Thematic feature - industrial relations and undeclared work

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

There are no reliable figures available on the extent of undeclared work in Germany. According to a [document](http://www.bundesregierung.de/Anlage556701/Schattenwirtschaft in Deutschland.pdf) issued by the federal government in March 2003, it is not even possible to make serious estimates because of the very nature of undeclared work. For the same reason it is not possible to give any reliable figures on the development of undeclared work and its structure.

However, on 11 June 2004 the government issued a statement citing estimates that claim undeclared work could represent a volume of EUR 370 billion a year, which would be equivalent to 17% of German GDP. According to the same source, undeclared work in the construction industry is estimated to account for EUR 140 billion - and domestic services are estimated to account for EUR 55 billion. These figures are, however, far from being hard facts - in particular because it is difficult to distinguish between the volume of undeclared work and other activities in the so-called 'shadow' economy.

Apart from the construction industry, undeclared work is thought to be particularly common in hotels and catering, and is also found in other sectors such as transport, road haulage or cleaning.

There are no figures available on the gender dimension of undeclared work. It may be assumed, however, that undeclared work carried out by women is mostly found in sectors with traditionally high numbers of women, such as domestic services, cleaning and hotels and catering, whereas construction is still a male-dominated sector. Since the recent introduction of the 'mini-job' scheme (DE0302105F) an increasing number of marginal part-time jobs in private households have been declared to the authorities (see below) and it is thus likely that the number of women affected by undeclared work has fallen.

Undeclared work is a phenomenon that affects German citizens, other EU nationals and other migrant workers. It is not known how many of the undeclared workers are migrants with no valid work permits.

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.

There are currently about 10 different laws containing provisions affecting undeclared work. A definition of undeclared work and some provisions on which public authority is responsible for controlling and combating the various forms of undeclared work are laid down in the Act to Combat Undeclared Work (Gesetz zur Bekämpfung der Schwarzarbeit, SchwarzArbG). In this Act the definition of undeclared work covers a wide range of self-employed activities:

• working on a self-employed basis while receiving welfare or social benefits without informing the public authorities concerned;

• working on a self-employed basis without having obtained an official registration of the business; and

• working on a self-employed basis in a trade or handicraft without being enlisted in the Register of Craftworkers as required by the Handicrafts Legislation Act (Handwerksrolle, HwO).

All these offences are pursued as administrative offences and may carry a fine of up to EUR 300,000. Offences involving fiscal fraud may be prosecuted and punished by fines and even prison sentences.

Furthermore, it is unlawful to employ foreign workers without them having valid work permits (so-called 'illegal employment'), to obtain work permits by giving false data, or to subcontract employment knowing that the subcontractor employs foreigners without valid permits. Violations of these provisions may carry a fine of up to EUR 500,000. Foreign workers working without valid permits may face a fine of EUR 5,000 and expulsion. Workers who work without a valid residence permit may face a prison sentence of up to one year. In addition, the general contractor is liable for the social security contributions of a subcontracted firm.

Employers that are found guilty of illegal employment can be excluded from bidding for public construction contracts for a period of up to three years.

Employers act unlawfully if they legally employ workers but do not issue formal invoices to customers, with the intention of avoiding paying taxes.

The law exempts from the definition of illicit work the kind of assistance carried out amongst neighbours (Nachbarschaftshilfe), presumably including friends and family, work done as a favour (Gefälligkeit) and do-it-yourself jobs - so-called self-help jobs (Selbsthilfe).

Employment that does not comply with the Posted Workers Act (Arbeitnehmerentsendegesetz) (DE0306207T) and the Act on Temporary Employment (Arbeitnehmerüberlassungsgesetz, AÜG) is also considered to be illegal.

The above legal framework is soon to change. On 6 May 2004, the parliament (Bundestag), with the support of the federal coalition government of the Social Democratic Party (Sozialdemokratische Partei Deutschlands, SPD) and Alliance 90/the Greens (Bündnis 90/Die Grünen), adopted a bill to intensify the fight against undeclared work and the fiscal fraud connected with it (Gesetz zur Intensivierung der Schwarzarbeit und damit zusammenhängender Steuerhinterziehung).

The bill, as it currently stands, provides for a number of changes to the SchwarzArbG. The definition of what is undeclared work has been streamlined. Work is considered to be undeclared if:

• employers or self-employed people provide or commission work or services without declaring it to the public authorities concerned;

• anyone subject to taxation does not fulfil the fiscal duties involved in providing work or services; or

• recipients of welfare or social benefits perform work without informing the public authorities concerned.

One major change is that a breach of the obligation for self-employed people working in a trade or handicraft to be enlisted in the Register of Craftworkers will no longer be considered as undeclared work. The current exemptions from the definition of undeclared work (such as assistance amongst neighbours etc) remain in place as long as the exempted activities are not excessively and sustainably directed towards obtaining profits. In the course of preparing the new legislation, the government dropped plans to tighten the legal sanctions for the employment of undeclared workers in domestic service.

The federal customs authorities - the main control authority in cases of undeclared work and illicit employment - will be given more rights to monitor employers and employees. The customs authorities will, however, no longer be responsible for the monitoring of private households. These duties will be moved to authorities at individual federal state (Land) level.

There might, however, be some changes to the bill as the legislative process has not yet been concluded. On 11 June 2004, the Bundesrat, the second chamber of the German parliament, in which the main political opposition parties - the Christian Democratic Union (Christlich Demokratische Partei, CDU), its Bavarian associated party the Christian Social Union (Christlich Soziale Union, CSU) and the Free Democratic Party (Freie Demokratische Partei, FDP) have a majority - sent the bill to the mediation committee (Vermittlungsausschuss) between the two chambers of parliament (the Bundestag and Bundesrat). The conservative and liberal opposition particularly criticised the fact that breaches of the obligation to enlist in the Register of Craftworkers are no longer considered as falling under the heading of undeclared work. If no compromise is found by parliament, however, the Bundestag can finally pass the bill as it stands, given the majority held by SPD and Alliance 90/the Greens.

As part of its campaign to combat undeclared work, the federal government also draws attention to its legislation concerning 'mini-jobs' (ie jobs paid up to EUR 400 a month that are exempted from social security contributions). The aim of this measure is to help transform undeclared work, in particular in private households, into regular employment. In June 2004, the government declared that since the registration of such employment was made easier in April 2003 the number of officially registered mini-jobs in private households had almost quadrupled. In the 2003 National Action Plan (NAP) for employment, the government underlined its legislative efforts to make entry into self-employment easier for unemployed and employed people and also highlighted measures taken to reduce bureaucratic burdens on small enterprises and to improve their financing opportunities.

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.

There are only two minor collective agreements covering undeclared work. Both were concluded in 1996 by the Trade Union of Food, Beverages, Hotel and Catering and Allied Workers (Gewerkschaft Nahrung-Genuß-Gaststätten, NGG) and some regional employers' associations for parts of the hotel and catering sector in northern Germany. The collective agreements apply to the east Friesian islands and the small federal state of Bremen and essentially underline the legal obligation of employers and employees to pay taxes and deduct social security contributions. According to NGG, the agreements have not had any practical relevance so far.

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?

In May 2003, the Trade Union for Building, Forestry, Agriculture and the Environment (Industriegewerkschaft Bauen-Agrar-Umwelt, IG BAU) and a regional employers' association for the construction industry in Lower Saxony and Bremen (Bauindustrieverband Niedersachsen-Bremen) joined together to respond to a call from custom offices for more controls to combat undeclared work. Other joint activities in the construction sector include a local demonstration of 3,000 employees and employers held in April 2001 in the city of Kiel in the north of Germany. At this rally, a speaker for the regional employers' association declared its opposition to undeclared work and the 'wage dumping' connected with it. Employers in the building industry fear that uncontrolled competition damages the market position of those firms that 'play by the rules'.

IG BAU, the trade union for workers in the construction industry, has led the most notable unilateral activities aimed at tackling undeclared work. The trade union has been campaigning for years against undeclared work. It claims that hundred of thousands of 'regular' jobs in the industry have been lost because so many employers participate in the practice of undeclared work. IG BAU is not only in favour of tighter legislation and stricter controls but also campaigns to ensure that the agreed minimum wages in construction are actually paid. IG BAU therefore welcomed a January 2002 ruling (DE0202208F) of the European Court of Justice in favour of Germany's Posted Workers Act (DE0306207T), which ensures that posted workers in construction are not paid below the German minimum wages. In the past, IG BAU also welcomed a bill which would have obliged those companies seeking to obtain public contracts in construction and local public transport to pay their employees collectively agreed pay rates (DE0201202F). The bill, introduced by the government in December 2001, was finally rejected in July 2002 in the second chamber of parliament (DE0208201N).

In 2004, IG BAU intensified its campaign against undeclared work, not least in the light of the announcement of new legislation (see above under 'Law'). In April, the union also set up a telephone and e-mail hotline and called on the public to report any undeclared work observed on construction sites. Any relevant tip-offs would be passed on to the prosecuting authorities. This hotline received some criticism. Critics argued that this initiative would hit undocumented workers hardest - already the most vulnerable group in the labour market - and that the hotline would encourage denunciations. In response to this criticism, IG BAU argued that it was acting in defence of collectively agreed and legal minimum standards in the industry and seeking to tackle those employers that exploit workers by not paying proper wage rates and not paying tax or making social security contributions.

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?

There have been no tripartite activities between the government and the collective bargaining parties dealing with the issue of undeclared work, nor have such tripartite activities on undeclared work developed in the context of the German NAP for employment.

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?

The government has entered into an administrative agreement with France to combat illicit employment and has announced further bilateral agreements with other neighbouring countries.

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.

On 19 March 2003, in the run-up to the new legislation on undeclared work (see above under 'Law'), the Confederation of German Employers’ Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA) and the German Association of Chambers of Industry and Commerce (Deutscher Industrie und Handelskammertag, DIHK) issued a [statement](http://www.bda-online.de/www/bdaonline.nsf/id/19F7649EC7388CC2C1256E6600316000/$file/1_5_ Anhang-Stellungnahme_ BDA_DIHK_Schwarzarbeitsg.pdf), in which they argued that the main causes for the increase of undeclared work in Germany are high taxes and social security contributions. They argued that the provisions of the German tax system were too complicated and bureaucratic, thus giving a further incentive to enter into illegal employment. The two associations therefore called for a simplification of the business environment and a deregulation of the labour market. Furthermore, they demanded an increase in the pay threshold for the definition of 'mini-jobs' (which are exempt from social security contributions), from EUR 400 to EUR 600 per month. BDA and DIHK also argued against an increase in administrative fines related to undeclared work, as it had not been proved that these measures lead to a reduction in the extent of such work.

The Central Association of the German Building Trades (Zentralverband des deutschen Baugewerbes, ZDB) issued a statement on legislative measures against undeclared work in 2002 and expressed its concern about the introduction of a law making the general contractor liable for breaches of law committed by subcontractors. In a more recent statement made in spring 2004, ZDB stated that it agreed with the IG BAU trade union about the need for concerted action to combat undeclared work and to enforce the minimum wage.

In March 2004, the Confederation of German Trade Unions (Deutscher Gewerkschaftsbund, DGB) issued a statement welcoming the new bill on undeclared work. With regard to the volume of undeclared work, DGB emphasised the responsibility of employers and contractors to declare all of the work that is actually carried out. In addition, DGB expressed the belief that, besides tighter controls and enforcement of the law, it is necessary to extend collectively agreed minimum wages to other sectors by way of decree - as has been done in the construction industry - to lessen wage competition and enable better controls of minimum standards. With regard to the bill, DGB expressed concern that the new definitions of undeclared work were not precise enough and allowed too many exemptions. IG BAU and NGG presented a similar argument.

In 2002, with regard to the new provisions on 'mini-jobs', the national women's conference of the United Services Union (Vereinte Dienstleistungsgewerkschaft, ver.di) stated that legalising undeclared work was not a substitute for a job with full social insurance coverage. The union welcomed the government's plan to tackle undeclared work but criticised the introduction of the 'mini-job' because this kind of jobs would not help women to acquire full social security coverage.

Commentary

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

It is unlikely that we shall see any reduction in undeclared work in the near future. There are many reasons for this kind of work and the motives vary. For some employers, it will remain an option because they then have cheap labour at their disposal even if this involves breaches of the law. In addition, for some workers undeclared work is the only way to make a living due to the lack of enough regular and sufficiently paid jobs. The wage gap amongst the European countries - not to mention between some countries in the so-called third world and Germany - together with a lack of jobs in the domestic labour market, will remain a strong incentive for migration. Within Germany, the lack of opportunities on the regular labour market will also further motivate people to look for jobs in the informal economy. For some people undeclared work will remain a survival strategy.

For trade unions, undeclared work is unacceptable in so far as it tends to undermine collectively agreed or legal standards of pay and employment conditions. Deregulating the labour market would only accelerate the downward spiral of wages and conditions. The challenge for trade unions, especially in the construction industry, is how to tackle those employers that do not honour the collective agreements and legal standards and benefit from undeclared work, while at the same time avoiding entering into 'unsolidaristic' conflicts amongst workers. There are no easy answers to this. (Heiner Dribbusch, Institute for Economic and Social Research, WSI)