Thematic feature - industrial relations and undeclared work

This article gives a brief overview of the industrial relations aspects of undeclared work in Romania, as of June 2004. It looks at: the nature and extent of undeclared work; the regulatory framework; the role, activities and views of the social partners; and partnerships between social partners and public authorities to tackle undeclared work.

The phenomenon of undeclared work - defined as 'any paid activities that are lawful as regards their nature but not declared to the public authorities'- is an issue which has been preoccupying the EU institutions for a number of years. In 1998, the European Commission issued a Communication on undeclared work, which was designed to launch a debate on the causes of such work and the policy options for combating it (EU9804197F). It suggested that there was a need to clarify the causes and extent, and concluded that combating undeclared work should be part of the overall European employment strategy.

According to the Communication on undeclared work, the main motivation for employers, employees and self-employed people to participate in the undeclared economy is economic. Working in the informal economy offers the opportunity to increase earnings and to evade taxation on income and social contributions. For employers, the incentive is to reduce costs. The same document mentions three factors contributing to undeclared work: i) demand for 'personalised services' to households; ii) reorganisation/restructuring of industry and firms; and iii) the impact of new technologies. Undeclared work has impacts on the social security systems, public finances, competition and industrial relations. At that time, studies estimated the average size of the informal economy at between 7% and 16% of the GDP of the then 15 EU Member States. The Commission has launched a number of studies on the topic, covering issues such as 'Measuring undeclared work' (the latter in collaboration with Eurostat). In July 2004, the Commission issued a new report on Undeclared work in an enlarged Union (EU0407204F). It looks at the incidence in each Member State, including the 10 new Member States that joined in May 2004, and examines the reasons behind the growth in undeclared work.

Since 2001, the issue of undeclared work has been included in the EU employment guidelines. The current version includes a specific guideline entitled 'transform undeclared work into regular employment'. This provides that Member States should develop and implement broad actions and measures to eliminate undeclared work, which combine simplification of the business environment, removing disincentives and providing appropriate incentives in the tax and benefits system, improved law enforcement and the application of sanctions. They should undertake the necessary efforts at national and EU level to measure the extent of the problem and progress achieved at national level.

Finally, in October 2003, the Council of the European Union adopted a Resolution on undeclared work (EU0311206F), calling on Member States to address this issue and to work together to improve the situation. Suggested actions include preventative measures and sanctions aimed at eliminating undeclared work. The Resolution also invites the social partners at European level to address this issue within the context of their current multiannual work programme (EU0212206F) - indeed, the partners plan a seminar on the issue in 2005, with the aim of reaching a joint opinion - and to deal with it in the context of the sectoral social dialogue committees. The Council calls on the social partners at national level to promote the declaration of economic activity, to engage in awareness-raising and to promote the simplification of the business environment, particularly in relation to small and medium-sized enterprises.

Given this high level of interest in the subject, in June 2004 the EIRO national centres in 23 European countries were asked, in response to a questionnaire, to give a brief overview of the industrial relations aspects of undeclared work, looking at: the nature and extent of undeclared work; the regulatory framework; the role, activities and views of the social partners; and partnerships between social partners and public authorities to tackle undeclared work. The Romanian responses are set out below (along with the questions asked).

Nature and extent

Please describe briefly the nature and extent of undeclared work (ie 'any paid activities that are lawful as regards their nature but not declared to the public authorities') in your country. The aim here is not to provide very detailed statistical information or go into concrete calculation methods, but only to give what overall figures are available, plus broad estimates and indications where such figures are lacking. This should cover matters such as: the overall amount of undeclared work; gender aspects (ie are women more or less affected, and why?); the relationship between undeclared work and migration (please distinguish between legal and illegal migration); and sectoral aspects (ie which sectors are most involved).

A study conducted during 2003 by the Alliance for Economic Development of Romania (Alianta pentru Dezvoltarea Economica a Romaniei, ADER) and the National Association of Craft Cooperation (Asociatia Nationala a Cooperatiei Mestesugaresti, UCECOM) estimated that undeclared work involves around 1.8 million-2 million people, and that the underground economy represents 20% of gross domestic product (GDP).

The 2003 annual report of the Ministry of Labour, Social Stability and Family (Ministerul Muncii, Solidaritatii Sociale si Familiei, MMSSF) states that the sectoral profile of undeclared work is diverse, including first of all agriculture, forestry, construction, commerce (especially markets), textiles and the food industry. In April 2004, MMSSF estimated that undeclared work involved at least 600,000 people. The most recent study (June 2004) puts the extent of the phenomenon higher, involving around 1 million people, representing 11% of total employment.

The gender breakdown of workers engaged in undeclared work is generally not included in estimates. The only such breakdown is provided by the 2003 report of the Labour Inspection (Inspectia Muncii, IM), but it refers only to the results of control and inspection campaigns. Thus, during the campaigns carried out in 2002 and 2003, 0.46% and 0.43% respectively of all workers were found to be working illegally. Of these proportions, women represented 0.25 percentage points in 2002 and 0.18 percentage points in 2003.

There is little empirical evidence on the relationship between undeclared work and illegal migration but it has been argued that the number of Romanians working abroad is much larger than the numbers of those who find such work through public or private employment agencies. Legal outward Romanian labour migration increased by 70% during 2003. Also, inward migration for work seems to register an upward trend. As compared with 2002, the number of foreigners granted work permits in Romania in 2004 has increased by 18%, reaching 3,396.

Law

What is the legislative framework in your country concerning undeclared work? Please include here: definition; incentives for transformation of undeclared work into regular work; sanctions and penalties; connection with the tax system and benefits; any attempts at administrative or fiscal simplifications; and any recent legislative changes.

The main regulation concerning undeclared work is law no. 130/1999 on 'some measures of protection for employed persons', which provides no explicit definition of undeclared work but outlaws such practices. The law has since been subject of many updates, including with regard to the amount of fines, which have been increased at a rate higher than inflation. The main body responsible for implementing appropriate policies and control campaigns is the Labour Inspection.

The 2003 Labour Code (RO0401107F) abolished an old type of employment, so-called 'civil convention' (conventii civile), which was considered as a way of avoiding labour taxation. It also provided for the replacement of the former individual 'work books' system of recording employment with a general register of employees. The full implementation of the latter measure has been postponed until January 2008.

In January 2004 a new Fiscal Code came into force, which unifies the previous tax legislation in a single document.

In April 2004, the employment law (law no. 76/2002) was updated and supplemented by law no. 106, which provides a set of new incentives for employers, addressing the creation of new jobs in the formal part of the economy (through employment subsidies, non-reimbursable loans and reduced social security contributions) as well as among unpaid family workers and the self-employed (by stimulating their contributions to the social security system).

Social dialogue

Please provide an overview of any collective agreements dealing with the issue of undeclared work (at any level - eg intersectoral, sectoral, company, regional). If there are any such agreements, please outline their content and, if possible, their impact, giving examples. Where possible, please provide details on collective agreements in sectors particularly affected by undeclared work, such as hotels/restaurants/catering, agriculture, domestic/personal services, retail or construction.

Please give details of any joint or unilateral initiatives on undeclared work taken by trade unions and employers’ organisations (such as information campaigns, providing training for their members responsible for negotiations, or adopting codes of conduct/ethics).

Are there cases in your country where workforce representatives have mobilised employees on the issue of undeclared work? If so, what form did this take (demonstrations, strikes etc)? Are there cases where social partners have made appeals on this issue to the public authorities (the government, elected representatives etc)? What were the results?

Undeclared work has not so far been an explicit subject of any collective agreements or other type of joint social partner initiatives.

Trade unions for a long time sought changes to the former legal framework that hindered union membership in small companies with fewer than 15 employees, where undeclared work is widespread. This was achieved in 2003 by the introduction of a new trade union law (RO0401107F). However, the results have been below expectations and trade unions are now starting to readjust their policies (RO0406102F) and placing undeclared work on the agenda.

Partnerships

Please outline any initiatives taken jointly by public authorities and social partners in order to address undeclared work, and their results. What types of partnerships exist in your country (eg involving local authorities or NGOs) and what tools or measures have been used to address the problem? Please refer to good and bad practices, indicating which policies have proved to be successful in the national context and why (such as a good mix of actors, cultural traditions or flexible tools).

Combating undeclared work is a relatively new activity in Romania and has not yet resulted in bipartite or tripartite partnerships. In 2003, the National Authority for Control (Autoritatea Nationala pentru Control, ANC) was established, with a goal of ensuring a better coordination of all control and inspection activities. There has been a clear trend to involve many control institutions in the campaigns carried on by the Labour Inspection - such as the local police, the National Authority for Consumer Protection (Autoritatea Nationala pentru Protectia Consumatorului, ANPC) and other public agencies.

A strong partnership has been developed between the National Employment Agency (Agentia Nationala pentru Ocuparea Fortei de Munca, ANOFM) and the Romanian Chamber of Commerce (Camera de Comert si Industrie a Romaniei si a Municipiului Bucuresti, CCIRB) with the aim of providing widespread support for the development of entrepreneurship by assisting the creation and growth of small businesses, and providing support for (re)entering the legal market.

Has a comprehensive partnership on undeclared work developed in the context of your country’s National Action Plans (NAPs) on employment (in response to the EU employment guidelines)? Have there been significant tripartite arrangements on undeclared work as a result or in the context of the NAPs? How have the social partners at various levels implemented the aspects of EU employment guidelines on the issue of undeclared work that are under their responsibility?

A tripartite 'social stability pact' for 2004, adopted in April 2004 (RO0406101F), sets many important economic and social strategy goals. It provides in a general way for some new kinds of partnership addressing undeclared work - twinning programmes, joint programmes with the Labour Inspection and programmes at local level. The 2004-5 NAP for employment introduces new measures to support such policies, such as: website information and consulting for small enterprises; 'e-learning' for the staff of trade unions and employers’ organisations, enhancing civic responsibility through permanent contacts with the local media; and creating a special postbox so that anyone can provide details about particular cases involving undeclared work.

Please give details of any cross-country collaborative plans involving your country with the aim of combating undeclared work? Are these inter-governmental activities (ie collaboration between two or more countries, neighbouring or otherwise) or initiatives taken by social partners, or both?

International cooperation in this field is generally conducted by the government. Many bilateral agreements addressing migrant workers, seasonal workers, repatriation, traineeships etc have been signed with both countries to which Romanians migrate and countries of origin of immigrants to Romania (Moldova, Hungary, Bulgaria, Germany, Spain, Portugal, Italy, France and Switzerland). Some of the agreements (which involve either the government itself, MMSSF or the Labour Inspection) provide only for a general collaboration, some develop common procedures to deal with 'circular' migration for work by stimulating legal migration, fighting illegal migration and supporting voluntary returns, and some establish annual quotas for legal temporary migrant workers.

The government has also signed a memorandum of understanding with the International Organisation for Migration (IOM), on cooperation in the field of assisted humanitarian returns of irregular migrants staying in Romania.

The National Trade Union Bloc (Blocul National Sindical, BNS) has been involved in supporting Romanian workers in finding a legal job abroad and even in recruiting personnel with specific qualifications.

Views

Please summarise the views of trade unions and employers’ organisations on the issue of undeclared work. Please include their positions on the role of the administrative, tax system and social welfare regime, and their view/assessment of government initiatives.

In respect of undeclared work, trade unions and employers’ organisations share a common position. They both call for a sharp reduction in labour taxation, which is considered as being by far the most important cause of the problem (RO0401106F). Stefan Varfalvi, the vice-president of the General Union of Romanian Industrialists (Uniunea Generala a Industriasilor din Romania, UGIR), argues that taxes on profits are currently a third of taxes on labour, and that a 2% reduction in social security contributions that the government intends to introduce in 2005 will not be of much help in this matter. The National Union of Romanian Employers (Uniunea Nationala a Patronilor din Romania, UNPR) has also criticised the government’s proposal to reduce the taxation rate on wages in 2005, arguing that: 'the maximum tax rate on wages is 29% in Bulgaria and it applies to wages higher than EUR 320 a month, in the Czech Republic it is 32% and it applies to wages higher than EUR 916 a month, while in Romania it will be 38% and it will apply to wages higher than EUR 365.'

Commentary

Please give your own comments on the issue of industrial relations and undeclared work.

A special circumstance in the case of Romania is the high level of employment in agriculture. In this sector, more than 3 million people work without any kind of contract - they may be self-employed, unpaid family workers, or members of an agricultural holding or a cooperative - and can barely cover their daily subsistence. This is regarded as a main source of supplying the non-agricultural part of the domestic economy with undeclared workers, as well as for illegal migration.

In non-agricultural activities, apart from people who are actually employed but without any kind of legal contract (which is most commonly encountered in small family businesses or in medium-sized companies), a large number of employees, especially in the private sector, are formally employed but are registered as receiving only the national minimum wage, while in fact being paid a much higher wage 'off the books'. The latter phenomenon is quite a common practice, which amplifies the share of the underground economy in GDP and also may be the cause of disparities between different evaluations of the scale of undeclared work. Since rights to social protection benefits are linked to contributions actually made, both kinds of undeclared workers will eventually suffer by receiving inadequate social assistance, but the lack of other means of subsistence forces people to accept unofficial jobs despite these major inconveniences.

For the time being, the main part of undeclared work in Romania involves Romanian nationals and, apart from a widespread belief that irregular emigration is much more extensive than its legal counterpart, it has also been foreseen that the immigration trend will be upward, especially as regards its illegal part. (Diana Preda, Institute of National Economy)