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DENMARK: An Introduction to Employment

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In the past few years, Denmark has seen a progress of the economy and this has affected the employment market positively. The unemployment rate has decreased to 3.7%. However, due to the COVID-19 crisis, the rate has increased to 4.4%, but unemployment still remains relatively low in Denmark compared to most other EU countries.

The Danish economy went into recession in 2020 due to COVID-19. Prospects for the next year remain uncertain, but the economy will most likely recover when COVID-19 – hopefully – declines due to vaccines.

The Danish labour market is characterised by a high number of small and medium-sized companies as well as several large multinational companies. Generally speaking, Danish companies are highly specialised, have a well-educated workforce and have an excellent ability to adapt to market changes.

The Danish model – Flexicurity 

The Danish labour market model is known as 'Flexicurity', a combination of flexibility and security. On the one hand, the Danish labour market is highly flexible with relatively short notice periods, low levels of severance pay, etc. In addition to this, the Danish courts generally cannot reinstate employees who have been dismissed. On the other hand, employees benefit from a high degree of social security thanks to the highly developed and extensive welfare system provided by the Danish state.

Compared to other EU countries, it is quite easy for Danish companies to employ, dismiss and re-employ employees. This is believed to make companies more willing to hire new employees, particularly in the aftermath of the economic crisis. The downside of Flexicurity is a heavy tax burden, with particularly high income tax rates in Denmark. In order to attract specialised foreign workers, highly paid foreign workers are offered a tax rebate their first years in Denmark.

Another feature of the Danish labour market is that a high number of employees are members of trade unions. It is estimated that approximately 65% of Danish employees are unionised, although this number is currently decreasing.

The Danish Trade Union Confederation (FH) is the largest central employee organisation. Its members are trade unions representing blue-collar and white-collar workers with no formal education in the private sector as well as white-collar workers in the public sector.

Danish labour and employment law 

The principal sources of law and regulation in the Danish labour market are:

• legislation
• collective agreements

Denmark has a long tradition of allowing employment conditions and pay to be decided through collective agreements. This means that there are relatively few acts governing this area of law.

Some acts establish a legal framework for specific groups of employees, such as the Danish Salaried Employees Act which protects and provides certain minimum rights, including notice periods and compensation for unfair dismissal, to salaried employees. Other acts govern individual issues relevant to all employees, such as the Danish Holiday Act.

Collective agreements cover the vast majority of the Danish labour market, regulating key employment issues such as pay and working conditions. The majority of those not covered by collective agreements are salaried employees with formal education working in the private sector, but it varies from sector to sector.

Key considerations for companies setting up in Denmark include deciding whether they should enter into a collective agreement and whether they should join an employer’s organisation. This also applies to companies that are not covered by collective agreements in other countries. It is recommended to obtain legal advice on these issues, as it is particularly difficult for a company to opt out of a collective agreement after becoming a party to a collective agreement, e.g. through membership of an employer’s organisation.

If no collective agreements apply to a company, its employees do not have a statutory entitlement to a certain amount of minimum pay, compensation for overtime, etc. The only limitations in this regard are that the pay must not be unfair or discriminate on the grounds of any of the protected criteria, including gender, age and disability. If a collective agreement applies, the pay must be in accordance with the provisions of the collective agreement.

There are no acts providing for pension schemes but employers can, and often do, set up tax-privileged pension schemes for their employees. Collective agreements usually contain provisions on mandatory pension schemes. Pension contributions under such schemes are normally approximately 15% of the pay, with employees contributing one-third and employers contributing two-thirds.

The Danish legislation on stock options is different compared to many other countries. Companies setting up in Denmark should be aware of such legislation which covers all employees, excluding managing directors.

Further, the Danish Salaried Employees Act regulates restrictive covenants and certain requirements must be met in order for a restrictive covenant to be valid under the Act. This includes a requirement for payment of compensation to the employee in question.

Particularly one area of Danish employment law has seen developments in the past year: economic relief packages to counter the COVID-19-related recession. Various relief packages have been adopted and several of these are still in place. Employers faced with decreased turnover or mandatory shutdown should seek advice regarding the different relief packages, also to make sure that all formal requirements are met since failure to comply can have very severe consequences. For example, if just one employee is found to have been laid off due to COVID-19 during a given relief package period, the employer will lose the right to “salary compensation” for all employees for the entire period in question.