Mandatory registration of individual employment contracts, Bulgaria

About

Country: 
Bulgaria
Sectors: 
Commerce
Target Groups: 
workers/suppliersemployers/purchasers

Mandatory registration of individual employment contracts and minimum social insurance thresholds was introduced by the government in 2003 as a measure to combat the informal economy and lack of sufficient employment insurance in Bulgaria. The initial effect of this initiative was significant, although in the following few years the informal sector continued to operate albeit in reduced size. The annual negotiations of higher minimum insurance thresholds in 2008, for 73 economic activities and nine occupational categories, reduced permanently the level of insufficient insurance and increased the collection of social insurance contributions.

Background

In the economic and political transition period in Bulgaria, the private sector practice of working without an employment contract became prevalent mainly in small and medium-sized enterprises (SMEs) and especially in the tourism, hotels, restaurants and catering, commerce and construction sectors. The second form of undeclared activity implemented in large private companies – and in almost all sectors and branches of the economy – is insufficient insurance coverage. ‘Payment on the black market and under the table’ means officially accounting for registration of a lower wage than the actual pay received by workers. The aim of participating in the informal economy for workers and employers is to pay the lowest taxes and social insurance contributions.

The National Social Security Institute (Национален Осигурителен Институт, NSSI) and, since 2007, the National Revenue Agency (Национална агенция за приходите, NRA) collect all information concerning the minimum social insurance thresholds and registration of employment contracts.

The nationally representative trade union and employer organisations supported the government in introducing, at the beginning of 2003, the registration of individual employment contracts and minimum social insurance thresholds. In 88% of cases, these thresholds were adopted through bipartite negotiations at sector level. In only 12% of cases, after bipartite negotiations failed, the thresholds were introduced by the Ministry of Labour and Social Policy (Министерство на труда и социалната политика, MLSP).

Objectives

The main objective of the government’s initiative is to curb the extent of undeclared work and narrow the scope of the grey economy. Specific objectives set out include the following:

  • reducing the number of workers without employment contracts;
  • increasing the social insurance levels in the private sector;
  • extending the social security base of insured persons (insured and self-insured);
  • increasing the resources accumulated in the social insurance funds;
  • increasing the tax revenues related to the income of natural persons.

Specific measures

Amendments made to the Labour Code at the end of 2002 introduced mandatory registration of employment contracts with NSSI. This measure forced the majority of employers to conclude contracts with their employees, which led to the registration of hundreds of employees previously working in the informal economy who are now included in the formal economy.

Meanwhile, after the changes to the Mandatory Social Security Code and with the State Budget 2003 Act including the NSSI budget, the minimum social insurance thresholds were adopted for the individual sectors and branches of the economy and for nine occupational categories. In this way, the practice of employers paying social insurance contributions on the basis of the national minimum wage was reduced.

These minimum social insurance thresholds were negotiated in 2002 between the nationally represented trade union and employer organisations in the respective sectors and branches of the economy. Through the State Budget Act, the thresholds were made mandatory for all companies of the respective branch or sector. Since 2002, each year the campaign on bipartite bargaining of the minimum social insurance thresholds for the next year is launched.

Evaluation and outcome

Achievement of objectives

The objectives related to increasing the resources in the social security insurance funds have been achieved in terms of a reduction of the practice of employers paying social insurance contributions on the basis of the national minimum wage, and a reduction in the number of workers without employment contracts. However, in sectors such as construction, tourism and hotels, restaurants and catering in particular, the insufficient social insurance contributions are still prevalent. For example, if in 2008 a minimum social insurance income of BGN 530 (about €270 as at 21 January 2009) was negotiated for qualified workers in the construction sector, it is well known that their real pay is between BGN 1,000 (€510) and 1,200 (€612).

Obstacles and problems

Although rare, cases occur where the employer avoids implementing the negotiated minimum social insurance income for the entire branch or sector. This happens with formal reappointing of part-time work or in the lowest qualification group. In both cases, the lowest social insurance contributions are paid and the persons continue to work in the same job and with the same working hours.

Other cases occur where the employer respects the minimum social insurance income, but does not pay the correct corresponding wage amounts. This means that a worker is artificially insured at the highest level of income but their employer calculates the higher expenses for insurance and subtracts this sum from the worker’s wages.

Lessons learnt

Some fears have arisen, including on the part of the International Monetary Fund (IMF), that the employers will not be able to manage to determine the basic economic activity and that it will be difficult to classify employees according to occupational groups. However, these fears are unfounded.

Employers are increasingly convinced of the effectiveness of the government’s measure and they are striving to achieve the optimum increase in minimum social insurance income in order to expose the informal economy.

Analysis of the effects of the initiative shows that the impact of the described measures of obligation has a stronger influence on undeclared work than the later introduced measures of reducing tax and social insurance contributions.

Impact indicators

In 2003, the number of workers with employment contracts increased by about 300,000. About 60,000 new employers were counted.

As a result of the negotiated new levels of contributions, in 2003 the revenues from the social security contributions in the state social security insurance funds – as a net effect of negotiations – increased by about BGN 405 million (€206 million) compared with 2002. In 2004, these revenues increased by BGN 305 million (€155 million) compared with 2003, and in 2005 by BGN 183 million (€93 million). It is expected that the revenues will amount to over BGN 500 million (€255 million) in 2009.

This revenue increase has led to an increase in workers’ security and a more equitable competitive business environment.

According to survey data and analyses of the expert group of the Center for the Study of Democracy (Център за изследване на демокрацията,CSD), in December 2002, 25% of employees were without an employment contract; in March 2003, this figure was lower at 17%, and in November 2003, it was 12.4%.

Another indicator was hiding part of the wages paid in an attempt to pay less taxes and social security contributions: in December 2002, 33.3% of the workers with an employment contract received a higher wage than they declared; in March 2003, this figure declined to 22.6%.

Transferability

The experience of the measures introduced is positive for countries where similar processes are observed – working without an employment contract and not receiving the full amount of social security insurance. To a certain extent, the annual negotiation of the minimum social insurance income stimulates and supports the process of collective wage bargaining at national level in the different branches and sectors of the economy, as well as bargaining at company level.

Commentary

The government’s initiative will be more effective if all negotiated minimum social insurance income is transformed into agreements for basic minimum wages. This trend is already visible in sectors such as foundry and machine building. The results of the minimum social insurance income negotiations this year are also encouraging: only 88 positions out of a total of 657 are paid under BGN 260 (€132). The expected minimum wage level for the country in 2009 is BGN 240 (€122).

Contact

National Social Security Institute (NSSI), www.noi.bg

Bibliography

Bulletin of NSSI, 2003–2008.

Center for the Study of Democracy (CSD), www.csd.bg.

European Industrial Relations Observatory (EIRO), ‘Thematic feature – industrial relations and undeclared work’, 2004, available online at: /ef/observatories/eurwork/articles/thematic-feature-industrial-relations-and-undeclared-work-13.

EIRO, ‘Social partners agree high social security thresholds for 2008’, 2008, available online at: /ef/observatories/eurwork/articles/social-partners-agree-high-social-security-thresholds-for-2008.

EIRO, ‘Record increase in minimum social security thresholds agreed for 2009’, 2008, available online at: /ef/observatories/eurwork/articles/record-increase-in-minimum-social-security-thresholds-agreed-for-2009.

Hristoskov, J., Competitiveness and social security insurance – aspects and interdependence, 2005.

Lyuben Tomev, Institute for Social and Trade Union Research (ISTUR)

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