Similar to economic decisions and political decisions, the legal issues also have a huge impact upon the regulation of markets, businesses and customers.
It is because governments decide to introduce laws, rules and regulations that stimulate or constrain business decisions and business activities, try to protect the interests of businesses and ensure that the general public and customers are protected.
The government’s laws fall into the following categories.
1. General labor laws
These laws set standards for selection and recruitment of workers, control the official labor relationship between employers and employees through official employment contracts and regulate termination of employment. They exist to protect the interests and safety of both the company and all workers.
Multinational companies that operate in countries with few legal constraints will most likely offer substandard working conditions, therefore lower production costs. However, some businesses offer working conditions and pay levels that far exceed legal minimum levels as specified by the law. These businesses will see benefits gained such as improved motivation. As these laws are constraints that add to business costs, therefore may lower overall profitability.
Legal constraints usually cover the following areas of employment practices including recruitment, employment rights and termination of employment.
Recruitment process
The rights of workers are meant to be protected starting from the beginning of the recruitment process. Discrimination against people during selection, recruitment and while at work is illegal in many regions around the world.
There is the minimum working age at which people can be employed by businesses – usually that is 18 years.
After the worker is successfully recruited, the written contract of employment, including the pay, working conditions and disciplinary procedures to be followed, must be signed by both parties. When employment contracts are clear and fair, workers will feel more secure and more valued, and it will lead to more satisfied workforce. Highly motivated workers are much more likely to work hard to help the business achieve its long-term business aim.
Employment rights
Although countries vary in their use of employment legislation, the employment laws typically found in most developed countries include:
- Anti-discrimination. Businesses are required to act fairly towards all their employees as specified in anti-discrimination legislation. It is illegal for employers to discriminate (show any form of prejudice) against individuals on the grounds of an employee’s age, gender, race, ethnicity, skin color, religion or lack of thereof, disability, marital status or family size. This applies to both when recruiting new workers, or in how the workers are treated during their employment tenures. Any worker who is discriminated against has legal rights to take the employer to court.
- Equal pay. Ideally, businesses ought to treat all workers as partners in the business, being equal in status and importance to other stakeholders such as shareholders, directors and managers. Equal pay legislation makes it unlawful for any employer to reward employees differently for doing the work that is equal in value. Businesses that promote equal treatment of its staff will make it easier to attract and keep the best employees as they will be keen to ensure quality output as they strongly feel a part of the business.
- Statutory benefits. Statutory benefits are all the legal benefits that businesses are obliged to offer to their workers – these are guaranteed by legal regulations. The most common statutory benefits include paid maternity leaves and paternity leave after the birth, paid leave for sickness, holiday pay and retirement schemes, pension entitlements, etc. The more the benefits, the higher the costs for the business.
- Work hours. The length of the maximum working week is also controlled by the law. The number of hours will vary between countries, usually between 37 hours in Scandinavian countries to 50 hours or more in many African and South-East Asian countries.
- National minimum wage. Minimum wage laws state that a worker cannot be paid less than the certain rate per hour. Regulations concerning minimum wage require all businesses to pay a legal minimum rate of pay to their workers, thus creating incentives to work for the poorest paid workers in the country. Governments introduce the minimum wage regulations to prevent employers from exploiting their workers by paying them very low wages. While the minimum wage laws increase business costs, the workers who receive a fair wage will be motivated to work harder and increase their productivity. Some less developed countries do not have specific laws regarding national minimum wage.
- Trade Unions. The main responsibility of trade unions is to provide legal advice and support to any of its members who have been a subject to any form of discrimination during their employment. If trade unions abuse their power, the government can control them by specifying trade union’s rights and responsibilities.
Termination of employment
Termination of employment is also subject to legal regulations. When large-scale redundancies are about to happen with many workers having their contracts of employment ended, this has to be discussed with trade union leaders.
When an individual has his or her contract terminated, the severance payment should be offered. In China, the rule for severance payment calculation equals to one month of salary for each year of employment.
If the employee’s contract is ended unfairly, then the case can be taken to court. If the worker wins the case, then higher compensation will have to be paid by the employer. Usually, unfair dismissal can be claimed, if the employment contract is ended because of pregnancy or during breastfeeding period, refusal by the employee to work during public holidays, refusal to work overtime or without any cause.
2. Health and safety laws
Health and safety laws aim to protect workers from discomfort (being too hot or too cold) and physical injury at work, as many manufacturing businesses can be a very dangerous environment for human beings. Businesses need to offer a secure and hygienic working environment for their staff, and should not require the worker to do anything that might cause harm or injury.
Also, these laws related to working conditions lay down minimum levels of health and safety in the workplace to prevent exploitation of workers by powerful employers.
Providing a healthy and safe environment in which to work is now a legal requirement in most countries, although the strictness of the laws and the efficiency of inspection systems vary considerably. Provision of safe and adequate working conditions requires businesses to:
- Equip factories and offices with safety production equipment.
- Provide adequate sanitary facilities such as washing stations and toilets.
- Provide protection from dangerous machinery, too heavy tools or toxic materials.
- Buy protecting clothing to meet health and safety standards.
- Give adequate lunch breaks and maintain proper workplace temperatures.
- Avoid overlong hours for existing workers by employing more stuff.
Failing to meet minimum of those standards will most likely lead to expensive court cases filed by injured workers and heavy fines imposed by the authorities. Whilst workers who ignore health and safety rules and procedures risk causing injury to themselves or others, and may by dismissed for gross misconduct.
In less developed countries health and safety at work requirements are less strict leaving lots of space for abuse of workers, e.g. Bangladesh does not follow International Labor Organization standards on work health and safety. It is because spending on health and safety increases business costs.
In many developed countries, the comprehensive inspection system supervised by the health and safety bureau has the power to enter and check any work premises at any time to make sure that they meet minimum standards. In addition to that, businesses that provide employment conditions and healthy environment beyond legal requirements have it easier to attract the best employees. A safe working environment reduces accidents, hence fewer days and less money will be lost due to time off work for bad health or work injury.
This will help the business to keep output at high levels and receive good publicity that might have marketing benefits
3. Marketing behavior laws
Businesses that offer clarity of advertisements, accuracy of promotional offers, quality of product and good after-sales service usually experience real sales and marketing benefits, hence leading to long-lasting gains in profitability.
But, many marketing practices used by modern businesses are in fact not only unethical but also very often illegal! That is the reason why governments around the world take legal actions to protect consumers of goods and services from unscrupulous business activities.
Here are some examples of illegal and unethical marketing practices:
- Misleading product descriptions. Products must meet quality standards and be fit-for-purpose. Because there are more scientific and technologically-advanced products these days, it is difficult for consumers, especially the elderly, to understand how they operate.
- Lack of detailed product information. When it comes to imported goods, consumers need protection from foreign producers of goods that adopt different quality and safety standards from those in the domestic country.
- Poor quality goods. Because of increasingly competitive nature of most markets, some businesses try to take advantage of consumers by reducing quality of the products and guarantee periods to offer better deals through lower prices. In case of any damage or injury caused by defective products, the business will be held liable and forced to pay compensation.
- Unethical advertising. Individual consumers are relatively weak against a large business with huge promotion budgets. Because the power of advertising can be so influential, it is not easy for consumers to always make rational decisions.
- Exploitative selling techniques. Some consumers may not be able to resist more pressurized sales tricks, e.g. consumer consumption credit with high interest rates that will leave consumers with paying off large debts for many years.
If these practices become widely publicized by the media or by the customers themselves, the business will not only need to change to meet the minimum standards of protection laid down by the law, but also offer disgruntled consumers a much-improved deal.
4. Consumer rights
Individual consumers do need protection from business actions of large businesses which have profit maximization as the main objective. Laws protecting consumer rights exist to make it illegal for any business to exploit, lie to or mislead customers. In the UK, the following consumer protection legislation laws are present:
- ‘Sale of Goods Acts, 1979 and 1982’ states that goods and services are fit to sell, safe and have no defects in them that will make them unsafe when used in the ways intended, are suitable for the purpose for which they are bought, and perform in the way described.
- ‘Trade Descriptions Act, 1968’ states that there should be no false or misleading descriptions of the products being sold. If a desk is claimed to made of oak wood which is relatively expensive, it cannot be made of cheaper pine wood and painted in oak color.
- ‘Consumer Protection Act, 1987:1’ states that firms that provide dangerous or defective products are liable for the cost of any damage caused to users, and that it is illegal to quote misleading prices. It is illegal for retailers to sell products for the price higher than ‘the manufacturer’s recommended price’.
- ‘Weights and measures’ govern quality-control standards and the accuracy in preparation of food products, consumer credit regulations and food safety
Of course, there will be costs to businesses from meeting those requirements, e.g. the need of redesigning products to meet health and safety laws, or redesigning advertisements to give clear and accurate information. Putting consumer interests at the forefront of company’s policies also requires adjustments of strategy and changes to corporate culture.
However, meeting the requirements of consumer protection legislation can bring substantial branding rewards for the business. Also, treating consumers fairly and responding to their complaints quickly may reduce the risk of court actions, therefore minimize expenses in the long term.
5. Business competition legislation
One of the roles of the government is to encourage and promote healthy competition between businesses by passing competition legislation laws. These laws prevent monopolistic mergers and outlaw anti-competitive practices such as price fixing or charging unjustifiably high prices to protect customers and smaller businesses.
The government will act against businesses deemed to be harmful for the public interest promoting fair competition between businesses as it has the following benefits:
- Wider choice of goods and services for consumers.
- Prices as low as possible due to increased competition.
- Improved quality, design and performance of products.
- Stronger economy due to more competitive local firms against foreign firms.
In fact, competition laws also present opportunities for businesses through innovation as copyrights, trademarks and patents give businesses legal protection against competitors who may want to replicate their inventions and sell them as their own.
6. Social protection laws
Social protection legislation exists to prevent or reduce the consumption of demerit products (i.e. tobacco, alcohol, gambling, illegal drugs) in the society. For example, in Sweden, there is a retail monopoly owned by the government called Systembolaget that sells alcohol only in certain places at the certain time to customers from 20 years of age and older.
It is because social costs to the general public of consuming those products outweigh the costs of consumption incurred by the consumer. The government will have to spend additional public money on treatment of the people addicted to cigarettes or alcohol. Without any social protection laws, the consumption of these products would be higher and therefore the costs to society would be greater, e.g. passive smoking, pollution and crime.
7. Business location legislation
When the business considers a new location, it should think about possible legal controls placed which will not be the same in every country. A business that considers relocation or expansion to another country will have to investigate the laws of that country and compare these laws with legal conditions in other locations.
Because different regions present different opportunities, some locations have been a major factor driving decisions of some of the multinational organizations. Local and national governments wish to attract large businesses to locate in their country to provide employment for the local population. In many countries, the governments encourage new companies to set up businesses in poorer areas to bring economic development.
However, the governments may also discourage business from locating in areas which may cause damage to the natural environment or other leisure areas enjoyed by the local community. Large investments will require planning permissions from local governments. For example, building a new factory near the national park may not be possible due to the problems caused by air pollution and excessive waste. Also, local residents do not want to be bothered by any noise or heavy traffic pollution from manufacturing activities.
Any business found breaking these laws regarding location might be fined, forced to relocate or even closed down.
