Exemption from social security contributions, Montenegro
This measure offers an incentive to employers to register their unregistered employees, in the form of an exemption from social security contributions for the first year of a newly registered employee, combined with a range of sanctions for employers. The measure has succeeded in reducing the incidence of waged undeclared work.
The Montenegrin labour market is characterised by a persistence and high rate of long-term unemployment. In 2009, the proportion of long-term unemployment was 81.3% of those defined as unemployed by the Labour Force Survey (LFS).
It is thought that individuals, especially low-skilled people, enter the informal labour market and remain there for their whole working life, never paying social security contributions and therefore not being eligible to receive most provisions after their working life. To avoid this trap and take a step towards formalisation the Montenegrin government has implemented incentives for employers to register their employees. This specifically targets those who work on an undeclared basis for a registered business rather than those not declaring for a fully informal business.
In Montenegro the social security contribution an employer is due to make lies at a rate of 9.8% of the employee’s wages. This contribution is comprised of pensions (5.5%), health (3.8%) and unemployment (0.5%).
The primary objective of this measure is to increase employment but it also encompasses the aims of reducing undeclared labour and encouraging the formalisation of jobs.
A programme has been implemented that offers incentives in the form of an exemption from social security contributions for the first year of a newly registered employee coupled with a range of sanctions for employers.
The exemptions could be used by those that employ:
- individuals with a disability;
- individuals over the age of 50 years;
- individuals that have been registered with the Employment Agency of Montenegro for longer than five years;
- individuals engaged with public works;
- unemployed individuals engaged in seasonal work;
- unemployed people from the Roma, Ashkali and Egyptian communities.
Those employing people from these categories are exempt from paying mandatory social security contributions (contributions for pension/disability insurance, health and unemployment) for the worker(s) concerned.
A fine of between 20 and 100 times the amount of the current minimum wage shall be administered to the employer if:
- the employment contract is not signed accordingly;
- the tax administration information is not filed in accordance to regulations;
- the prescribed application is not submitted;
- the employer fails to submit the calculation of earnings for newcomers, in accordance with regulations outlined in the relevant Act.
Lessons and conclusions
Achievement of objectives
Sisevic et al (2008) argue that the introduction of temporary cuts in social contributions for new employees in their first year resulted in a total contribution rate of 20% for these individuals. This has resulted in 54,700 more persons being registered with the Pension Fund and paying their social contributions.
Furthermore, from the data available from the government:
- 6,499 people were employed on a seasonal basis in 2010;
- 1,631 unemployed persons were employed in public sectors (state and local) in 2010;
- 1,414 individuals were co-financed;
- the number of persons seeking employment over five years decreased from 12,858 in early 2006 to 5,284 by the end of 2010.
Obstacles and problems
This is a short-term measure; nobody knows how long these people will stay as active contributors. However, some employers feel that it has only served to reward companies that had previously hired staff without paying the mandatory contributions.
The measure of offering temporary cuts in social contributions and/or taxes on labour is, in various ways of execution, found in many EU countries. In this case it targets waged undeclared activities and in this sense it could be a useful model for other eastern European countries where envelope wages are common.
Ministry of Labour and Social Welfare (Ministarstvo rada i Socijalnog Staranja)
Sisevic, B. (2008), Addressing the problem of undeclared work through social dialogue in Montenegro, International Labour Organization (ILO).