Thematic feature - industrial relations and undeclared work

This article gives a brief overview of the industrial relations aspects of undeclared work in Sweden, 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 Swedish 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).

It is very difficult to find any accurate figures or official statistics on undeclared work in Sweden, given that it occurs in the 'hidden' economy. However, in 1997 the National Audit Office (Riksrevisionen), was commissioned by the government to conduct a survey of undeclared work in Sweden, mainly based on data from anonymous personal interviews. (Reports RRV 1998: 27, 28, 29, Svart arbete). The National Tax Board (Skatteverket) has also conducted various surveys, the latest relevant one in 1998 (Fel och fusk), dealing with tax fraud and to some extent undeclared work. Some data on undeclared work in the building industry is provided in a government-commissioned survey conducted in 2002 by the Building Commission (see below under 'Law').

The National Audit Office found in 1997 that about 12% of the population aged between 18 and 74 years, or around 700,000 people, had performed some undeclared work (commonly known in Sweden as 'black work', or 'svart arbete') during the year. Undeclared work corresponded to about 5% of all work performed and about 3% of Swedish GDP (a figure put at 4.6% a year later by the Office). Those involved worked an average of five undeclared hours a week. The average yearly income from undeclared work amounted to SEK 25,000. The typical person involved was male, young, and most often a student or the owner of a small company. Some workers with regular, declared jobs also performed undeclared work. Unemployed workers did not perform undeclared work to a major extent.

It is generally estimated that undeclared work has become more widespread since the end of the 1990s.

The most common areas of undeclared work in Sweden are:

• services between friends and within families;

• household services, such as cleaning;

• handicraft work, such as painting, building, maintenance and repairs; and

• work in restaurants, hairdressers, taxi-driving and transport businesses

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 concept of undeclared work is defined by the tax legislation, which is interpreted by the tax authorities. A basic definition has been formulated by the National Audit Office (RRV 1997:59), and is deals separately with workers and companies. In short, according to this definition, undeclared work is work that is performed by workers for remuneration which the workers then do not declare to the tax authorities. In relation to companies, it means that some of their income from the business is not declared to the tax authorities. As a principle, all remuneration for work in cash, goods and services or fringe benefits must be declared.

The tax legislation concerning income from work (Inkomstskattelagen 1999:1299) and the legislation regarding violations of income tax law (Skattebrottslagen 1971:69, 1996:658) refer to undeclared work (among many other issues). If a person gives untrue information to the tax authorities he or she can be sentenced to prison for a maximum of two years. If the crime is considered as minor, fines may be imposed.

In 1998 a new authority was set up, the National Economic Crimes Bureau (Ekobrottsmyndigheten, EBM) which deals primarily with dishonesty towards creditors, tax crimes, infringements of the insider trading legislation, and crimes against the financial interests of the European Union. EBM also handles cases such as serious fraud, embezzlement and swindles that require special knowledge of financial matters, business circumstances, tax legislation and fraud relating to EU financial interests. EBM is thus a prosecuting authority that combats economic crime of a certain importance. For example, in May 2004 five people in Malmö (southern Sweden) were sentenced to prison for using undeclared work. About SEK 9 million in taxes had been evaded.

One example of EBM's work is a 'hairdressers project' carried out in Malmö in 2001-2. With EBM as the coordinator, the Swedish Hairdressers (Sveriges Frisörföretagare) employers' organisation, the Commercial Workers' Union (Handelsanställdas Förbund) trade union, the National Tax Board and the local tax authorities in Malmö received SEK 2 million from the government to conduct a pilot project against undeclared work, income and wages in the hairdressing sector. The project involved initiatives such as information campaigns and voluntary certification of bona fide hairdressers. However, only 25% of the companies concerned applied for certification. One problem is that hairdressing is a 'cash business', with clients paying cash and rarely bothering about receipts - use of a cash register was therefore a requirement for certification.

The concept of undeclared work - ie employers using undeclared workers or employees taking on additional undeclared work from their employers - is not encompassed by labour law.

Tax evasion in the building sector has been a matter of debate in recent years. In early 2002 the government ordered the Building Commission (Byggkommissionen) to investigate the issue and propose measures in areas such as preventing undeclared work (Directions 2002:24, Competition, quality and costs in the building and installation sectors). In December 2002, the Commission presented its report. It proposed a law to prevent undeclared work, in order to obtain more income tax revenue for the state. Under the proposal, a building company winning a contract for a job would pay 40% of the contract sum directly to the tax authorities, with the rest of the money set aside in a special account until any subcontractors used have paid all their taxes and other fees. The social partners in the building sector approved the proposal.

In March 2004, the Minister of Finance indicated that a bill would be presented soon, containing rules giving lead contractors more responsibility in terms of tax and other commitments. Standard taxation of restaurant owners is also being considered.

In autumn 2004, parliament will decide upon a tax deduction scheme known as the ROT. The ROT deduction may be used by owners and tenants of houses, flats etc to offset the costs of maintenance, repairs and rebuilding. The person who applies for the deduction must present proof (receipts etc) that the work has been done legitimately and been declared, and that the relevant taxes and fees have been paid, and identify the worker(s) concerned. Under the scheme, the individual's costs for repairs etc will be cut, and part of the building trade will be brought more into the legal sphere.

In late April 2004, the Swedish parliament rejected government proposals that would have limited the free movement of workers from the new EU Member States in central and eastern Europe for a two-year transitional period (SE0405103F). In the preceding debate, one of the arguments of those in favour of such transitional rules was that free movement would create unfair competition, above all in the building and transport sectors, with new entrants from low-wage countries accepting low wages and participating in tax fraud.

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.

Undeclared work is not dealt with by collective agreements in Sweden.

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).

There have not been many such social partner initiatives. One exception is the abovementioned project in the hairdressing sector in Malmö (see above under 'Law'). Another is that the Swedish Hotel and Restaurant Employers' Association (Sveriges Hotell och Restaurangföretagare, SHR) has launched a special ethics programme, in which it is stated that employers should treat employees in a fair way and that should be no undeclared work or tax evasion. The Hotel and Restaurant Workers' Union (Hotell och Restaurang Facket) and many other trade unions warn their members, especially younger ones, at the beginning of the summer casual work season not to accept undeclared work, with numerous supporting arguments.

Overall, the implicit opinion among the social partners is more or less that undeclared work is a problem for the tax authorities and the state to resolve. This attitude may change as the Swedish labour market becomes more open to workers from other EU Member States and countries outside the EU.

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?

There are no known examples of such mobilisation.

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).

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?

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?

There are very few tripartite initiatives on undeclared work - though see above (under 'Law') for the example of the recent hairdressing project in Malmö - and NAPs on employment do not seem to have prompted partnerships in this area. However there is much cooperation among the various governmental authorities in order to combat undeclared work.

The social partners are always consulted over government proposals for legislative or other change, including on issues relevant to undeclared work such as taxation.

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.

The social partners are opposed to undeclared work and seek to combat it in various ways, if not through collective bargaining. The social partners (in line with most public opinion) believe that undeclared work is unfair and hits those who are in legitimate and declared employment and pay their taxes regularly. Undeclared work is generally not a very prominent issue for trade unions at present, with one or two exceptions. For example, trade unions in the transport and building sectors are concerned about migrant workers from low-wage countries being employed in Sweden on low and undeclared pay, creating unfair competition.

Commentary

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

It was estimated in 1997 that at least 3% of Swedish GDP consisted of undeclared work. Since then, the level has increased, with the latest approximation being 4%-5%. The government has a strong desire to combat the phenomenon, and the social partners help in the areas where the problem affects their area of influence. However, there is a rooted belief that undeclared work is a tax problem rather than, for example, a collective bargaining matter.

The Finance Minister, Bosse Ringholm, told the Stockholm Chamber of Commerce on 19 November 2002 that a fair system of taxes and social contributions is the basis for the Swedish welfare system. He stated that fighting tax evasion and employers using undeclared labour is a priority for the government. Honest tax-paying employers may suffer from unfair competition and have their businesses threatened, and undeclared work must be fought alongside other forms of economic crime. This summarises well the attitude of the government. (Annika Berg, Arbetslivsinstitutet)