Board censures employers for treatment of economically dependent workers

The Estonian Tax and Customs Board has expressed dissatisfaction with employers who force their employees to become formally self employed while continuing to work solely for the same employe, a trend that seems to be on the increase in Estonia. The Estonian Employers’ Confederation has supported the statements of the Tax and Customs Board and has suggested that the legal regulations pertaining to self-employed people should be revised and reorganised.

Situation of economically dependent workers

The Estonian Tax and Customs Board (Maksu- ja Tolliamet) has stated its disapproval of the actions of employers who force their employees to become formally self employed while continuing to work solely for the same employer. The board considers that this gives employers an unfair competitive advantage in the economy and puts employees at a disadvantaged position in the labour market.

The Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK) has supported the statements of the Tax and Customs Board. According to the Director of ETTK, Tarmo Kriis, the legal regulations affecting a self-employed person should be revised and reorganised. He also stated that the current situation is not desirable for employers or employees, and that it puts too much pressure on the Estonian social system.

Disadvantages

Loss of benefits

Employees are not always aware of the risks and additional obligations that are associated with registering as self employed. In addition to new obligations, there are also many benefits that salaried workers get that will thus be lost if a person becomes self employed.

For example, workers’ rights stipulated in the Holidays Act (Puhkuseseadus) and Employment Contracts Act (Töölepingu seadus) cover persons employed under employment contracts or public servants but are not extended to self-employed individuals.

Tax and insurance cover

In the case of salaried workers, employers are obliged to pay both a social security contribution and an unemployment insurance premium for employees. However, self-employed persons are liable for their own social security contribution, which accounts for 33% of their total business gains. At the same time, self-employed people are not covered by unemployment insurance. Moreover, they are personally responsible for occupational health and safety at their workplace and the consequences of their business activities (the latter concerns all of their personal assets), and they must remain in charge of their own accounts.

Lower job security

Although economically dependent workers basically function as salaried workers, employers do not have any obligations towards these workers due to the legislation relating to self-employed persons. Therefore, the Tax and Customs Board has stressed that it is important for individuals who are pushed into self employment by their employer to thoroughly consider the consequences that accompany the new status.

In order to raise awareness about the status of self-employed persons and the additional obligations that come with it, the Tax and Customs Board has issued a reference book that includes all the necessary information about becoming self employed.

Tax and Customs Board highlights irregularities

The Estonian Tax and Customs Board has examined the contracts for the supply of services between companies and self-employed persons and has concluded that these contracts are basically employment contracts.

As a result, the board has found ways to reduce the problems facing economically dependent workers. According to the Manager of the control unit in the Tax and Customs Board, Egon Veermäe, the type of the service contract is not consistent with its content when a self-employed person continues to work under the control of a single employer. In that case, the Taxation Act (Maksukorralduse seadus) gives the tax authority the right to regard the business income of a self-employed person as an employment income. In brief, if the Tax and Customs Board considers the situation of economically dependent workers as concealed employment contracts, it treats the incomes of these workers like salaries and not as business gains. Consequently, no deductions that are typical for business gains can be made from the incomes of the self-employed persons. In addition, the employer can be obliged to pay the obligatory social contributions for the self-employed person.

According to the Tax and Customs Board, the number of economically dependent workers is on the increase in the Estonian economy. This is one of the reasons why the board has decided to address this problem now.

To date, the Estonian tax authority has concluded that over 1,700 self-employed persons can be regarded as economically dependent workers. In all, about 7,000 individuals have been registered as self employed with the Tax and Customs Board over the period from January to September 2006.

Marre Karu and Kirsti Nurmela, Praxis Centre for Policy Studies