; Manufacture of textiles; Manufacture of wood, wood products, pulp, paper and paper products; Manufacture of chemicals, rubber, plastic and chemical products; Electricity and gas supply; collection and distribution of water; Sale, maintenance and repair of motor vehicles and motorcycles; Research and development; Other personal and domestic services.


Table 3: Comparison of industry shares in the sample and in the stock of employment

recent contracts* Industry share (16 levels)

% % weighted

stock of employment+

EA Agriculture, forestry, fishing 1 EB Manufacture of food products, beverages and

tobacco 3 3 3

EC Manufacture of consumers goods 6 3 3

ED Manufacture of motor vehicles 2 1 1

EE Manufacture of capital goods 3 2 3

EF Manufacture of intermediate goods 1 1 6

EG Energy 1 1 1

EH Construction 1 4 6

EJ Trade 15 18 15

EK Transports 9 5 5

EL Financial activities 10 4 3

EM Real estate activities 3 3 2

EN Services to businesses 27 25 19

EP Personal and domestic services 15 14 8

EQ Education, health and social work 6 15 13

ER Administration 0 2 10

All 100 100 100

* this database + private employment (source: INSEE, DADS 2004)

Other characteristics of jobs and firms

We distinguished unlimited-term contracts from fixed-term contracts, for which certain legal

constraints exist in French law as far as their form is concerned. 17.6% of the contracts in the data base

are fixed-term contracts, which is close to the national mean over the past few years (11% in 2000,

INSEE employment survey, including public sector).

Apart from the legal nature of the contract (fixed-term or unlimited), we distinguish jobs in terms of

whether they are full- or part-time, the hierarchical class in the sense of collective agreements

(workers/Middle rank10/’ Executives’).

10 professional category of middle rank clerical workers, technicians and supervisory staff.


Table 4: Other characteristics of jobs and firms (%)

Hierarchical level Blue collar Middle rank and employee Executive & Manager

6.9 52.4 40.7

100.0 Type of job 11 Blue collar in production 12 Middle rank in Production 13 Executive Production, maintenance 21 Blue collar in maintenance, handling, transport 31 Blue collar or employee cleaning, caretaking 42 Middle rank in handling, transport, maintenance 52 Employee (cash desk, counter, secretarial work) 62 Middle rank management 63 Executive management Accountant, lawyer 72 Middle rank technical salesman 73 Executive technical salesman 8 Consultant, Research & Development 8I Technician or ingeneer Computing 92 Middle rank in Health or Caring 102 Middle rank in Communication or information 103 Executive Communication or information

2.5 1.6 1.6 0.7 6.8 6.5

15.8 4.7

13.1 1.7

13.8 9.3 6.4 3.3 7.1 2.4 2.7 100.0

Firm s size VSF (<100) SMF(between 100 and 500) LF (>500)

23.3 22.2 54.5

100.0 Presence of union membership No Yes Unknown

25.0 41.1 33.9

100.0 Industry-wide collective agreement (CA) or sector Ex-public firm sector Professional status Agri-food CA Parisian UIMM CA Executives metallurgy Other transformation industries CA food trade Other trades CA Catering, hotel, café Other activity of restauration CA Road transport CA Air transport, ground staff CA Banks CA Insurances Other financial industries. CA Techni. and engineering consultants Other consulting industries Firms standard services Education, health and social action Entertainement and cultural industries Other services

3.5 1.4 4.1 1.7 3.7 6.1 7.8 10.1 5.6 3.5 7.1 1.0 1.7 1.2 1.1 9.2 1.5 8.2 13.6 3.4 4.5

100.0


Also, the share of contracts signed with executives, in the sense of industry-wide collective

agreements, is over-represented (41%), as opposed to 15% in 1999 (last population census, excluding

farmers and artisans). One important characteristic of job we have introduced is based on the

combination of hierarchical class and the job function, of which 17 modalities was retained in order to

have enough contracts in each one.

Information on firms concerns the size of the firm (number of employee <100, between 100 and 500,

>500) and the presence or not of union membership. We have also constructed a variable enabling us

to characterize the collective agreement to which the employment contract corresponded. In the case

where there were too few employees we formed groups in relation to a business sector. A total of 21

modalities were selected, one of which corresponded to jobs in large public-sector corporations (3.5

%). Among the conventions that were well-represented was the one applicable to staff of 'technical

consultants, engineering consultants and consulting firms' (9.2%). The other modalities represent

sectors (agri-food, chemicals, trade).

* Synthetic variables

We have built synthetic variables, encompassing several original variables that pertain to the same

kind of characteristic of the contract. Table 5 shows the relation of these synthetic indicators with the

original dummy variables (and one simple dummy variable QUAL1 where there only a reference to

the employment qualification without any additional definition of the content of the job). These 11

synthetic variables are used for the typology of contracts.

* Labour market variables

Three variables are available to know the state of the micro labour markets; they are included in the

qualitative regression explaining the choice of a type of contract:

- Growth of employment is the coefficient of the log-linear regression for years 1997-2005 by 17 types

of jobs (listed in table 4 above; source: Dares),

- Turn-over is half the sum of hiring and separation, divided by the stock of employment, for each year

and type of job (source: Dares-DADS),

-Vacancy ratio is the ratio of new vacancies (for a year) divided by unemployment (categories 1+2+3),

for each year and type of job (source: ANPE),


Table 5: Synthetic variables and their dummy component

Variable

Acronym Definition Mean

Flexibility of the job content

FLEXEMP Poly Flexfn train

Poly+flexfn+train Multi-skills obligation Functional flexibility Training obligation during the contract

0.53 0.16 0.27 0.10

Geographic flexibility FLEXGEO Depla Mobi flexgetr

Depla+mobi+flexgetr Trips obligation Geographic mobility Foreign trips and mobility

0.94 0.39 0.47 0.08

Temporal flexibility FLEXTEMP Flexh Forfh Hsup Hatyp Resid Autocp

Flexh+forfh+hsup+hatyp+resid+autocp Flexibility of work hours Predefined number of work hours Extra hours obligation Unusual working hours Obligation to have a place of living close to the work place Obligation for the employee to plan ahead his holidays

1.95 0.47 0.24 0.31 0.24 0.05 0.33

Work monitoring devices CONTROL Tadm Outil Tenu Gestcli

Autoh+manag+outil+tenu Obligation to report and to inform the hierarchy Obligation to work with certain managerial norms, tools or

product Obligation in terms of ‘conduct and presentation’ Compagny’s right to allocate the clientele

0.40 0.19 0.05 0.14 0.02

Prequalification of dismissal reasons

RI Licfaut Resilia

Licfautl+resilia Defined ‘misconduct’ leading to dismissal Defined ‘misconduct’ leading to the suspension of the

employment contract

0.43 0.38 0.05

Restriction to worker mobility

LIMOB Dedif Nondeb Concu Indconcu Exclus fidel

Dedif+nondeb+Concu+Indconcu+exclus+fidel Forfeit for training clause No poaching clause Non-competition clause Non-competition compensation Exclusivity clause Loyalty clause

1.03 0.03 0.03 0.20 0.05 0.41 0.31

Confidentiality clause ACONF Discret Restit publi

Discret+restit+publi Obligation of discretion + Trade secrecy Restitution of goods and technical documents Researchers need authorization to publish

1.36 1.02 0.29 0.05

Grant back to the employers of intellectual properties and firm’s property rights upon the clientele

DPI Pibrev Pilog Marq Respecli

Pibrev+pilog+marq+respecli In matter of patent In matter of copyrights (software) Interdiction of the use of the trademark for personal use Obligation to respect the firm’s clientele after the breach of

the contract

0.25 0.06 0.05 0.01 0.13

Performance pay IREM Perfin piremu stocko

Perfind+piremu Remuneration according to individual performances Remuneration due to technological inventions Stock-options

0.29 0.24 0.03 0.01

Employee’s individual accountability

RESP clobj Autresp Obmoy

Clobj+autresp+obmoy Performance clause Other clauses of liability Obligation of means

0.36 0.14 0.13 0.09


* Typology

The typology is built by the hierarchical ascending classification technique (CAHQUAL procedure of

the INSEE & SAS software). We seek for a limited number of classes, for the sake of clarity of the

presentation, and a separation that is clear cut, as appreciated by the inertia of the grouping: a 4 class

partition meet these criteria (graph 1 indicates that a 3 class partition would also do quite well, in a less

detailed manner). This partition substantially increases the intra-class variance, compared to the

partition into six classes (from 71% to 77% of the share of total variance).

Graph 1: Inertia of partitions (semi-partial R2) I DCONT

74AA5

74AA374AA6

74AA4

Semi -Par t i al R-Squared

0. 00 0. 02 0. 04 0. 06 0. 08 0. 10 0. 12 0. 14 0. 16

Table 6 presents the signed decomposition of RHO2 of each active variable; that is the distance

between the centre of classes and the gravity centre of the cloud. That gives some indication of the

contribution of each active variable to the construction of the four classes.

Table 6: Signed decomposition of RHO2 the active variables

(1/1000, except RHO2)

Class1 Class2 Class3 Class4

RHO2 1.7836 3.9841 4.1358 14.9987

Active variables*

QUAL1 51 56 -138 -11

FLEXEMP -72 -62 145 36

FLEXTEMP -75 -39 176 93

FLEXGEO -99 29 7 84

CONTROL -154 -70 356 9

RI -70 -20 101 27

LIMOB -77 96 -19 192

ACONF -67 9 1 139

DPI -42 33 -39 286

IREM -190 579 -10 33

RESP -103 6 8 167

* see table 5 for definition of variables


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