Thematic feature - industrial relations and undeclared work

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

Undeclared work is considered as a lawful activity, the income from which is not declared to the public authorities. Undeclared work can be of two different types:

• cases where an employment contract has been signed, but all or part of the wages are not paid officially. These so-called 'envelope wages' are cash and non-cash payments to workers, which are not reported to tax authorities; and

• cases where there is no employment contract and neither the employment nor the income is reported to the authorities.

According to surveys by the Estonian Institute of Economic Research (Eesti Konjunktuuriinstituut, EKI), a reduction in the amount of 'envelope wages' could add up to EEK 1.2 billion to the state budget. EKI’s surveys indicate that the share of employees who receive or have received envelope wages declined from 18% in 1999 to 13% in 2002. Some 89% of respondents did not support envelope wages. Suggested solutions included the government strengthening control mechanisms or lowering the tax burden.

Envelope wages are relatively common in sectors such as trade, construction, transportation services, and the services sector in general. For example, a survey of transport employers conducted in 2000 by the Estonian Transport and Road Workers’ Trade Unions (Eesti Transpordi- ja Teetöötajate Ametiühing, ETTA) found that 70% admitted paying envelope wages. The practice was especially common in small firms with three to five employees.

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 items of legislation relevant to undeclared work are the Taxation Act, Income Tax Act, Social Tax Act, Unemployment Insurance Act, Wages Act and Employment Contracts Act. The term 'undeclared work' is not used in the legislation, but cases where taxes are not paid are treated as undeclared work.

According to the Employment Contracts Act, all employees should have employment contracts with their employers (EE0405103F). An employment contract should be written, though an oral employment contract is allowed for employment with a duration of less than two weeks. The Wages Act regulates the remuneration of people who work under employment contracts. The wage conditions applying to employees must be determined by their employment contracts. The following deductions can be made from an employee’s wages without the consent of the employee:

• taxes established by law;

• in the event of termination of an employment contract before the end of a working year, remuneration for any leave already taken by an employee for which entitlement had not been acquired; and

• other deductions prescribed by law.

There are two employment-related taxes paid by employees:

• income tax is charged on all remuneration paid to employees or public servants, including wages and salaries, additional payments, holiday pay and compensation on termination of the employment contract or release from service. The rate of income tax is 26%;

• unemployment insurance contributions are levied on pay and other remuneration paid to employed people. The aim of this compulsory insurance is to pay benefits to employees and public servants in the event of unemployment, collective termination of employment contracts or service relationships, and insolvency of the employer. The contribution rate for insured people is currently 1% of total remuneration (it may vary between 0.5% and 2%). The supervisory board of the unemployment insurance fund proposes the rate to the government each year.

Employers must pay the following taxes in respect of employees:

• 'social tax' is levied on pay and other remuneration paid to people working under employment contracts and 'contracts of service'. The rate of social tax is 33% of taxable remuneration. The social tax funds state pensions and health insurance; and

• the employer's unemployment insurance contribution is currently 0.5% of an employee's total remuneration (it may vary between 0.25% and 1%).

Supervision of compliance with the requirements of Wages Act is provided by the Labour Inspectorate (Tööinspektsioon). Supervision of compliance with tax obligations is provided by the Tax and Customs Board (Maksu- ja Tolliamet). The Tax and Customs Board verifies the correctness of tax payments, assesses the amount of tax due if necessary, collects taxes pursuant to the procedure provided for in the Taxation Act, and applies the coercive measures permitted by law against people who violate tax law by failing to meet their obligations. If a taxable person fails to pay the necessary tax by the due date prescribed by law, that person is required to calculate and pay interest on the amount of tax outstanding by the due date. The rate of interest is 0.06% per day.

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?

There are no collective agreements dealing with the issue of undeclared work at any level in Estonia. However, central trade union and employers' organisations do conclude collective agreements on issues that relate to undeclared work. Such agreements have been signed on the national minimum wage since 1995 (EE0311101N) and, according to experts, increases in the minimum wage diminish the amount of undeclared work. Furthermore, in February 2001 the Confederation of Estonian Trade Unions (Eesti Ametiühingute Keskliit, EAKL) (EE0308101F) and the Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK) (EE0310102F) signed a bipartite agreement on unemployment insurance, another factor influencing employees’ willingness to work for 'envelope wages'.

At the sectoral level, there is an extended (ie binding on non-signatory employers and employees) collective agreement in the road transport industry, signed by the Union of Estonian Automobile Enterprises (Eesti Autoettevõtete Liit, AL) and the ETTA trade union (EE0408102F), which stipulates the conditions of payment of wages and prohibits lower remuneration for employees than laid down in the agreement

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?

In November 2003, representatives of trade unions and employers’ organisations, together with the officials from Labour Inspectorate and Tax and Customs Board, discussed the possibilities of reducing the payment of 'envelope wages' and strengthening control mechanisms on the implementation of the relevant laws and regulations (EE0312101N). The participants at the meeting stated that all parties, including the state, should make common efforts to solve the problem. During the meeting, objectives were set at the level of sectoral social partner organisations, as well as at national level. At national level, it was proposed to simplify and intensify the procedure for supervising the application of laws, and to ensure basic guarantees for all employees, regardless of the form of their employment. All parties agreed to continue cooperation and information sharing.

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.

According to Harry Taliga, the general secretary of the EAKL trade union confederation, unions have always explained to employees the importance of official employment contracts. Unions view undeclared work as harming workers, because unpaid taxes and contributions reduce the funding of the social benefits system. Trade unions believe that changes in the social insurance system will increase workers' awareness and improve the situation in the future.

According to Kadri Seeder, the manager of communications at ETTK, the employers' confederation is trying to raise the awareness of companies and fight undeclared work. According to ETTK, undeclared work could be reduced by changing the social tax contribution system (see above under 'Law'). While at present only employers pay social tax, ETTK proposes that employees should pay part of the tax. Such tax-sharing would, it is suggested, increase workers' interest in declaring their actual wages, because they would feel that they are contributing to the system.

According to experts, the problem with undeclared work is not only the lower state taxation revenue, which prevents an increase in social expenditure and thus worsens workers’ living and working conditions, but also the threat to fair competition. Those firms that ignore the prevailing standards on employment conditions and tax laws may obtain an unfair competitive advantage, as they operate with lower costs.

Commentary

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

'Envelope wages' are very common in sectors such as construction, catering and trade. Most firms in the service sector are very small and very often they use cheap labour and their workers receive undeclared wages. For example, in the construction sector competition is very acute and usually only large firms are able to meet the requirements of the contracts for major works. However, they use subcontractors, which are mainly small firms, to perform most of the work and in order to be competitive these subcontractors must keep their costs down. This often means the payment of the national minimum wage, plus envelope wages on top.

Empirical studies of 'transition countries' in central and eastern Europe have found that formal legislative measures have only a small effect on labour market behaviour. The efficiency of regulations depends on the extent to which law enforcement agencies control the implementation of legislation and punish violations.

In general, it can be said that the average standard of living has increased in Estonia, while the share of undeclared work has dropped. Arguably, the decline of envelope wages is due to general economic development rather more than to state intervention or the social partners’ involvement. (Raul Eamets and Kaia Philips, University of Tartu)