Despite all-encompassing applicability of the relevant laws, Croatian labour market is in practice segmented. Employees in different sectors tend to experience substantial differences in protection of their legal and contractual rights. Due to the institutional insufficiency of the judicial system,segmentation largely results from the patterns of unionisation and collective bargaining. Employees of the highly unionised public sector and state-owned enterprises, or some larger companies, tend to enjoy job security, above-average wages, and good working conditions. The workers in the SME sector and some larger privately-owned companies, where unionisation is ineffective or even discouraged by employers, experience more problems in the protection of their rights. Having analysed the crucial legal provisions and the available data on (un)employment, wages, unionisation, social dialogue and labour disputes, we discuss the effects of such segmentation on the labour market, particularly focusing on the current reforms aimed at increasing the levels of flexibility of industrial relations, and offer some policy recommendations.