Social partner cooperation agreement, Estonia

About

Country: 
Estonia
Target Groups: 
employers/purchasersgovernmentsectoral organisationsworkers/suppliers

 

A roundtable meeting on Estonia’s widespread problem of undeclared work was held in January 2005. The social partners, public institutions and social security bodies participating in the meeting signed an agreement of joint activities aiming to decrease the extent of this practice. These activities mainly involve increasing public awareness of the negative consequences of undeclared work. The agreement was signed by 10 organisations, which together represent a significant proportion of the Estonian labour market.

 

Background

On 18 January 2005, a roundtable meeting was held at the Tax and Customs Board (Maksu- ja Tolliamet) to discuss the possibilities of reducing the scale of undeclared work in Estonia, otherwise known as ‘envelope wages’. The level of undeclared work in Estonia has been fluctuating in recent years: while the proportion of employees receiving undeclared wages decreased over the period 2002–2006, it increased again in 2007 up to 14% of workers. Furthermore, a continuing increase might be expected due to the unfavourable economic situation in Estonia, which is forecast to last up to 2010. Undeclared work has a negative impact on entrepreneurship and the competitive environment, and considerably decreases the social guarantees of employees.

The cooperation agreement supports the activities of the Tax and Customs Board, which in 2007 carried out 72 inspections to identify employers paying undeclared wages. Following the inspections, 66 operations involving undeclared work were closed and unpaid taxes of EEK 12 million (about €767,000 as at 28 January 2008) were charged.

Along with the Tax and Customs Board, the cooperation agreement was signed by the:

  • Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK);
  • Estonian Trade Union Confederation (Eesti Ametiühingute Keskliit, EAKL);
  • Association of Municipalities of Estonia (Eesti Maaomavalitsuste Liit, EMOVL);
  • Association of Estonian Cities (Eesti Linnade Liit, ELL);
  • Labour Inspectorate (Tööinspektsioon, TI);
  • Estonian Labour Market Board (Tööturuamet);
  • Unemployment Insurance Fund (Töötukassa);
  • Social Insurance Board (Sotsiaalkindlustusamet);
  • Health Insurance Fund (Haigekassa).

Objectives

The cooperation agreement primarily aims to increase public knowledge about the negative consequences of undeclared work. The signatory organisations inform both employers and employees about the losses caused by undeclared work.

Specific measures

The following actions were agreed on by the 10 participating organisations:

  • to systematically inform the public, employers and employees about the impact of undeclared work on social guarantees. For that purpose, the Tax and Customs Board has initiated information campaigns for the general public, as well as publishing information on the websites of the agreement’s partners; information is also given in hand-outs for persons seeking work and by government officials dealing with social benefits;
  • to persuade dishonest employers to stop paying undeclared wages, with the help of the trade unions and employer organisations. Although the methods adopted to persuade employers are not specified, this measure is similar to a previous one, whereby trade unions and employer organisations inform employers through personal contacts;
  • to analyse the current legislation and make proposals for amendments if necessary, with the aim of a better organisation of surveillance and control measures. Under this aim, the labour inspectorate has devised instructions to detect illegal employment relations. In addition, changes were introduced to the Public Procurement Act to control the background of applicants and prevent unfair competition arising due to undeclared work in the public procurement procedure. Some changes have also been discussed in relation to the Employment Contracts Act, the Taxation Act and the Value-Added Tax Act;
  • to concentrate on industries and activities where the problem is acute, jointly choosing those to be inspected systematically and ensuring coordination of action while carrying out joint inspections. As reported in 2006, joint inspections were conducted by the Tax and Customs Board, Labour Inspectorate, police, Labour Market Board and Citizenship and Migration Board. The inspection activities are preceded by research to detect areas where possibilities of undeclared work are the highest, based on tax payment data or by comparing the annual turnover with the number of employees;
  • to set up an inter-organisational system of information and control, under the management of the Unemployment Insurance Fund, to ensure that unemployment insurance benefit is paid only to people who are unemployed and looking for employment. According to the reports of the Tax and Customs Board, the information exchange between government agencies – including the Health Insurance Fund, Labour Market Board and Labour Inspectorate – was intensified during 2005 to monitor benefit recipients who have evoked suspicion;
  • to encourage local government agencies to avoid paying benefits to people who actually work or receive a higher wage than declared;
  • to request that local government agencies explain to employers the negative impact of undeclared work on local government budgets and that they implement development plans. Although information is not available on any specific actions undertaken in this respect, it is reported in general that Estonia’s city and municipal agencies have added the respective information to their websites and that, together with the trade unions and Social Insurance Board, they have arranged thematic training initiatives and information days;
  • to highlight to the public through general information activities how undeclared work results in a shortfall in pensions;
  • to expand trade unions’ activities to the industries where the problem of undeclared work is most widespread and to conclude wage agreements in these industries. This objective falls under the general measures of trade unions to increase membership levels, as the unions are constantly seeking opportunities to found new trade unions and increase membership across all sectors. It is expected that expanding the scope of trade unions will also reduce the risk of undeclared work, as trade unions generally act as a ‘watch-dog’ to prevent undeclared work;
  • to persuade enterprises, under the management of ETTK, to join industry associations and establish in cooperation with the Tax and Custom Board an ‘honest taxpayer’ scheme. However, as of yet, this objective has not been implemented.

Evaluation and outcome

Achievement of objectives

The fact that 10 organisations signed the cooperation agreement is a positive aspect in itself, as all of the signatory parties recognise the problem of undeclared work and are committed to tackling it in their everyday activities. More specifically, according to a representative of the Tax and Customs Board, Mr Veermäe, the general aim of raising awareness of undeclared work has been achieved, as reflected by the favourable tax revenue and wage increases among those wage groups where the risk of paying undeclared wages was the highest. However, it should be mentioned that these positive results could also, at least partly, be attributed to the favourable economic climate during that period.

Obstacles and problems

No obstacles or problems have been identified in terms of the agreement’s implementation. The most significant problem relates to the lack of impact assessment (see also ‘Lessons learned’).

Lessons learnt

As the cooperation agreement is a bit too declarative in nature, it is more difficult to observe its direct impacts. Moreover, there is no available impact assessment of the initiative. Therefore, the activities of the organisations involved in the agreement should be further analysed, for instance in terms of the specific actions undertaken and their effects.

Impact indicators

The 10 organisations that signed the agreement represent a significant proportion of the Estonian labour market. The confederation EAKL, for instance, represented 19 trade union organisations and 37,283 employees as at 1 January 2007, which is the equivalent of about 6% of the total workforce in Estonia. ETTK represents 23 sectoral employer organisations, to which more than 1,500 enterprises are affiliated, amounting to about 2% of the total number of enterprises in the economy in 2007; overall, these ETTK-affiliated organisations represented about 145,000 employees at the beginning of 2008, which was the equivalent of about 24% of employees in the economy in 2007.

Some financial indicators have also been underlined by the Tax and Customs Board. For example it was reported that the proportion of employees earning EEK 1,000–3,000 (€64–€192) – the wage group where the risk of payment of undeclared wages is the highest – decreased by 9.3% over the period 2004–2005. At the same time, the proportion of employees earning between EEK 8,000–12,000 (€511–€767) or EEK 12,000 (€767) or more has increased by 4.1% and 4.4% respectively. However, direct causality between the reduced number of employees in low-wage groups and the activities undertaken to tackle undeclared work should not be presumed, as the period in question was also characterised by general wage increases and more favourable economic conditions.

Transferability

The concept of a cooperation agreement is probably transferable to other countries. However, the activities that are agreed on could vary depending on the characteristics of the signatory organisations and the needs of the specific labour market.

Contacts

Main organisations responsible:

Bibliography

EIRO, ‘New action agreed to combat undeclared wages’, March 2005, available online at: /ef/observatories/eurwork/articles/new-action-agreed-to-combat-undeclared-wages.

EWCO, ‘Problem of undeclared wages on the rise’, August 2008, available online at: /ef/observatories/eurwork/articles/undefined/problem-of-undeclared-wages-on-the-rise.

Pau, A., Kümme asutust ja organisatsiooni alustavad ümbrikupalgavastast ühisvõitlust, Press release, Estonian Tax and Customs Board, 14 January 2005, available online at: http://www.emta.ee/?id=2222.

Pau, A., Ühisavaldus ümbrikupalkade vastasest koostööst, Press release, Estonian Tax and Customs Board, 18 January 2005, available online at: http://www.emta.ee/?id=2228.

Vare, T., Ümbrikupalka makstakse vähem, Press release, Estonian Labour Inspectorate, 31 January 2006, available online at: http://www.ti.ee/index.php?article_id=809&page=54&action=article&.

Kirsti Nurmela and Liis Lill, PRAXIS Centre for Policy Studies

 

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