Control measures to limit illegal employment, Latvia

Since the adoption of key measures for the prevention of illegal employment and the accompanying legal documents in 2004, the administrative capacity of Latvia’s State Labour Inspectorate has improved. In particular, the measures have allowed for stricter control of undeclared work and the expanded development of legislation seeking to limit illegal employment. However, although the control measures have facilitated the increased transfer of people from illegal employment to partly declared work, they have failed thus far to eliminate or significantly reduce illegal employment.

Background

The control of undeclared work in the labour market is the responsibility of Latvia’s State Labour Inspectorate (Valsts Darba Inspekcija, VDI). The inspectorate has the power to propose amendments to legislation seeking to improve labour market conditions. The main objective of VDI’s key principles – entitled ‘Measures for the prevention of illegal employment’ – and the accompanying legal documents is to strengthen the inspectorate’s capacity. It was deemed necessary to improve the capacity of VDI to control companies engaged in the industries increasingly at risk of illegal employment – such as construction, wholesale and retail trade, forestry and wood products, beauty care and healthcare. Prior to this, the resources of VDI in these industries were considered insufficient: although more than 48,000 companies were engaged in these industries, VDI only had about 115 inspectors and was therefore only able to check approximately 10,000 companies. The low salaries of inspectors also proved a further hindrance to VDI’s work.

On 2 November 2004, the Republic of Latvia’s Cabinet Order No. 836 – the ‘Action Plan 2005–2009 for increasing VDI’s administrative capacity in relation to reducing illegal employment’ – was adopted. In addition, funding from EU Structural Funds was directed at strengthening the administrative capacity of VDI.

After the implementation of these measures, VDI’s work in the field of illegal employment control began to improve.

Objectives

The primary aim of VDI’s enhanced control measures and proposals to amend the legislation is to eliminate illegal employment, including undeclared work. The target group for these measures are the employers and company employees.

Specific measures

Control measures

VDI regularly inspects companies, mainly in the growing risk sectors of construction, wholesale and retail trade, hotels and restaurants, and industry. The VDI inspections are the most effective way of uncovering illegal employment. The inspectorate chooses the companies to be inspected at its own discretion or following information given through its confidential telephone hotline, as well as on the basis of employee complaints. If necessary, representatives of the mass media, border guards or trade union representatives participate in this inspection process.

Information about checks

VDI regularly publishes information about the detected illegal employment cases in Latvia’s mass media, while the State Revenue Service (Valsts ieņēmumu dienests, VID) reports on the outcomes of these measures – such as the greater regulation of businesses and increased tax payments.

Proposed amendments to legislation

Since 2004, VDI has put forward a number of proposals, which the government has subsequently adopted, to amend the country’s legislation so that control measures could be improved, thus increasing the possibilities for preventing illegal employment; such proposals include improved capacities with regard to the enforcement of administrative penalties.

In 2005, the government tabled a discussion proposing to prohibit the business activities of employers that are repeatedly found to be engaging in illegal employment over the space of a year for a period of one to three years; however, the proposal was rejected. In 2006, the government put forward another proposal to penalise not only the employer but also the employee if they are found to be working without an employment contract. It was proposed to impose a temporary ban on accessing state procurement and EU Structural Funds among companies found to be engaging in illegal employment or undeclared work. It was also suggested that recruitment agencies be banned from publishing job advertisements without giving the name of the prospective employer. However, neither of these proposals was adopted.

In 2006, a further proposal was put forward regarding the establishment of an employee register, in which people would have to register before starting an employment contract. Although the proposal was approved, the establishment of the register has been delayed.

Administrative penalties

The administrative penalties for violating the country’s labour law and engaging in illegal employment are specified under the Latvian Administrative Offences Code.

Since 2005, the increased penalties proposed by the government for illegal employment have been applied and the system of punishment has been changed: previously, only one penalty was imposed; however, a number of new sanctions have since been introduced. The penalty for persons employed without an employment contract is up to €498, or up to €1,422 for a legal entity. If the offences are committed repeatedly within a year after the administrative penalty has been imposed, a further penalty is imposed on the natural person up to the amount of €711 or up to €7,114 for a legal entity. Moreover, employers that fail to provide information on their employees will be charged €7 for each employee not reported.

VDI can impose additional penalties and reports data on the offenders to the State Employment Agency and VID.

Cooperation

VDI cooperates with VID in exchanging information and carrying out joint inspections, along with the State Border Guard and the Office of Citizenship and Migration Affairs, the State and Municipal Police, and the State Social Insurance Agency. VID also conducts inspections at companies, independently of VDI.

Preventive measures

The preventive measures relate to compliance with VID’s requirements. Within the framework of preventive measures, the taxpayer can themselves prevent violations by legalising the employees and their salaries. The taxpayer is not punished for previous violations, provided that they respond to VID’s invitation to engage in dialogue and take on board their recommendations.

Outcome and evaluation

Achievement of objectives

Despite the increased control measures of VDI on employers, illegal employment is still widespread in Latvia. Moreover, the situation is worsening given the declining economic situation in the country and globally. It appears that, as a result of the stronger control measures, the shift from illegal employment into partially registered employment is increasing when employment contracts are concluded; however, part of the salaries are being paid through the evasion of taxes. More specifically, companies are trying to optimise salary taxes by using service agreements rather than employment contracts.

Obstacles and problems

VDI reports that its control measures are being hampered by a number of factors, more specifically due to the fact that: inspectors are not being permitted to enter the premises of companies chosen for inspection; employers are unable to give details of the precise number of workers employed; and it is difficult to prove employment and the duration of employment where the employees themselves have agreed to work without an employment contract and are unwilling to cooperate with VDI. Compliance with the labour law is particularly complicated in sectors involving mobile operations – such as construction, transport and consumer services. Therefore, VDI requires that the employment contracts are not only stored at the employer’s administrative premises but also at the place of work – for example, at construction sites.

Impact indicators

Several indicators have been used to assess the impact of the aforementioned measures – namely, the number of inspections conducted, the number of illegal employees detected, the number of companies found to be engaging in illegal employment, the number of newly registered employees or workplaces, and the amount of unplanned budget revenue.

Regardless of the more frequent controls and stricter penalties, the level of illegal employment has not decreased in Latvia; in fact, it has increased somewhat. Every month, VDI uncovers several hundred illegally employed workers, including foreign workers. Illegal employment has been detected in almost one third of the companies checked within each period, with the number of companies engaging in such practices reaching the thousands.

However, it should also be added that, as a result of the controls, the number of people legally employed and tax revenue has increased. For instance, over an 11-month period in 2006, the number of people legally employed increased by 31,000 persons, while the state budget revenue rose by €7.8 million.

Transferability

Any activity which helps to limit illegal employment is useful for other countries; therefore, the described measures may have merit in other countries.

Contacts

State Labour Inspectorate (Valsts Darba Inspekcija, VDI)

Bibliography

Latvian government, Key principles: Measures for the prevention of illegal employment (Informative part), Republic of Latvia Cabinet Order No. 60, 29 January 2004, available online (in Latvian) at: http://lm.gov.lv/upload/darba_tirgus/darba_attiecibas_socialais_dialogs/lmpamn_kops2.doc.

Latvian government, Action Plan 2005–2009 for increasing the VDI administrative capacity in relation to reducing illegal employment, Republic of Latvia Cabinet Order No. 836, 2 November 2004, available online (in Latvian) at: http://lm.gov.lv/upload/darba_tirgus/darba_attiecibas_socialais_dialogs/vdi_271004_kops2.doc.

Ministry of Finance, Measures by the Ministry of Finance, financial supervision and taxation policy to reduce illegal employment (in Latvian).

State Labour Inspectorate (VDI), Annual Report of the State Labour Inspectorate, Rīga, 2007, available online (in Latvian) at: http://www.vdi.gov.lv/admin/files/dokumenti/VDI_2007.parskats.pdf.

State Labour Inspectorate (VDI), State Labour Inspectorate’s experience of reducing illegal employment, Presentation of the Head of the Labour Law Department at VDI, Vilnis Virza, 10 November 2006, available online (in Latvian) at: http://www.vdi.lv/admin/files/dokumenti/Vilnis_Virza.ppt.

University of Latvia, Nereģistrētās nodarbinātības novērtējums, Rīga, 2007.

Raita Karnite, Institute of Economics, Latvian Academy of Sciences