Promoting external work contracts, Slovakia
Work performed outside standard employment relationships – external employment increased in the Slovakia during the economic crisis in particular. These work contracts are often used by employers as an alternative to undeclared work. Employees performing work according these contracts are registered for tax purposes, but they do not pay contributions to social security and health insurance. Hence it allows employers to avail of a cheaper work force and for employees to receive higher net income as well. Currently, amendments to the legislation are under preparation to extend payments to compulsory insurance funds and also agreements regarding external work.
In 1998–2002, a large number of obsolete enterprises were phased out due to huge economic changes in Slovakia and the unemployment rate increased rapidly – to over 20%; in some regions of southern and western Slovakia, even to over 35%. The government sought to improve the business environment with the aim of attracting foreign capital to support economic growth and employment growth. At the same time, it was necessary to suppress negative phenomena, including undeclared work. The government introduced several measures (including the liberalisation of the forms of labour contracts), which indeed decreased the labour costs of the employers and improved the conditions for legal work, but at the same time had a negative impact on job security for the employees and decreased their future retirement pensions. Unemployment was temporarily reduced, but the financial crisis following the year 2008 revealed the need not only to address unemployment, but also the low level of pensions and health care (funded by insurance contributions) and at the same time not to allow the growth of undeclared work.
The measure in 2004 aimed at, among other things, reducing the motivation for illegal work by extending the possibilities for working on external work contracts. The 2012 measure aims to keep the attractiveness of the external work contracts, which also may assist in lowering the motivation for undeclared work, but at the same time, also increase the resources of compulsory insurance funds and the social protection of employees.
Since 2004 new legislation (the Act No. 5/2004 on employment services and the amendment to the Labour Code) has helped to liberalise the labour market. In order to reduce labour costs, the employers to a larger extent have been allowed to employ persons in the form of external work contracts, where they do not have to pay contributions to the retirement and health insurance for their employees (instead of 35.2% only 1.05% of the amount of wages paid is paid to the insurance funds). The work performed externally on contract has become advantageous for the employees as well, for they are not levied 13.4% of their gross wage which goes to the insurance funds and only pay taxes from their gross wage.
The second measure introduced temporary employment agencies to the labour market, which accelerated the process of job brokering (where the employer hires the employees from an agency, which pays the contributions to the insurance funds for the employees).
Both these measures significantly reduce the interest of employees and employers in working illegally.
From 2013 onwards, the amendment to the Act No. 461/2003 on social insurance is expected, which anticipates an increase in insurance levies for work performed based on the external work contracts, but not in the same amount as the levies for the standard employment relations. Thus, the benefits of the work performed externally compared to the regular employment relations will be partially maintained, which also should contribute to the slowdown of growth of illegal work.
Employers, Offices of Labour, Social Affairs and Family and the Social Insurance Agency.
Outcome of evaluations: lessons and conclusions
Achievement of objectives
Reducing the labour cost burden has enabled the employers to hire a larger amount of employees and thus contribute to the lowering of unemployment. At the same time, the motivation of the employers towards undeclared work has been reduced. By increasing the levy burden of the work under external work contracts both public finances and the social protection of workers improve; however, the wage costs of the employers increase at the same time and thus also the motivation for illegal employment. However, as some extent of a lower levy burden on external working relations in comparison to regular working relations remains, it is possible to expect only a small increase of motivation for providing illegal work by the employers.
Obstacles and problems
There is a growth in the number of workers working externally outside the regular employment relations and also in the number of self-employed persons, who either do not pay any contributions to compulsory insurance funds or only levies reaching the legislatively allowed minimum level, has increased. The result is the deterioration of resources of compulsory funds of retirement insurance, health insurance, sickness insurance and unemployment insurance. The lower current level of insurance contributions results in a lower amount of future pensions of these workers.
Employers, however, request not to increase the current level of wage costs anymore, which could adversely affect the increase of illegal work. 'We are warning that the above-mentioned measure will result in higher costs of temporary workforce, worsening of the possibilities to legally get employed for hundreds of thousands of people, without an adequate increase of flexibility of the labour law', is the statement of the National Union of Employers (RUZ SR) from the 2 July 2012 on the draft amendment to the Act No. 461/2003 on social insurance.
Slovakia has used the legal form of external work outside the regular employment relations that has existed over a long period (it is regulated by the Labour Code since 1965) to reduce the motivation to illegal work by enabling its extension. The current scope of employment in the external form is slowly losing its original additional character, which starts threatening the social protection system. The original advantage of reducing the motivation for illegal employment in times of economic difficulties and high unemployment is turning into a disadvantage with respect to the need for the consolidation of public finances. It is therefore necessary to proceed wisely when increasing the levy burden of the work.
Direct data on the relation between the growth of external employment relations and the reduction of illegal work are not available. Tables 1 and 2 show the development in the number of external work contracts.
|Year||The number of external contracts|
Source: Social Insurance Agency, Bratislava
|Professional, scientific and technical activities||43,090|
|Administration and supporting services||46,785|
Source: ŠU SR. Employees and average monthly wages 2010.
Depending on individual national legislation on labour and social security.
- National Labour Inspectorate: www.ip.gov.sk, www.safework.gov.sk
- Ministry of Labour, Social Affairs and Family of the Slovak Republic: http://www.employment.gov.sk/
- Central Office of Labour, Social Affairs and Family: www.upsvar.sk
- Social Insurance Agency in Slovakia: www.socpoist.sk
Close to the form of external contracts is the so called forced self-employment. Several years practice has shown that liberalisation of the Labour Code has enabled the performance of work in enterprises in the form of contracts for self-employed persons. The redundant employees were subsequently hired as self-employed persons to perform practically the same work, thereby reducing the labour costs (by reducing the sum of levies to the social and health insurances). This has also been a way to contribute to the decrease of the unemployment rate and reduction of motivation for illegal work. The price of such 'reclassification' of the legal form of work, however, is the reduction of social protection of employees.
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Rastislav Bednárik, Institute for Labour and Family Research