Thematic feature - industrial relations and undeclared work

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This article gives a brief overview of the industrial relations aspects of undeclared work in Bulgaria, as of June 2004. It looks at: the nature and extent of undeclared work; the regulatory framework; the role, activities and views of the social partners; and partnerships between social partners and public authorities to tackle undeclared work.

The phenomenon of undeclared work - defined as 'any paid activities that are lawful as regards their nature but not declared to the public authorities'- is an issue which has been preoccupying the EU institutions for a number of years. In 1998, the European Commission issued a Communication on undeclared work, which was designed to launch a debate on the causes of such work and the policy options for combating it (EU9804197F). It suggested that there was a need to clarify the causes and extent, and concluded that combating undeclared work should be part of the overall European employment strategy.

According to the Communication on undeclared work, the main motivation for employers, employees and self-employed people to participate in the undeclared economy is economic. Working in the informal economy offers the opportunity to increase earnings and to evade taxation on income and social contributions. For employers, the incentive is to reduce costs. The same document mentions three factors contributing to undeclared work: i) demand for 'personalised services' to households; ii) reorganisation/restructuring of industry and firms; and iii) the impact of new technologies. Undeclared work has impacts on the social security systems, public finances, competition and industrial relations. At that time, studies estimated the average size of the informal economy at between 7% and 16% of the GDP of the then 15 EU Member States. The Commission has launched a number of studies on the topic, covering issues such as 'Measuring undeclared work' (the latter in collaboration with Eurostat). In July 2004, the Commission issued a new report on Undeclared work in an enlarged Union (EU0407204F). It looks at the incidence in each Member State, including the 10 new Member States that joined in May 2004, and examines the reasons behind the growth in undeclared work.

Since 2001, the issue of undeclared work has been included in the EU employment guidelines. The current version includes a specific guideline entitled 'transform undeclared work into regular employment'. This provides that Member States should develop and implement broad actions and measures to eliminate undeclared work, which combine simplification of the business environment, removing disincentives and providing appropriate incentives in the tax and benefits system, improved law enforcement and the application of sanctions. They should undertake the necessary efforts at national and EU level to measure the extent of the problem and progress achieved at national level.

Finally, in October 2003, the Council of the European Union adopted a Resolution on undeclared work (EU0311206F), calling on Member States to address this issue and to work together to improve the situation. Suggested actions include preventative measures and sanctions aimed at eliminating undeclared work. The Resolution also invites the social partners at European level to address this issue within the context of their current multiannual work programme (EU0212206F) - indeed, the partners plan a seminar on the issue in 2005, with the aim of reaching a joint opinion - and to deal with it in the context of the sectoral social dialogue committees. The Council calls on the social partners at national level to promote the declaration of economic activity, to engage in awareness-raising and to promote the simplification of the business environment, particularly in relation to small and medium-sized enterprises.

Given this high level of interest in the subject, in June 2004 the EIRO national centres in 23 European countries were asked, in response to a questionnaire, to give a brief overview of the industrial relations aspects of undeclared work, looking at: the nature and extent of undeclared work; the regulatory framework; the role, activities and views of the social partners; and partnerships between social partners and public authorities to tackle undeclared work. The Bulgarian responses are set out below (along with the questions asked).

Nature and extent

Please describe briefly the nature and extent of undeclared work (ie 'any paid activities that are lawful as regards their nature but not declared to the public authorities') in your country. The aim here is not to provide very detailed statistical information or go into concrete calculation methods, but only to give what overall figures are available, plus broad estimates and indications where such figures are lacking. This should cover matters such as: the overall amount of undeclared work; gender aspects (ie are women more or less affected, and why?); the relationship between undeclared work and migration (please distinguish between legal and illegal migration); and sectoral aspects (ie which sectors are most involved).

Official Bulgarian statistics, in line with EU economic accounting systems, classify undeclared work (or 'unobserved' economic activity) in four categories:

  • illegal activities - the production and distribution of products and services banned by law, or permitted by law but produced by unauthorised companies;
  • hidden production - lawful production that is not reported because of: evasion of taxation or social security payments, non-compliance with statutory standards on minimum wages and working time, or the use of workers without an employment contract;
  • informal activity - labour activity that is not registered, usually provided to meet household needs; and
  • statistically hidden activities - those not recorded because of imperfections in the statistical system, or defective survey responses.

Research and analyses conducted by an expert group at Centre for the Study of Democracy (CSD) has found that the 'grey' sector economy represents a relatively high share of the Bulgarian GDP, at about 25%. However lately there has been a tendency for the grey economy to shrink, mainly because of the measures taken to address it (see below).

Research from the Vitosha Research polling organisation indicates that in December 2002, 25% of workers had no employment contract, falling to 17% in March 2003 and 12.4% in November 2003. Most of the male workers in question are employed in construction, and most of the women in the retail, hotels and restaurants sectors. Another indicator of the level of undeclared work is the concealment of part of the wage in order to pay less tax and social security contributions. In December 2002, some 33.3% of people working under an employment contract received actual wages higher than those declared for tax and social security purposes. In March 2003, the share was 22.6%. This practice is mainly found in micro-companies, where approximately 29% of the real income from work is concealed. In larger firms, this percentage decreases and in the largest companies (with over 500 employees) it stands at 6.7%.

It has been estimated that on average a working Bulgarian devotes approximately three minutes per day to informal employment that is not declared and cannot be counted statistically. For those engaging in undeclared work, this amounts to an average of 5.5 hours per day. For those people working on employment contracts, additional informal employment averages 64 minutes per day.

Law

What is the legislative framework in your country concerning undeclared work? Please include here: definition; incentives for transformation of undeclared work into regular work; sanctions and penalties; connection with the tax system and benefits; any attempts at administrative or fiscal simplifications; and any recent legislative changes.

In recent years a number of legislative measures have been taken to tackle undeclared work more effectively (BG0307101F), and especially the key problems of employment without a proper contract, and the practice of employers paying social security contributions on the basis of the national minimum wage, rather than on employees' actual pay.

Amendments made to the Labour Code at the end of 2002 have obliged employers to register with the the National Social Security Institute (NSSI) all employment contracts concluded, amended or terminated since January 2003. Under these amendments, there are two prerequisites in order for legal employment relations to arise - first, the employment contract should be drawn up in writing and, second, it should be registered at the NSSI. If one or both of these prerequisites are lacking, the employee cannot start working. Employment contracts must be registered within relatively short deadlines: within three days of the conclusion or amendment of an employment contract (if the amendment concerns a change of job position or the terms of the contract); and within seven days of the termination of a contract. After registration and before the first day of work, the employer is obliged to give a copy of the registered contract to the employee This measure has forced many employers to sign contracts with their employees and thus bring them within the 'observed' economy.

Following amendments to the social security legislation and in line with the 2003 state budget law, since the beginning of 2003 employers have been required to pay social security contributions in respect of their employees on the basis of a specific minimum amount of pay - the 'minimum social insurance threshold'- to be determined by collective bargaining at sector and branch level for 48 economic activity groups and nine occupational groups. The aim is stop the practice of employers paying contributions on the basis not of the employees' actual wage but of the much lower national minimum wage. These minimum thresholds were negotiated in 2002 by trade unions and employers' organisations in the various sectors, and extended to cover all companies in the relevant sector by the state budget law. In 2003 the thresholds were updated for 2004, and negotiations over thresholds for 2005 were under way in mid-2004.

According to preliminary NSSI data, as a result of these measures, during 2003 some 336,000 employees were moved out of the grey economy into the formal economy, and social security incomes increased by BGN 448.5 million (EUR 224 million).

The Ministry of Finance has also presented a package of measures to combat the gray economy. This provides for: the creation of an 'office for fiscal investigations'; measures to combat distribution of goods with fake or no labels; the creation of 'national incomes agency'; increased customs and tax monitoring; decreasing the level of VAT fraud (non-payment or claiming VAT back falsely); and tackling the distribution of illegal software.

Social dialogue

Please provide an overview of any collective agreements dealing with the issue of undeclared work (at any level - eg intersectoral, sectoral, company, regional). If there are any such agreements, please outline their content and, if possible, their impact, giving examples. Where possible, please provide details on collective agreements in sectors particularly affected by undeclared work, such as hotels/restaurants/catering, agriculture, domestic/personal services, retail or construction.

The nationally representative trade union and employers' organisations (BG0307204F and BG0310103F) supported the government's measures on the registration of employment contracts and introduction of minimum social insurance thresholds, introduced in 2003 (see above under 'Law'). In 88% of cases, these thresholds were set by bipartite negotiations between the social partners at sector level and in only 12% of cases were they set by the authorities, after negotiations failed or did not take place.

Please give details of any joint or unilateral initiatives on undeclared work taken by trade unions and employers’ organisations (such as information campaigns, providing training for their members responsible for negotiations, or adopting codes of conduct/ethics).

In accordance with the 1998 International Labour Organisation (ILO) Declaration on Fundamental Principles and Rights at Work, the largest trade union organisation in Bulgaria, the Confederation of Independent Trade Unions in Bulgaria (CITUB), launched a national campaign on the protection of fundamental rights at the workplace. Hundreds of enterprises where breaches of basic rights were suspected were visited, and many meetings with workers, trade unionists and employers were organised. The Labour Inspection, along with its regional offices, was actively involved in the campaign. The violations and sanctions imposed were publicly announced, and CITUB presented all the cases in a 'black book'. During the campaign, a number of violations connected with various aspects of the grey economy were identified, including: work without employment contracts; incorrect calculation and irregular payment of remuneration; use of child labour; and systematic use of unpaid overtime work.

Are there cases in your country where workforce representatives have mobilised employees on the issue of undeclared work? If so, what form did this take (demonstrations, strikes etc)? Are there cases where social partners have made appeals on this issue to the public authorities (the government, elected representatives etc)? What were the results?

The trade unions have organised a special campaign against unpaid wages (BG0307205N), which are thought to total over BGN 120 million (EUR 60 million) and have some relevance to undeclared work. Protest actions and demonstrations against delayed payment of wages were held in a number of towns and enterprises.

Partnerships

Please outline any initiatives taken jointly by public authorities and social partners in order to address undeclared work, and their results. What types of partnerships exist in your country (eg involving local authorities or NGOs) and what tools or measures have been used to address the problem? Please refer to good and bad practices, indicating which policies have proved to be successful in the national context and why (such as a good mix of actors, cultural traditions or flexible tools).

Initiatives taken jointly by public authorities and social partners in order to address undeclared work include the abovementioned measures on minimum social insurance thresholds. They have also worked together on a number of projects that have both helped create new jobs and legalised informal employment.

Has a comprehensive partnership on undeclared work developed in the context of your country’s National Action Plans (NAPs) on employment (in response to the EU employment guidelines)? Have there been significant tripartite arrangements on undeclared work as a result or in the context of the NAPs? How have the social partners at various levels implemented the aspects of EU employment guidelines on the issue of undeclared work that are under their responsibility?

The social partners are involved at all levels in negotiating and implementing agreements in the context of the Bulgarian NAP on employment. For example, on the basis of the EU employment guidelines, a national programme entitled 'From social assistance to employment' has been launched on a tripartite basis. In 2003, this programme involved about 80,000 preliminary long-term unemployed people, who are hired by employers with state subsidies, instead of receiving social assistance. Involving these people in subsidised employment limits the likelihood that they will enter the grey economy. Another project, entitled 'Training for professional qualifications for the development of traditional local manufacturing and crafts', has so far trained about 400 unemployed people for self-employment. An expansion of this project could contribute to the transition from undeclared work to employment on a contract, or to self-employment, in accordance with regional needs.

Please give details of any cross-country collaborative plans involving your country with the aim of combating undeclared work? Are these inter-governmental activities (ie collaboration between two or more countries, neighbouring or otherwise) or initiatives taken by social partners, or both?

Bulgaria had signed bilateral agreements on labour migration with the governments of Germany, the Czech Republic, Portugal and Spain, which seek to limit undeclared work by Bulgarians abroad. At present, immigrants to Bulgaria are not a factor in the development of undeclared work there. Some trade union initiatives have recently been launched and developed in collaboration with partner organisations in neighbouring countries (eg trade union centres in Greece and Turkey) in order to regulate cross-border employment and limit 'social dumping'.

Views

Please summarise the views of trade unions and employers’ organisations on the issue of undeclared work. Please include their positions on the role of the administrative, tax system and social welfare regime, and their view/assessment of government initiatives.

The representative trade union and employers' organisations as a whole are united in their assessments of the risks that undeclared work entails and the way in which it distorts the labour market. For employers that operate within the law, undeclared work is a form of unfair competition. For the trade unions, undeclared work hinders increases in pay and benefits and is a factor in 'social dumping'. Trade unions and employers’ bodies support government initiatives seeking further to decrease the tax and social security burden on both workers and businesses, believing that this will help bring most 'grey' economic activity into the open.

Commentary

Please give your own comments on the issue of industrial relations and undeclared work.

While it has many negative aspects, it should be acknowledged that undeclared work in some of its forms ensures incomes for many people, without which poverty levels would be higher. In the process of the restructuring of the Bulgarian economy and in the light of the high rate of unemployment (between 12% and 19%) in the past three or four years, the grey economy has arguably been to some extent acceptable. A reasonable alternative would be increasing the flexibility of the labour market, combined with new forms of hiring and social protection. (Lyuben Tomev, Institute for Social and Trade Union Research)

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