Measures to combat ‘social fraud’, Austria


Construction and woodworking
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The Austrian government has, since 2004, introduced a series of legal measures to tackle the growing incidence of ‘social fraud’ practices, particularly in the construction sector. However, as these measures proved largely ineffective in terms of deterrence, a new employee registration law and new legislation on the liability of construction companies subcontracting work to other companies were introduced in 2007 and 2008, respectively, to come into effect in 2009. Experts consider the latter initiatives to be more promising in terms of tackling organised social fraud.



During the past decade, a variety of illegal employment practices, particularly in the construction sector, have been reported by the media, trade unions and the authorities. Austria’s growing informal economy is estimated to represent up to 10% of gross domestic product (GDP), depriving the state of at least €7 billion in taxes and social insurance contributions each year.

In recent years, a widespread practice has been alleged among employers in the construction industry of founding and registering ‘pseudo-companies’ for the sole purpose of exploiting employees and defrauding the tax authorities. These pseudo-companies are founded as private limited liability companies and obtain subcontracts with well-established companies. Shortly after their foundation, the statutory minimum capital of €35,000 disappears and the two obligatory managing directors resign. After the works contract concerned is carried out, the pseudo-company declares itself bankrupt, which means that taxes and social security contributions remain unpaid. As these companies never plan to pay taxes or social insurance contributions, they can offer their services for ‘dumping prices’ and thus unfairly compete with non-fraudulent companies.

Apart from this practice, another reportedly widespread fraudulent practice in the construction sector, at least until recently, is where companies make use of a legal loophole with respect to employees’ registration for the sole purpose of evading taxes and social insurance contributions. Until recently, an employer was entitled to an elapsed period of seven days prior to registering an employee with the relevant social insurance institution. This possibility has allegedly been abused by a number of companies, as they were failing to register some of their staff for a much longer period than the seven days stipulated. In cases where the authorities uncovered one or more unregistered employees at the workplace, employers often claimed that the employees concerned had only been engaged in work for a few days and were about to be registered in the subsequent days. In such instances, the authorities have found it difficult to establish proof of fraud, unless the employees concerned were willing to supply information, which they usually were not.

In response to the increased incidence of such practices, a number of initiatives were introduced. The initiatives were originally launched by the social partners and – after they had largely been adopted by the government – drawn up by the responsible ministries. Within the Federal Ministry of Finance, a special law enforcement unit (Kontrolle der illegalen Ausländerbeschäftigung, KIAB) was established in 2002 to combat illicit work; this unit also monitors the observation of employment regulations with respect to the measures outlined below.


Against this background, the government and social partners sought to introduce legal measures to combat such instances of ‘social fraud’. In this respect, a number of draft bills were drawn up aiming to extend the existing provisions of criminal law to organised ‘social fraud’ in general and to the illegal evasion of social insurance payments in particular.

Specific measures

At the end of 2004, the parliament passed the Social Fraud Bill (Sozialbetrugsgesetz, SozBeG (in German, 700Kb PDF)), which came into effect on 1 March 2005. The bill extended the existing legal provisions of criminal law concerning organised tax and social fraud. Before this legislation, operators of ‘pseudo-companies’ had only been threatened with administrative fines. Since 1 March 2005, they face imprisonment of up to five years for such practices. Moreover, the term of imprisonment for organised undeclared work – that is, the recruitment, placement and hiring out of workers without registering them with the relevant social insurance institutions – was extended to two years.

A second important legislative initiative tackling fraudulent practices in companies was taken by the parliament in June 2007, when the General Social Security Act (Allgemeines Sozialversicherungsgesetz, ASVG) was amended. The amendment, which came into effect on 1 January 2008, stipulates that employers are obliged to register their employees with the relevant social insurance institutions before the commencement of work. This measure aims to prevent the practice of social security fraud as described above. Moreover, the amendment provides for a stricter penalty scheme for infringements of the registration law, increasing the ceiling of fines for repeated offenders from €3,630 to €5,000 for each case of illegal employment.

Evaluation and outcome

Achievement of objectives

It is still unclear whether these legal initiatives have been subject to any evaluation procedure. Therefore, only vague conclusions on the effectiveness of the measures under consideration can be made. While the social partners and most commentators expect the amendment of registration law to be an appropriate and effective means for combating illegal evasion of social insurance payments, the deterrence effect of the 2004 SozBeG appears to be limited. According to a representative of the Social Democratic Party (Sozialdemokratische Partei Österreichs, SPÖ), the courts have made virtually no use of the possibility of higher penalties, or even imprisonment, in the case of organised ‘social fraud’ thus far. Therefore, the incidence of fraudulent ‘pseudo-companies’ is unlikely to have decreased since the new regulations came into effect.

Obstacles and problems

According to experts, it is difficult for the courts and the authorities to acquire proof of criminal intent against a fraudulent employer, which is a necessary prerequisite for more severe penalties in terms of fines or even imprisonment.

Lessons learnt

The government had to experience that higher penalties alone do not address the root of the problem of fraudulent employment practices. As a consequence, the registration law was tightened up in 2007. Moreover, in June 2008, the Customer Liability Act (AuftraggeberInnen-Haftungsgesetz) was endorsed (which has not yet come into effect but will so do in 2009). This act stipulates that companies which are subcontracting work to other companies are liable for the discharge of the subcontractors’ social insurance contribution obligations. Most commentators have considered this initiative, as soon as it will take effect, as representing an important milestone for fighting against fraudulent employment practices.

Impact indicators

It is not possible, at this point, to assess the impact of the aforementioned measures due to the lack of evaluation procedures. Possible indicators for the impact of the measures could include the number of workers or entrepreneurs involved, estimated costs and estimated benefits.


The new and clear-cut registration law is likely to be easily transferable. However, regarding the extension of criminal law to illegal practices of ‘social fraud’, transferability might be more difficult, since corresponding measures would have to be adjusted to each country’s judicial system and traditions.


Main organisations responsible:

Federal Ministry for Justice (Bundesministerium für Justiz, BMJ), Website:

Law Information System (Rechtsinformationssystem, RIS) of the Federal Chancellery (Bundeskanzleramt, BKA), Website:

Chamber of Labour (Arbeiterkammer, AK), Website:

Association of Social Security Providers (Hauptverband der Sozialversicherungsträger, HSV), Website:

Austrian Trade Union Federation (Österreichischer Gewerkschaftsbund, ÖGB), Website:


Austrian Federal Broadcasting Federation (Österreichischer Rundfunk, ORF), Sozialbetrugsgesetz ‘Papiertiger’, ORF, available online at:

Bartos, B., Die neue Auftraggeberhaftung im Kampf gegen den Sozialbetrug, Online paper, Association of Social Security Providers (HSV), 2008, available online at:

EIRO, ‘Controversy over organised “social fraud” in construction industry’, 2003, available online at: /ef/observatories/eurwork/articles/controversy-over-organised-social-fraud-in-construction-industry.

EIRO, ‘Building industry and social partners call for stricter Social Fraud Bill’, 2005, available online at: /ef/observatories/eurwork/articles/building-industry-and-social-partners-call-for-stricter-social-fraud-bill.

EIRO, ‘Social partners agree on measures to combat social security fraud’, 2007, available online at: /ef/observatories/eurwork/articles/social-partners-agree-on-measures-to-combat-social-security-fraud.

Federal Ministry for Justice (BMJ), Sozialbetrugsgesetz. Einführungserlass, Gesetzestext, Gesetzesmaterialien, BMJ, Vienna, 2005.

Georg Adam, Department of Industrial Sociology, University of Vienna


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