European companies have a harder time laying off staff than their North American counterparts. But even with legal constraints, they are making the necessary cuts. David Pringle of the CareerJournalEurope reports.

Like other makers of telecommunications equipment, Telefon AB L.M. Ericsson has been forced to lay off vast numbers of employees over the past two years because of falling sales. But how fast can European companies, which are boxed in by rigid labour laws, hope to eliminate staff?

In Ericsson's case, much faster than many outside the company would have guessed. The Swedish maker of mobile-phone networks is nearing the completion of a cost-cutting program that has chopped its domestic work force to about 30,000 from almost 45,000 in March 2001.

Worldwide, Ericsson has cut the head count to less than 65,000 from a peak of 107,000 in early 2001. By working closely with unions and sharing more information than in the past, Ericsson has won labour concessions that have enabled it to take emergency action despite the strict laws.

Richard Windsor, an analyst with Nomura in London, says Ericsson has shown that unions in Sweden, at least, will cooperate in dire situations. Ericsson has been able to say: "Look...we need to get some bodies out of the door in this environment or we are going out of business," says Windsor.

The rigid labour restrictions faced by employers throughout much of Europe, determine, for instance, who companies can lay off and how they can go about it.

In Germany and other nations, employers have to select workers to be laid off according to social criteria that sometimes force them to retain older staff, those with large families and employees who might find it very difficult to get new jobs.

In France, large companies are often required to give detailed reports on the progress of staff-cutting programs to state authorities.

But there are signs that unions in Europe, particularly in Sweden, are starting to realise they must be more flexible if local companies are to survive. Union leaders in Germany have recently suggested that job-protection laws may need to be changed to encourage companies to create new jobs.

At the same time, labour experts say European companies are becoming increasingly creative in finding ways around restrictions.

Professor Gilles Saint-Paul of the Universite des Sciences Sociales de Toulouse notes that French companies now are increasingly offering early retirement to employees over 55, who qualify for a pension provided by the government.

French telecom-equipment maker Alcatel SA has managed to cut its work force to 77,000 from 110,000 in two years by exploiting the early-retirement laws and selling operations to other companies.

Still, layoffs in Europe tend to take longer and cost more than they do in North America.

Lucent Technologies Inc., a telecom-equipment maker based in Murray Hill, New Jersey, shed 54,000 employees in the past two years at an average cost of about USD 78,000 (EUR 70,824) for each person. Ericsson officials estimate it costs SKR 1 million (USD119,380), or EUR 108,398, for each person in Sweden.

Swedish companies are required to have employee representatives on the board, and they must be consulted on major decisions. The Swedish government also sometimes gets involved. In March 2001, it appointed a full-time official to monitor Ericsson's restructuring program.

Moreover, there is a requirement under Swedish law that companies first lay off staff with the shortest job tenure -- a restriction that could have led Ericsson to lose a whole generation of young engineers. "It's first in, last out. But we simply can't have that," says Per-Arne Sandstrom, Ericsson's chief operating officer.

During a series of weekly meetings that ran late into the night, Sandstrom and his colleagues persuaded the Swedish unions to waive the "first in, last out" rule. In return, they offered each employee laid off 12 months pay -- more than most were entitled to.

Sandstrom, who previously headed the company's North American arm, was accustomed to laying off staff in as little as three weeks at Ericsson's operations in Texas.

But Ericsson couldn't move that quickly in Sweden. During a small restructuring program carried out in 1997, it took as long as four months for Ericsson and unions to negotiate which employees should be laid off, says Anna-Karin Mattsson, an official at the Sif white-collar union in Stockholm.

In 2001, Ericsson speeded the process up to about two months, in some cases, but Mattsson says the company did a poor job of explaining to individual employees why they had to go. "We met so many people who didn't understand: 'Why me?' " she says.

In early 2002, Ericsson launched a second wave of cutbacks. Officials at Sif say Ericsson became better at communicating with staff and began to involve the unions earlier in preparing for layoffs.

By this time, analysts were becoming increasingly worried about Ericsson's financial strength, and the company reduced the severance terms; some departing staff got six months pay instead of 12. Still, the unions accepted the move, and Mattsson says it took just six weeks to negotiate the layoffs made late last year.

Last month, Ericsson said it was on track to cut its work force below 60,000 by the end of 2003, and most analysts now predict that Ericsson will be able to limp back to profitability without having to raise more cash from the securities market.

Although Sandstrom says it still takes longer and costs more to lay off employees in Sweden than in the US, he believes Ericsson has found an effective way to cope with Swedish labour law. "We have broken ice," he says.

David Pringle is a staff writer for the Wall Street Journal.

March 2003