Socio-Economic Review, n. 6, 2008, p.449-472
The Organizational Governance of Work Relationships
between Employment and Self-employment.
Ulrike Muehlberger, Sonia Bertolini
Abstract
This paper analyses work relationships on the border between employment and selfemployment and the consequences of making use of these new forms of work, especially on the
side of firms. We study the complexity and variety of dependent forms of outsourcing by
comparing the firm-internal solutions adopted to solve the arising control-flexibility dilemma in
two industries (insurance, business services) embedded in two different institutional contexts
(Italy, Austria). It is shown that employers have established informal relational contracts that, in
combination with formal contracts, reduce the threat of opportunism while simultaneously
allowing a certain amount of control over the worker. We highlight that through the mechanisms
of control and dependency, hierarchy returns into the relationship. Finally, we stress that social
relationships complement the market mechanism through the creation of assurance and trust as
well as the development of specific configurations of social networks (i.e. network and temporal
embeddedness).
Keywords: self-employment, outsourcing, employment relationship, relational contracts.
JEL classifications:
j21: labour force and employment, size, and structure
k31: labour law
l22: firm organization and market structure: markets vs. hierarchies; vertical
integration; subsidiaries.
1.
Introduction
The literature on new forms of work, including work relationships on the border between
employment and self-employment (often referred to as dependent self-employment), has become
abundant over the last decade. This literature mainly deals with the specificity of these forms of
work, analysing the differences to traditional work relationships and the motives why they have
become increasingly widespread, either from the viewpoint of the workers involved or from the
firms deploying them (e.g. Authors’ Own, 2000; Delsen, 1995; Atkinson, 1985). Much less
attention, however, has been paid to the consequences of making use of these new forms of work,
especially on the side of firms. Sourcing out labour is usually connected with a reduction of
control and an increase in opportunism (Williamson, 1985). We aim at exploring the solutions
firms adopt to cope with these contradictions arising from extensively deploying dependent selfemployed workers.
This paper analyses the complexity and variety of this problem by comparing the firminternal solutions adopted to solve the arising control-flexibility dilemma in two industries
embedded in two different institutional contexts. We present comparative qualitative research in
the Italian and Austrian insurance and business service industries where dependent forms of selfemployment have gained in importance, arguing that employers have established informal
relational contracts that, in combination with formal contracts, reduce the threat of opportunism
while simultaneously allowing a certain amount of control over the worker. We show that
through the mechanisms of control and dependency, hierarchy returns into the relationship. It is
stressed that social relationships complement the market mechanism through the creation of trust
and the development of specific configurations of social networks (i.e. network and temporal
embeddedness).
The paper proceeds as follows. Section Two gives an overview of the empirical research
carried out so far on the subject, including the research on the motives to deploy dependent self-
employed workers. Section Three discusses the legal problem of the distinction between
employment and self-employment and sheds light on the legal regulation in the two countries
investigated. Section Four identifies the contradictions of externalising labour. Section Five
reports the empirical approach and the organization of dependent self-employment in the two
industries analysed. Section Six discusses the solutions adopted by firms to deal with the
identified contradictions. Section Seven highlights the main findings, focusing on the differences
between our cases. Finally, the last section concludes.
2.
Dependent Forms of Self-employment in Europe
Over the last two decades we have seen an increase in outsourcing and subcontracting
activities, which appear to be replacing the hierarchy in firms by market forms of governance.
However, there is evidence that an increasing share of outsourcing activities leads to the
outsourced worker being both economically dependent on the firm she or he contracts with and
being in hierarchical subordination to it (ILO 2003; EIRO 2002; OECD 2000). There is no
consensus on how to define dependent self-employment since there is little sociological or
economic research on this topic; so far, the debate has been mostly discussed amongst legal
scholars.1
The EU Green Paper on ‘Modernising labour law to meet the challenges of the 21st
century’ (EU Commission 2006) discusses the concept of ‘economically dependent work’,
referring to the grey area between subordinate employment and labour law on the one hand and
independent self-employment and commercial law on the other hand. The ILO (2003) defines
dependent self-employed workers as ‘workers who provide work or perform services to other
persons within the legal framework of a civil or commercial contract, but who in fact are
dependent on or integrated into the firm for which they perform the work or provide the service
in question’ (p. 9). In a report on the future of work and labour law for the European
3
Commission, Supiot (2001) looks at self-employed workers that are ‘economically dependent on
a principal’ (p. 3) and in ‘permanent legal subordination’ (p. 6) from their principal. The OECD
(2000) claims that there has been an increase of jobs that ‘lie on the borders of wage and salary
employment and self-employment’, including in particular contractors who work ‘in a dependent
relationship with just one enterprise’ and who have only ‘little or no more autonomy than
employees, even when classified as self-employed’ (p. 162). In a comparative study at the EU
level, EIRO (2002) describes these workers as ‘economically dependent workers […] who are
formally self-employed but depend on a single employer for their income’ (p. 1).
So far only few empirical studies have been carried out to investigate the phenomenon of
dependent forms of self-employment in Europe. For the U.K., Burchell et al. (1999) claim that
around 30 per cent of those in employment hold an unclear employment status. Authors’ Own
(2006) explore the British Labour Force Survey and argue that dependent forms of selfemployment are used by firms to increase labour flexibility of firms as part of their outsourcing
strategies rather then as a port of entry into self-employment. For Austria, Heineck et al. (2004)
find that roughly 1.6 per cent of the Austrian labour force are self-employed working only for one
company and being bound to the instructions of the company they contract with.
Berton et al. (2005) analyse the probability of changing the labour market status from
employee to dependent self-employed worker and vice versa in Italy, showing that for employees
the probability of becoming a dependent self-employed worker increases with age and education.
Authors’ Own (2006) find that dependent self-employed workers in Italy are not low qualified
workers, but young, highly educated professionals and stress that these contracts are not a port of
entry into the labour market nor do they find that they are a vehicle to more stable jobs although
they seem to be a possibility for Italian women to work part-time (see also Authors’ Own,
2005a). Accornero et al. (2001) report that roughly a third of Italian enterprises deploy dependent
self-employed workers mainly to reduce labour costs, but also to increase labour flexibility. IRES
4
(2005) highlights that the majority of dependent self-employed workers are deployed only by a
single firm, mostly working on the enterprise’s premises in managerial subordination. Qualitative
research on dependent self-employed workers in Italy focuses on the careers of these workers and
how they vary across different social contexts (Authors’ Own, 2003; Rizza, 2003; Magatti and
Fullin, 2002; Reyneri, 2002 and 1998; Samek Lodovici and Semenza, 2001; Addabbo and Borghi
2001; Dall’Agata and Grazioli, 1999; Bologna, 1998). Barbieri (2003 and 1999), Authors’ Own
(2005ab and 2002) and Semenza (2000) and look at the micromechanisms of the regulation of
these work relationships.
Research on the motives to deploy dependent self-employed workers highlights that they
are mainly linked to cost reduction by transforming fixed into variable costs (financial
flexibility), the need to increase numerical flexibility and to externalise part of the entrepreneurial
risk (Authors’ Own, 2007a, Grimshaw and Rubery, 2005; Accornero et al., 2001). As stressed
mainly by legal scholars, dependent self-employment is also used to subvert labour and social
security laws. Legal constraints of employment protection in terms of working time or security
are invalidated since most employment protection laws are not applicable in such work
relationships. The externalised workers are, moreover, usually beyond the scope of collective
bargaining and trade union representation (Sciarra, 2004; ILO, 2003; Supiot, 2001).
Although this paper is mainly concerned with the level of the firm, we want to stress that
contracts may also reflect the needs of workers. In contrast to the ‘entrepreneurial’ self-employed
(i.e. those who work for different clients/firms), dependent self-employment is associated with
lower start-up costs and a simpler work process (in terms of coordination). In comparison to
employment, externalised workers face similar, yet less control, more flexibility, often a reduced
legal liability and tax benefits (for a detailed discussion on the motives of the dependent selfemployed workers see Authors’ Own, 2007b).
5
3.
Regulation of Dependent Self-employment
Changes in the organization of work over the last two decades have shown that the
personal scope of labour law and parts of social security law in many European countries is too
narrow, no longer reflecting the organization of work of the postfordist society (Schmid 2006;
Sciarra, 2004; Freedland, 2003; Perulli, 2003; Engblom, 2001; Supiot, 2001; Burchell et al.,
1999). Both common law countries and continental legal systems distinguish a self-employed
worker from an employee using criteria like subordination, allocation of risk and dependence.
However, this distinction is becoming increasingly difficult to apply since new forms of work
organization proof that both concepts are fuzzy in reality, including a variety of work activities
(Perulli, 2003, p. 14f). Schmid (2006) and Collins (2006) advocate a reorganization of legal and
welfare state institutions to better allow labour market transitions between various labour market
states. They argue that this would help to overcome asymmetries of risk and to facilitate risk
management, simultaneously stabilizing and protecting new flexible employment relations.
Besides the legal categories of ‘employment’ and ‘self-employment’, Austrian law knows
different mixed or hybrid forms. A ‘freelancer’ or ‘freie Dienstnehmer/in’ is someone with no or
only minor personal dependence (without a binding commitment in terms of time, place and how
work is done) but who is economically dependent on the contractor. They are treated as
employees in some minor aspects of labour law such as legal liability. Yet the majority of
employment protection measures do not apply to them.2 A ‘contractor for work and services’ or
‘Werkvertragvertragsnehmer/in’ is engaged to deliver a certain product or service at her/his own
risk, with her/his own assets and without instructions from the contract partner. After delivering
the product or service, the contract is terminated. Like freie Dienstnehmer/innen,
Werkvertragvertragsnehmer/innen are excluded from major employment protection acts.3 The
same is true for a group of self-employed individuals, which was legally created in 1998 in order
to prevent self-employed individuals escaping the social security system. This group, the so6
called ‘New Self-employed’ or ‘Neue Selbständige’ is very heterogeneous and includes selfemployed individuals like scientists, artists, teachers, doctors, journalists and other types of
freelancers. A widespread reform of the Austrian social security system between 1996 and 2000
has focused on the inclusion of the various kinds of self-employment in the social security
system. As a result, self-employed workers earning over a certain (low) threshold have hardly
any possibility of escaping the statutory social security system (Authors’ Own, 2007b).
Nevertheless, only selected employment protection measures within labour law are applicable to
these kinds of self-employment. Additional regulations of such work relationships near the
border of employment relationships come from commercial law. Recognising the difficulty of
assessing dependent self-employment, the Austrian legislative introduced laws for specific work
relationships to partly extend employment protection (e.g. sales representatives, pharmacists,
sportspeople) (Eiro, 2002).
In Italy, the ‘genuine’ self-employed workers (‘lavoratori autonomi’, i.e. autonomous
workers) are those who perform a service or work without being subject to subordination,
working with their own assets and without instructions. They are not salaried and are, thus,
beyond the social protection that is associated with salaried work. Additionally, Italian law
knows the ‘liberi professionisti’ (i.e. free professionals) like advocates, doctors, journalists and
others, who have their own private professional social security funds and their own private
protection regarding maternity leave (although limited), illness and pension. They are, however,
excluded from collective and firm agreements, working time regulation, protection in case of
insolvency of the firm, holiday regulation and equal treatment regulation. The ‘Treu’ law, which
introduced a hybrid legal category between the legal categories of employment and selfemployment, creating the contracts of continuous collaboration (‘co.co.co’), was introduced in
1997.4 The collaborators are semi-independent contractors who sign fixed-term employment
contracts to carry out a specific objective set by the employer. The work is performed in a regime
7
of coordination, according to which the collaborator is free to decide the means, the place and the
timing of his or her work and is theoretically allowed to work for more than one employer at the
same time. They are not subject to substantial parts of labour protection and social security laws
that are guaranteed to employees. For instance, collaborators have less protection when they are
temporarily unable to work (e.g. in case of illness or pregnancy). In particular, they provide the
employer with the right to suspend the contract for up to 90 days in the event of illness, but they
do not receive money in that period unless hospitalized (Fiscal Law 2000); in the case of
maternity leave the suspension of the contract is allowed for up to 5 months with 80 per cent of
the previous wage. They are excluded from the minimum wage, Christmas bonus, severance
payment, rules for holidays and leaves, the right for trade union action or equal opportunity and
training rights (Regalia, 2003). The ‘Biagi’ law of 2003 restricted the possibilities to deploy
collaborators, leading to an increase in work relationships where the worker is legally selfemployed (Authors’ Own, 2005a; ISTAT, 2005).
It is important to underline that in both countries, a dependent self-employed worker may
legally appear on the market either as a genuine self-employed or as a worker on the basis of one
of these hybrid forms.
4.
Problem Identification
The new postfordist market conditions have forced companies to reorganize themselves
into more flexible modes, simultaneously guaranteeing high quality standards (Reyneri, 2002;
Kalleberg, 1990; Piore and Sabel, 1984). In terms of human resource management, business
organizations have to reconcile two main requirements. (1) They need to establish flexible
relationships with their workers, simultaneously (2) ensuring the workers’ commitment and
loyalty. However, externalization means that employers have to find new ways to generate
workers’ commitment and loyalty, which are usually achieved by guaranteeing stability to
8
workers (Marsden, 1999; Williamson, 1975). In principal, externalization of labour leads to less
control over the workers (Williamson, 1985 and 1975). The labour segmentation literature
considers labour segmentation as the main solution to the needs of employers to reconcile
flexibility and loyalty (Rubery and Wilkinson, 1994; Doeringer and Piore, 1971). It is stressed
that employers have segmented the workforce into a ‘fixed’ component, characterized by
commitment, loyalty and permanent contracts, and a ‘flexible’ one that guarantees numerical
flexibility by non-standard forms of work. The former represents the internal labour market, the
company’s core, where employees have access to a traditional type of career, at the same time
developing firm-specific skills. The latter consists of flexible workers recruited from the external
labour market, passing from one company to another. They possess generic skills and perform the
company’s secondary functions, assuming that firms do not require the same level of
commitment from all workers.
The emergence of new organizational and contractual forms like dependent selfemployment challenges such assumptions. It is no longer only the businesses secondary functions
and non or low-qualified activities that are externalised. In terms of labour segmentation theories,
we would assume that the issues of control, trust and loyalty become problematic in these
relationships. The few studies that have been carried out on the subject so far stress the difficulty
of commitment and loyalty, showing, for instance, that confidentiality of firm-internal
information or the lack of identification with the company are key problems these firms face
(Authors’ Own, 2007b; Authors’ Own, 2002; Samek Lodovici and Semenza, 2001; Regalia,
2001; Dall’Agata and Grazioli, 1999).
5.
Research Design and the Cases
We analyse how firms cope with the organizational contradictions which derive from an
extensive use of dependent self-employed workers and what managerial solutions are adopted to
9
solve the control-flexibility dilemma, considering two sectors in two countries, respectively.
Thus, we investigate the national and sectoral variation of this phenomenon and the diversity of
the strategies adopted within two systems of micro regulation which are embedded in two
different institutional contexts. This research design provides an understanding of the link
between micro and macro regulation.
We have chosen Italy and Austria for several reasons. First, both countries show a strong
increase of the externalisation of workers (ISTAT, 2005 and 2004; Statistik Austria, 2002). Many
industries in the two countries have undergone an intensive restructuring process over the last 15
years, mainly a result of deregulation (less in Italy, more in Austria) and increased competition.
These regulatory changes significantly altered the organization of work. Second, in both
countries specific legislation has recently been introduced to cover forms of work on the border
between employment and self-employment. Third, they have similar patterns of labour market
regulations, especially regarding the high degree of protection for insiders, but a significantly
lower level of protection for outsiders (such as outsourced workers), although the protection for
insiders is stronger in Italy than in Austria. In sum, we analyse two industries embedded in a
similar institutional framework although regulation of product and labour markets is higher in
Italy than in Austria.
We look at two sectors where workers with medium and medium to high professionalism
have been increasingly externalised. Previous research has demonstrated that firms especially
struggle with the issues of control, trust and loyalty when externalising workers with a medium to
high skill level (Authors’ Own, 2007a; Authors’ Own, 2002; Regalia, 2001). Moreover, we chose
two sectors where dependent self-employed workers are deployed on the basis of different legal
forms. While the insurance industry works in both countries with legally self-employed workers,
the business service industry, which is gaining in importance in both countries, deploys them on
the basis of the hybrid legal forms discussed above. This allows us to also investigate whether the
10
legal form of the dependent self-employed workers has an effect on the organisational
governance of these forms of work.
In order to control for the effect of industry-specific micro-regulation, we have chosen
two industries in each country: the insurance (32 interviews in Austria, 19 in Italy) and the
business service industries5 (14 interviews in Austria and 29 in Italy6). We interviewed not only
managers, but also employees, self-employed persons, dependent self-employed workers and
representatives of trade unions and business organisations. Interviews were conducted in a semistructured way with open-ended questions, allowing the interviewees a certain flexibility in
responding. At the same time, a fixed list of questions was prepared for interviews to examine the
specific aspects of interest for our analysis. The interviews focused on the issues of the
organisational governance of contracting out, motives of both parties, firm-internal effects and
consequences of contracting out, the set-up of contracts, daily routines, working methods and
conditions, methods of recruitment, training and payment.
The guiding research principle of this case study was to explore phenomena and build
theory (Eisenhardt, 1989). The first research phase concentrated on the interviews with managers,
employees, self-employed persons and dependent self-employed workers. The second phase
evaluated the collected data on the basis of existing theories and additional theory construction.
We coded the interviews along the dimensions contracts, hierarchy, control, dependency and
social relations. The third phase consisted of interviews with representatives from interest
organisations and key informants. In order to strictly focus on the main tendencies that came out
from our analysis, we opted for a non-direct presentation of the interviews.
Most Austrian insurance companies organize their distribution using different channels
like direct sales agents (employed), tied agents (dependent self-employed) and independent
agents (genuine self-employed). Although they all specialize in selling insurance contracts to
clients, they work on a different contractual basis. The latter two are both legally self-employed,
11
but while tied agents are only allowed to represent one particular insurance company,
independent agents sell insurance contracts from different companies. Although tied agents are
self-employed and work from their own premises, they access the market under the logo and
name of the insurance company they contract with.
Deregulation and increased competition following the accession to the European Union in
1995 has considerably changed the organization of work in the Austrian insurance industry. As a
result, companies have substantially downscaled their employed sales force by sourcing out parts
of it. Between 1995 and 2001 employment in the insurance sector declined by 12 per cent
(Statistik Austria, 2003, p. 165), while the number of tied agents has increased by 600 per cent.7
In contrast, tied agents (‘produttori liberi’) have already had a long tradition in Italy, but
their number has augmented over the last years. Virtually all sales agents of an insurance
company are tied agents, representing only one particular insurance company and accessing the
market under the logo and name of the insurance company they contract with. As in Austria, they
are only paid for the products they sell. However, in contrast to Austria, these tied agents are not
directly controlled by managers of the insurance company, but by other dependent self-employed
(‘titolari di settori’), who are responsible for the coordination of tied agents of a specific region.
Those, in turn, are managed by employed company managers (‘agenti generali’). Thus, although
the managerial structure differs in the two countries, we find that in both countries the insurance
industry represents an example where companies use legally self-employed workers who work
exclusively for them in managerial subordination.
The business service industry, especially the training and consulting sector, extensively
uses the hybrid legal form in both countries. In Italy, this sector has only recently gained in
importance, also due to the augmentation of project funds of the European Union. Firms are
mainly small and medium-sized companies that particularly deploy staff with short-term
employment contracts or contracts of continuous collaboration. This particularly refers to experts
12
in EU projects, course tutors and teaching staff. In contrast, management and administrative
personnel is hired with standard employment contracts.
Like in Italy, employment in the business service sector has strongly expanded in Austria,
with a substantial increase of work relationships that are based on hybrid legal forms (Adam et
al. 2007; Blaschke, 2001). In both countries, industrial restructuring has led to a trend of sourcing
out both core and non-core activities, leading to a fundamental change in the demand for input
factors. The intermediary (business to business) demand for business services has been steadily
rising due to increasing demand spurred by technological innovation, market changes and
augmented complexity of labour processes.
Since the business service industry subsumes many different jobs in both countries, the
organisation of dependent self-employment is, of course, not uniform. The common criteria is
that dependent self-employed workers only work for one company in (more or less) hierarchical
subordination. Some of our interviewees stated that they work from the premises of the company
they contracts with, others from their own. Although the business service sector is in both
countries the sector that uses extensively the legal hybrid forms discusses above, we nevertheless
find also legally self-employed that work only for one company.
6.
Solutions Adopted
The importance of the problems identified in Section Four as well as the organizational
solutions adopted differ across the industries investigated in this paper. Employers in business
services usually deploy self-employed workers at a medium professional level with a high level
of education, but without having acquired specialisation in the job. Additionally, self-employed
workers with specialized competencies and a high level of professionalism provide the specific
skills for the firm when needed. Having to replace the latter during on-going projects creates high
costs for the employer, and also for the specialized self-employed worker it may be difficult to
13
resell their specific competencies on the external market. Employers face the risk that dependent
self-employed workers often not develop ‘loyalty’, constantly looking for better job
opportunities. The necessity for commitment in this sector is essentially linked to a ‘make one’s
job well’ dimension, even if it is a fixed-term job with the risk that workers do not commit
themselves enough. This dimension cannot be supervised well by employers during the work
process because these functions are usually related to services that cannot be easily controlled
(e.g. research and teaching). In sum, the major risks of externalizing core workers in the business
service industry are, first, to lose specific skills and, second, the workers’ low commitment and
loyalty.
Insurance companies deploy workers on a medium professional level with medium skills.
The contracts between the two parties are usually long-term contracts, including a clause of
exclusiveness. The insurance companies are interested in getting a high value work (i.e. treatment
of customers and potential customers) from their tied agents. Since it is difficult to write a
contract which determines high-value work (despite the fact that it may be observable), the
outsourcing company has to find a way to give the tied agents incentives to carry out work with
an observable but non-contractible high value. Additionally, outsourcing companies face the risks
that they lose direct access to customers which means that tied agents may take the customers
with them in case they change the company they work for. Finally, insurance companies develop
and invest in creating a ‘brand’ which can be damaged by misbehaving tied agents.
The solutions adopted by companies to deal with these risks deriving from outsourcing
are, firstly, the application of informal relational contracts and, secondly, the introduction of
hierarchical elements into the work relationship. The following presents the results of our case
study research, discussing the importance of informal relational contracts in both industries, the
mechanisms how hierarchical structures are used and the embeddedness and trust of these social
relationships between the companies and their outsourced workers.
14
Informal Relational Contracts
In the Austrian and Italian insurance industry we find that formal contracts only regulate
the basic framework of the work relationship; the particulars, however, are managed by informal
relational contracts. Relational contracts are informal agreements, unwritten codes and
understandings between the contract parties (Baker et al., 2002). Formal contracts only determine
the exclusiveness of the business or work relationship and the amount of the commission for
products sold. However, they do not fix issues such as the organization of administration,
training, provision of business know-how and management skills, assistance in (or control of)
accounting, IT, tax matters, organization of business meetings with company managers or
pecuniary and non-pecuniary incentive schemes. The details of the financial support, a minimum
turnover or the treatment of the files of the customers after the termination of the contract are
only regulated in some cases.
To avoid conflicts with legal regulations, insurance companies do not include any
authority or routine mechanisms in legal contracts that may raise the suspicion of an employment
relation. They use formal contracts for the basic framework of the work relationship and
relational contracts to have a certain amount of managerial control over tied agents. Writing
complete contracts would require to foresee all relevant contingencies, making them impossible
or too costly due to bounded rationality problems. Most issues of the actual organization of the
work relationship are therefore governed by relational contracts.
Relational contracts provide incentives for both parties not to behave opportunistically
due to the self-enforcing nature of relational contracts. The relationship between insurance
companies and their tied agents is organized in a way so that both parties profit in the longer term
for two main reasons: First, tied agents get better conditions, higher commissions and have less
hierarchical control the longer (and better) the relationship goes. If tied agents sell long-term
15
insurance products (e.g. private pension), they get a part of their commission after the insurance
contract is signed and subsequent payments every year as long as the insurance contract
continues. However, after termination of the work contract, the tied agent either loses the
subsequent payments entirely or only receives a small part of them. Thus, tied agents would lose
part of their income if they cancelled the contract. Second, the conditions of the financial support
improve over time. Of course, also insurance companies profit from a longer term perspective of
the work relationship since the present value of training and recruiting costs as well as costs of
supporting tied agents decrease over time (Authors’ Own, 2007a).
We find a similar basic set-up also in the Italian and Austrian business service industries.
Dependent self-employed workers have a basic contract with their employers, but the main part
of the work relationship is governed by informal relational contracts. The formal contracts
usually fix only the nature of the service the dependent self-employed workers have to carry out,
the timing of realisation and the regime of coordination between the employing firm and the
worker. In contrast to the insurance industry, dependent self-employment in the business service
industries in both countries is connected with short-term contracts that are subject to renewal on a
regular basis. Thus, the worker has an incentive to provide high quality work in order to get a
new contract (high powered incentives), while the firm has an incentive to keep the worker that
has already generated firm-specific know-how with the simultaneous possibility to get rid of low
performing workers. Consequently, both the worker and the employer will respect the relational
contract as long as they are interested in renewing the contract or in a new contract in the future.
Furthermore, respecting the relational contract is also enforced by network embeddedness, as still
to be discussed further below.
Hierarchy through Control and de facto Dependency
16
In the Austrian and Italian insurance industry, dependence is created by two different
mechanisms: support and control. Tied agents get a wide range of support to mitigate the
principal-agent problem. Insurance companies grant their tied agents low-interest credits,
financially support the purchase of office and IT equipment or marketing material, provide
business know-how, management skills in accounting, IT and tax issues. These measures do not
only help to mitigate the principal-agent problem, but do also bind the worker more tightly to the
insurance company, imposing high costs for changing contract partner. In addition, various
managerial control instruments make the actual work organization of tied agents similar to that of
the employed direct sales force by introducing elements of hierarchy. Examples are regular
meetings with supervisors that control the work of the tied agents, the control whether their tied
agents comply with the insurance company’s corporate culture in terms of marketing, advertising
or corporate design. In some cases, insurance companies mandate trustees to audit their tied
agents and undertake customer surveys to check the quality of the interaction with customers.
Information technology plays a crucial role here since it strongly decreases controlling costs. In
Austria, the authority mechanism is additionally facilitated by the fact that most insurance
companies deploy individuals of their former direct sales force and can thus apply firm-specific
routines.
In general, both support and control are substantially less in the Italian and Austrian
business service industries. In both countries we find that dependency is mainly created through
three different mechanisms. First, most of the self-employed workers supply their labour only to
one firm (exclusiveness of the contract) which decides over working hours, content and place of
work. In both countries, dependent self-employed workers experience not only control over their
working time, but also over the overall performance. Team work, regularly meetings, the support
with marketing and management tools, training courses and research results enable the employer
to influence the way the work is carried out. Most dependent self-employer workers report to
17
have their workplace at the office of the employer and are provided by back-office support and
sometimes work equipment.
Second, most dependent self-employed workers in the business service industries are
highly educated, delivering specialized skills. Their contracts are often based on specific projects
that are subject to renewal after the termination of the project. Thus, with each project they
increase their firm-specific know-how and specialization, improving their chances for contract
renewal, but also increasing dependency due to the accumulation of firm-specific know-how.
Third, dependency is also created by labour market conditions and regulation. In Italy and
to a substantially smaller extent in Austria, many firms in the business service industry only offer
jobs to young professionals on the basis of dependent self-employment. In some cases, only the
project coordinator is employed by the firm, working with a network of self-employed
subcontractors. Thus, the port of entry in this sector is dependent self-employment. This is a
phenomenon that concerns mainly young professionals after finishing their studies (Authors’
Own, 2006). Thus, also the fact that there are hardly alternative job opportunities creates
dependency.
Social Relationships: Embeddedness and Trust
In both countries we found informal networks among dependent self-employed workers
in the business service sector. Usually, they are established to exchange orders and often also
because the workers have been knowing each other since the time in formal education. These
networks not only constitute a social capital in the form of circulation of the information, but also
to facilitate information between workers and employers. However, in the business service sector
workers do not activate these strategies collectively, but individually. The employers are situated
in the structural holes of the informal network of the self-employed workers (Burt, 1980). This
allows them to get information on the reliability of specific workers from other workers.
18
Opportunism is also discouraged by the fact that workers know that information circulates in
their network and that it may also be accessible by the employer. The reliability of information is
guaranteed by concerns about individual reputation. Networks are dense and multiplex and false
information would be detected and traced back.
Thus, these networks help the employer to simultaneously ensure flexibility and
trustworthiness. For both parties these networks reduce the threat of opportunism since a good
reputation is a fundamental element for future contracts.
In particular between dependent self-dependent workers and employers it develops an exchange
of mutual expectations, outside of the contract, based on trust. For example employers can say to
dependent self-dependent worker: “ if you work more than the formal contract establish I will
renew the contract”. The problem for workers, as they underine in the interview, is that
sometimes the promise are not respected by employers.
As also stressed by Baumann (2002) and Jones (1996), the market is regulated by social
mechanisms: reputation and network closure (i.e. limited entrance) are pivotal in these
relationships. The former has the function to give information on the performance of workers in
the past transactions and limits opportunism in present ones. Thus, the transactions are ‘network
embedded’ (Authors’ Own, 2003; Rooks et al., 2000). The later limits the number of partners
with whom the employers have transactions, increasing the number of transactions with the
partners whose competencies and reliability have been tested. This refers to ‘temporal
embeddedness’ and therefore to the reiteration of the interaction.
Consequently, employers transfer the strategy of the internal market to the external
market through informative networks of a qualitative and personalized character. Social networks
operate with informal market signals on the abilities and competencies of workers. The
colleagues, ex-employers and customers become knots of informative networks that govern an
informal system of credentials (Luciano, 1989). Additionally, the formation of the professional
communities allows the outsourced workers to cope with the discontinuity of work because the
community develops a mechanism of exchange of orders that allows to smooth the flow of the
jobs.
19
In the Austrian and Italian insurance industry we also find informal networks between
dependent self-employed workers, although with a rather different character than in the business
service industry. These networks are not to exchange orders or to complement skills, but are
networks between colleagues from the same firm and ex-colleagues from different firms (since
most tied agents worked as employees before, often also for other companies) mainly to
exchange information about employers. In this case, employers are not in structural holes, being
not even part of these networks. In contrast, employers (i.e. company managers) have their own
informal networks, exchanging information about workers. These informal networks of
dependent self-employed workers and employers do, however, not interact with each other.
We do also not find ‘temporal embeddedness’ in the insurance industry since contracts
between dependent self-employed workers and the company are supposed to be long-term. As
already discussed above, relational contracts play a pivotal role here and are constructed in a way
that both parties profit in the long term, mitigating the problem of opportunism by the selfenforcing nature of relational contracts.
7.
Discussion of the Solutions Adopted
The results of our empirical analysis demonstrate that dependent forms of outsourcing
allow firms to profit from financial and numerical flexibility, simultaneously mitigating the
problems that are usually connected with outsourcing such as losing control over the worker and
a lower commitment of workers. Firms have established a complex set of managerial control over
the outsourced workers by both formal and mainly informal contracts which binds the worker
closer to the firms. Furthermore, hierarchical structures produced by managerial control, creating
dependency. Finally, social networks help firms to simultaneously ensure flexibility and
trustworthiness. However, we have discovered important differences and similarities across
countries, industries and legal statuses, which will be discussed in more detail in the following.
20
Interviews in both countries have shown that while the major risks of outsourcing in the
business service industry are connected to losing specific skills and the workers’ loyalty,
managers of insurance companies have stressed principal-agent-problems (i.e. to ensure that the
worker carries out the work according to the firm’s rules), the loss of direct access to customers
and the risk of reducing the brand value. Thus, we see different sets of risks in these two
industries which are mainly explained by the nature of work to be performed, asking for different
strategies to cope with these risks.
In both cases we have found that formal contracts play only a minor role in governing
these work relationships. Especially when workers are legally self-employed rather than working
on the basis of one of the hybrid legal forms, employers have to make sure not to write contracts
that raise the suspicion of a work relationship. In both countries, the former is mainly observed in
the insurance industry, while the latter exists predominantly in the business service industry. The
reason for this difference of work contracts between the two sectors lies in industrial regulation.
In contrast to the heterogeneous business service sector, the possible work forms in the insurance
industry are strictly regulated in both countries, determining the way work is organized in the
industry. Contracts on the basis of hybrid legal forms allow to also formally set out a regime of
coordination without risking legal problems. Our results show that in both countries hybrid legal
forms are usually connected to short-term contracts because they are less costly to set up in
contrast to establish a genuine business.
We also found that due to bounded rationality problems, formal contracts in both
industries do not regulate the specificities of the work relationship, but engage in informal,
relational contracts which govern the actual form of cooperation. The main difference between
the two industries is that while formal contracts in the business service industry are usually short
term, they are long term in the insurance industry. Consequently, the relational contracts come
into play via different mechanisms. In both industries we have observed that the actual
21
organization of the work relationship (i.e. how the work is done, supervision etc.) is not written
down in formal contracts, but is developed by on-going cooperation. The incentives not to renege
on these relational contracts differ between the two industries, however. In the insurance
industry, these incentives relate mainly to the better conditions and the threat of losing part of the
income. In contrast, in the business service industry both employers and workers will respect
informal contracts due to the existing social networks and the risk of losing one’s reputation
within these networks. Additional incentives come from the a possible contract renewal or further
contracts in the future.
We have argued that control over the workers establishes hierarchical structures similar to
employment relationships, creating dependency. However, also here we have found substantial
differences mainly between the industry and much less between the countries. In contrast to the
business service industry, we have observed a high degree of control in the insurance industry,
mainly through various support measures (e.g. low interest loans, back-office support), tight
supervision (e.g. setting business goals, monitoring by IT) and the incentives deriving from
economic advantages in the long term (i.e. better conditions, higher earnings). In the business
service industry of both countries we have found considerably less every day managerial control,
mainly due to the different skill levels in the two industries. In the business service industry, skill
evaluation is more important (‘make one’s job well’ dimension) both because the level of
competences required is higher and because entrepreneurial risk is externalized to a smaller
extent: dependent self-employed workers in the business service industry are not just paid on the
basis of commissions. In the insurance industry, wages are exclusively linked to performance, i.e.
self-employed insurance agents only earn when they sell insurance products. Thus, the insurance
company does not have an incentive to interrupt the work relationship during non-work periods.
In the business service industry, on the contrary, the selection of workers and the evaluation of
the work carried out, as well as the commitment in the work-in-progress phase, are troublesome.
22
As a result, firms use short-term, project-based contracts as a way to control workers by
promising a renewal of the work contract (‘temporal embeddedness’). As mentioned above, these
contracts are mostly on the basis of hybrid legal forms due the fact that they are easier and
cheaper to establish than a genuine business.
We argue that dependent self-employed workers face both economic and personal
dependence. Economic dependence is mainly created by the exclusiveness of the work
relationship and financial support measures that tie the worker closely to the firm by increasing
the costs of outsider options. Personal dependence (or subordination) is created by support
measures that increase the managerial control over the worker, such as assistance in accounting,
IT, tax issues, or business know-how. Firms introduce hierarchical elements into these work
relationships that are legally based on business contracts instead of labour contracts, placing the
self-employed worker in partial subordination. Our empirical results show that workers are
substantially integrated into the firm they contract with. For instance, while most insurance
agents work from their own premises, they nevertheless work under the logo and the name of the
insurance company. In the business service industry, many workers are located on the premises
of the firm, working closely together with the firm’s employees. We found that the degree of
integration into the firm of the contract partner has no systematic connections with the legal
status of the dependent self-employed worker.
A further difference between the industries was found in the role of networks. While
informal networks among dependent self-employed workers in the business service industry are
an important source for employers to reduce the threat of opportunism and to ensure trustworthy
behaviour, they exist, but hardly play a role in insurance industry. Furthermore, these networks
are used by the self-employed workers as a mechanism of exchanging orders, increasing the
likelihood of a continuous flow of work contracts. We argue that the reason for the difference in
23
the role of networks is the different time horizon of the contracts in the two industries, as already
stressed above.
We have shown that temporal and network embeddedness help to mitigate the problem of
trust. As stressed in the sociological literature, trust is one of the mechanisms that permits to
predict other people's behaviour, helping to overcome problems of opportunistic behaviour and
incomplete contracting (Bachmann, 2001; Lane and Bachmann, 1999). It allows for savings on
control costs and provides a tie to the person invested in (Mutti, 1998; Gambetta, 1988), but it is
difficult to produce. Temporal and network embeddedness allow to develop positive expectations
between workers and employers. In both industries, we find that the level of trust is strongly
dependent on the length of the work relationships as suggested by Yamagishi et al. (2005). In
most cases we found that the initial state of ‘assurance’ becomes ‘trust’ over a longer period of
time.
8.
Conclusions
Business organisations increasingly source out parts of their work force and establish
business relationships that are based on relational contracts and hierarchical structures, creating
dependent forms of self-employment (Authors’ Own, 2007ab; ILO, 2003; Supiot, 2001; OECD,
2000). This development has two major effects. Firstly, the boundary between employment and
self-employment becomes blurred, resulting in a need to rethink the restrictions of labour and
social security law (Sciarra, 2004; Supiot, 2001). These work relationships are not based on
employment contracts, but on private contracts, placing the workers beyond the scope of labour
law even though the actual conditions of work are similar to those of employees. Secondly, the
boundaries of firms become fuzzy. This paper has demonstrated that dependent self-employed
workers are neither clearly separated from the firm they contract with nor clearly integrated.
Consequently, the changing nature of work demands that researchers look beyond formal
24
organizations to capture the actual coordination of production and employment (Grimshaw and
Rubery, 2005).
We have shown that employers establish informal relational contracts that, in combination
with formal contracts, reduce the treat of opportunism while simultaneously allowing a certain
amount of control over the worker. In other words, hierarchy returns into the relationship through
the mechanisms of control and dependency. Social relationships complement the market
mechanism through the creation of trust and the development of specific configurations of social
networks (i.e. network and temporal embeddedness). Consequently, firms that deploy dependent
self-employed workers have developed specific strategies to mitigate the problems of control,
commitment and loyalty. In particular, we put forward the argument that these work relationships
are mainly regulated by informal, relational contracts and by network and temporal
embeddedness, significantly reducing the control-flexibility problem. However, we have stressed
important differences in the development of relational contracts as well as network and temporal
embeddedness in the two industries which we traced back mainly to the different time horizon of
formal contracts and, thus, the work organization of the industries.
This paper has also demonstrated that it is difficult to legally assess dependent forms of
self-employment due to its complexity and sectoral differences. We observe both different levels
of economic dependency and managerial subordination as well as heterogeneous conditions of
industries. We argue that the creation of legal hybrid forms has stimulated the growth of
dependent forms of self-employment in both countries.
From a theoretical point of view this paper shows that a integration of economic, legal and
sociological concepts are useful to analyze the regulation of work relations. The process of
externalization shifts workers from employment (hierarchy) to self-employment (market), mainly
for economic reasons (i.e. reducing direct and indirect cost) as suggested by the theory of cost
transaction (Williamson, 1985 and 1975). At the same time, we showed that with this
25
externalization process issues such as reciprocity in the form of relational contracts, specific
social networks’ configurations, specific kind of assurance and trust are introduced into the
market. We have argued that economic transactions are embedded in social relations, as stressed
by Economic Sociology (Polanyi, 1944) and by New Economic Sociology (Granovetter, 1985).
In dependent forms of self-employment, hierarchy comes back into the market by social
mechanisms.
26
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1
For example, Burchell et al. (1999) and Collins (1990) for the UK; Dietrich (1996) for Germany; Lyon-Caen
(1990) for France. For international aspects see OECD (2000) and ILO (2003); Supiot (2001), EIRO (2002),
Perulli (2003), and Sciarra (2004) provide an European perspective.
2
For instance, collective agreements, firm agreements, working time act, protection in case of insolvency of the firm,
holiday act, equal treatment act.
3
They are excluded, for example, from collective agreements and do not get any money in case of illness or when
they are prevented from carrying out their work. The working time act, the health protection measures, the maternity
leave act and so on are not applicable for WerkvertragsnehmerInnen.
4
Since 2003 the contracts of continuous collaboration have been transformed in contracts for a project
(‘Collaborazioni a Progetto” or ‘Co.Pro.”) in some sectors. However, the conditions of the contracts have not
substantially changed with the exemption that the new law introduced the idea that this contract can be stipulated
only when there is a project.
29
5
The interviewees work in the areas ‘computer and related activities’, 'research and development’, 'consulting' and
'financial services’. The size of the firms of Insurance sector are medium–big (50-100 workers), the firms of business
service industries are small, with few workers (10-20).
The organisational structure of the firms in the business service industries usually is composed by a manager, some
area directors and a segretary, all dependents of the firm, and a group of more or less 10 dependent self dependent
workers.
6
The 94 semi-structured interviews were conducted between 2001 and 2002.
7
This refers, however, to both tied agents that work only for one insurance company (tied agents) and those that
work for more than one company (multi-tied agents) because the data does not allow to differentiate between those
two groups. All major insurance companies in Austria – and all of the companies included in this case study – have
established tied agency in the late 1990s and early 2000s.
30