New law seeks to regulariseirregular work

Source: Istat.

Recent estimates from the International Monetary Fund indicate that the irregular economy makes up 27% of Italian GDP, compared with a European average of 15%.

Previous attempts at regulation

Irregular employment has been an issue for social and political dialogue in Italy for some time. During the 1980s, a 'gradual alignment agreements' scheme was developed by the social partners to enable businesses operating in the irregular economy gradually to adapt to the pay and conditions set out in sectoral collective agreements and thus enter the legitimate economy (IT9706207F). The scheme concerned mainly small and medium-sized enterprises located in the South of Italy, or Mezzogiorno (IT9903244F).

Law No. 448/98 of 1998 established, under the auspices of the cabinet, a 'committee for the emergence of the underground economy' with the task of analysing and coordinating regularisation initiatives. At the same time, regional and provincial committees for the emergence of the 'underground' economy were set up with the tasks of analysis, promoting agreements and providing assistance. These committees are each composed of 15 members: seven appointed by the public administrations and eight appointed jointly by the most representative trade union and employers' organisations.

Law No. 448/98 also provided for administrative and economic sanctions against companies which do not respect legal provisions regulating economic activities and employment.

The 1998 law extended the joint approach to the fight against irregular employment already adopted by the alignment agreements. This joint approach meant that the entire regularisation process was supported and promoted, within the limits set by the law, by negotiations between the social partners and institutions at local level.

New measures

In October 2001, the new centre-right government modified the prevailing approach to the problem and developed new instruments to combat irregular work, based on automatic mechanisms and on tax and contribution incentives (IT0109302F). Law No. 383/01 of 2001 thus introduced new rules for companies which intend to regularise their activities. However, since this law came into force, only 150 companies, employing a few hundred workers, have so far sought to regularise their situation.

As a result, on 25 April 2002, the government approved law No. 73/01 of 2002, which integrates and amends part of law No. 383/01 and introduces an 'automatic emergence procedure', plus an agreed and progressive procedure through which employers can also regularise other kind of irregularities. Under the new rules, an employer wishing to regularise its situation can now choose between two procedures, as follows.

Automatic emergence procedure

Employers which want to regularise their situation and that of their employees must submit, before 30 November 2002, a 'declaration of emergence' to the Interministerial Committee for Economic Planning (Comitato Interministeriale per la Programmazione Economica,, Cipe) which will decide whether or not to approve the request, having heard the views of the relevant sectoral trade union and employers' organisations.

'Automatic emergence' provides for two separate regularisation procedures. The first concerns the three years following regularisation (ie 2002-4) and the second concerns earlier years.

Three-year period following regularisation

Employers will benefit from tax incentives during the three-year period following regularisation. Personal income tax (Imposta sul reddito delle persone fisiche, Irpef) and corporate income tax (Imposta sul reddito delle persone giuridiche, Irpeg) will be the only taxes levied on the increased taxable income resulting from the employer's regularised situation. Tax rates will increase progressively from 10% in the first year (2002) to 15% in the second year (2003) and 20% in the third year (2004). After 2004, company taxation will the same as provided for by the normal legislation.

Employers' obligatory social security contributions will be calculated on the increased income resulting from regularisation and will increase from 7% in the first year to 9% in the second and 11% in the third. Insurance premia for accidents at work, paid to the National Institute for Industrial Accident Insurance (Istituto Nazionale Assicurazione Infortuni sul Lavoro, Inail), will be subject to a reduction of 75% during the first year, 70% during the second year and 65% during the third year.

Sanctions for breaches of the value added tax (Imposta sul valore aggiunto, Iva) regulations will not be applied, provided that these taxes are paid by the annual due date.

The workers involved in the emergence programme will have to regularise their tax situations, paying a contribution equivalent to 6%, 8% and 10% (respectively for the first, second and third years) of their annual incomes. During the three-year emergence period, they will not have to pay social security and insurance contributions.

Earlier years

Employers, on request, will be able to use their 'declaration of emergence' as a tax and contribution agreement with the public administration, enabling them to regularise retrospectively their position over previous years, as regards both taxes and possible penal sanctions arising from past breaches of the law. Employers will have to:

• declare the total cost of irregular labour used in the past; and

• make a comprehensive tax payment - for personal and corporate income tax, Irap regional tax, VAT, social security contributions and insurance premia - equal to 8% of the value of the irregular labour declared for each year. If the payment is made in one amount, the employers will benefit from a 25% reduction - otherwise it will be possible to pay by instalments without interest.

Workers involved in the emergence programme may regularise their previous situation by:

• paying off tax and social security debts at a rate of EUR 103.29 for each past year that they intend to regularise; and

• regularising their social security position through voluntary contributions. The 'fund for the emergence of underground economy' (set up by law to support regularisation of the clandestine economy) will be able to receive workers' contributions of up to 66% of the employers' contribution. Workers will be able to regularise no more than five years of past irregular work. The 'reconstruction' of the workers' past social security position will be gradual and proportional to the work performed after emergence - workers will be able to recover a contribution period of 20 months for each 12 months worked after emergence.

The workers involved in this regularisation programme will have to sign a 'conciliation agreement' (atto di conciliazione) which will start the employment relationship anew. From that moment on, the workers will be entitled to the full application of the pay and employment conditions provided for by relevant national sectoral collective agreements.

'Regularised' employees will not be considered, during the three years following regularisation, as part of the company's personnel for the purpose of minimum workforce-size thresholds laid down by law and by national collective agreements for the application of certain provisions (including trade union rights), though excluding those related to dismissal.

Individual emergence programmes

Employers wishing to rectify other irregularities, other than those relating to taxes and social contributions, may submit, before 30 September 2002, an 'individual emergence plan' to the mayor of their local authority. The anonymity of the employer concerned will be guaranteed. In the plan, the employer must indicate the number of workers that it intends to regularise and their current remuneration, and may set out a proposal for a gradual alignment of their pay and conditions with the relevant national sectoral collective agreements.

The mayor will decide whether or not to approve the plan within 45 days of submission. If the plan includes gradual alignment of pay and conditions with the provisions of national collective agreements, the mayor will have to submit the proposal for approval to the provincial or regional emergence committee (see above). Once the plan has been approved, the employer must present a declaration of emergence to the national Cipe committee before 30 November 2002 and must also follow the automatic emergence procedures (see above).

As well as providing incentives for regularisation, the new law also introduces more severe sanctions. In addition to the sanctions already in force, the law introduces a fine on employers which make use of irregular work, varying from 200% to 400% of the total labour costs for each worker concerned - calculated on the basis of the relevant national collective agreement - for the period between the beginning of the year and the detection of the violation.

Under the new law, Cipe will be responsible for developing an 'extraordinary' plan aimed at defining the priorities for intervention, which will be coordinated and integrated by the appointed surveillance bodies. The Minister of the Economy will assess annually the results of the emergence process after having consulted sectoral social partner organisations.

Reactions

Trade unions had called for a radical change of tack in the fight against the underground economy, in the light of the initial lack of success of law No. 383/01, and have made many criticisms of the latest legislation. The main criticisms concern the marginal role granted to trade unions in the emergence process and the possibility provided for by the law of excluding 'regularised' workers, for three years, from the workforce-size thresholds for the application of various aspects of labour law (eg, if a provision applies only to companies with 15 or more employees, workers undergoing regularisation are not counted towards this total). According to Raffaele Bonanni, the confederal secretary of the Italian Confederation of Workers' Unions (Confederazione Italiana Sindacati Lavoratori, Cisl), this latter provision 'will allow companies with fewer than 15 employees to regularise their situation without applying for three years the rules on trade union activities provided for by the Workers' Statute as regards meetings, trade union leave and transfers, which are constitutionally guaranteed rights'.

According to some observers and researchers, the government's new measures do not seem appropriate to eradicate the problem of the clandestine economy. There are various objections. First of all, the government has acted in this area at a time when it is under pressure because of a growing public expenditure imbalance, as a result of which Italy is not succeeding in respecting the parameters set by the EU Economic and Monetary Union 'stability pact'. The government has thus decided to adopt 'one-off' measures to increase public revenues, including the new provisions on the underground economy.

However, this need, according to the critics, is not consistent with the problems linked to emergence from the underground economy. According to Luca Meldolesi, president of the committee for the emergence of irregular work and one of the main Italian experts on the subject, many employers 'do not like to sign emergence declarations ... Many employers, instead of denouncing themselves, prefer making recourse to other forms of regularisation such as shifting irregular manufacturing outside the firm or abroad, or closing and reopening companies with another registered name, thereby benefiting from incentives provided for companies.'

Commentary

Attempts to regularise companies operating in the underground economy through tax and contribution incentives are problematic. This kind of incentive reduces for a certain period of time the business costs of the employers concerned, but the decision to use irregular labour does not depend only upon costs. Many companies operate in the underground economy because they are not able to compete with other companies in terms of quality, innovation and marketing and they thus prefer to operate as irregular companies and not only as companies which use irregular workers.

The possibility of such companies regularising their situations and acquiring a sound position on the market depends upon their capacity to strengthen their business structure, their competitiveness and their managerial and professional competences. The government's measures, which are exclusively centred on costs, ignore these structural issues linked to company regularisation. It is important to introduce, together with tax and contribution incentives, policies capable of supporting entrepreneurs through providing services to companies which can support business consolidation and development.

The government's measures are inspired by a logic which entrusts employers and workers with the promotion of emergence from the undergound economy. The process of regularisation can be triggered only by the workers concerned. Considerable research indicates that, especially in the Mezzogiorno regions where high level of irregular work coincide with the highest unemployment levels, irregular work is the only source of employment for many unemployed. Between these irregular workers and the employers there is a mutually convenient relationship which seriously reduces workers' freedom. In many cases, these workers have protected the employers by hiding the evidence of irregularities.

The government seems to ignore the fact that, in the majority of the cases, the main beneficiaries or irregular work are companies based in the North of the country. In the fashion sector in particular, many companies use irregular suppliers which in turn work with irregular companies. Part of the Italian supply-chain is composed of irregular companies. A measure aimed at certifying suppliers, including from the ethical point of view, would be advisable in order drastically to reduce the recourse to irregular work. Certification could be entrusted to joint structures, companies and trade unions. They would be able to develop genuine company emergence plans to allow companies to regularise their situation and to operate on the market. in a stable, competitive and regular way.

The government measures are mainly focused on labour issues and ignore the complexity of the problem. This approach neglects the social responsibility of employers, which should also be interested in avoiding the distortions of the competition implied by irregular work and the underground economy, and reduces the role of trade union organisations in local emergence processes.

The lack of progress achieved so far by the October 2001 and April 2002 legislation shows the difficulties in achieving the objectives set out by the government. (Domenico Paparella and Vilma Rinolfi, Cesos)