New legislation on minimum social insurance thresholds and registration of employment contracts
In 2003, the Bulgarian government, supported by the social partners, has introduced new measures to address two major labour market problems - employment without a signed contract, and the practice of employers paying social insurance contributions on the basis of the national minimum wage, rather than on employees' actual pay. Thus, registration of employment contracts with the National Social Security Institute is now mandatory, while minimum social insurance thresholds have been introduced, which are higher than the national minimum wage and set at different levels for specific sectors and occupations.
During recent years, two developments on the Bulgarian labour market have caused particular concern among the authorities and social partners - the use of hired labour without a signed employment contract, and the widespread practice of employers paying social insurance contributions only on the basis of the national minimum wage, rather than on employees' actual pay. The present government has recently introduced two new inter-related measures - both long demanded by trade unions - adding to the efforts of previous governments to reduce the extent of these two problems. The National Council for Tripartite Partnership (NCTP) has agreed these measures, which are: mandatory registration of employment contracts with the National Social Security Institute (NSSI); and the introduction of minimum social insurance thresholds, higher than the national minimum wage and set at different levels for the various economic sectors and the occupations.
Registration of employment contracts
Bulgarian labour legislation requires that an employment contract should be concluded in writing. Failure to comply with this requirement has been the most frequent violation of employment law over the past decade. Working with no contract whatsoever has become a widespread phenomenon on the Bulgarian labour market. The workers concerned are paid cash, with no social security contributions, and are deprived of practically all their employment rights. People working on this basis are not able to prove in court that they have ever worked - due to the lack of any written evidence - and in many cases are dismissed without being paid for their work. Furthermore, the lack of an employment contract makes the application of labour regulations impossible, which leads to adverse consequences for both parties, especially in cases of accidents at work.
Amendments made to the Labour Code at the end of 2002 have obliged employers to register with the NSSI all employment contracts concluded, amended or terminated since 2 January 2003. Under these amendments, there are two prerequisites in order for legal employment relations to arise – first, the employment contract should be drawn up in writing and, second, it should be registered at the NSSI. If one or both of these prerequisites are lacking, the employee cannot start working. Employment contracts must be registered within relatively short deadlines:
- within three days of the conclusion or amendment of an employment contract (if the amendment concerns a change of job position or the terms of the contract); and
- within seven days of the termination of a contract.
After registration and before the first day of work, the employer is obliged to give a copy of the registered contract to the employee. During the first five months of 2003, according to NSSI, these new rules have led to the registration of about 300,000 employees previously working in the 'grey' economy.
Minimum social insurance thresholds
According to NSSI data, about 1.9 million people were working on the basis of employment contracts in 2002. However, in breach of the law, for about 1.2 million of them, their employers paid social insurance contributions on the basis not of the employees' actual wage but of the (much lower) national minimum wage, and sometimes even less. This widespread phenomenon has led to many problems in the social insurance sphere. These are both: personal, in that many people are working outside the law and deprived of social insurance for the various risks; and societal, in that the social insurance funds are deprived of funds and the solidarity principle, as well as the principle of fair and free competition on the market for goods and services, is violated
In order to limit the spread of this negative phenomenon, the Bulgarian parliament amended the social insurance legislation at the beginning of 2003, following negotiations in the tripartite NCTP. The changes oblige employers to pay the social insurance contributions for their employees calculated on the latters' gross wages received. At the same time, these contributions should not be less than a new minimum monthly social insurance income (higher than the national minimum wage), established by the cabinet for particular occupations and sectors. The introduction of these minimum social insurance incomes, set by by occupation and sector, also aims to reduce the number of cases of illegal payment of higher wages. During the second half of 2002, the social partners together with the Ministry of Labour and Social Policy (MLSP) had agreed at sector level the 2003 minimum social insurance thresholds for 33 out of 48 sectors and occupations.
The most significant factors which have increasingly led many employers to seek to avoid both concluding employment contracts and paying social security contributions based on workers' real wages are as follows:
- the existence of large 'grey' economy sector, which to some extent is due to high tax and social security burdens;
- the structure of industry and the economy – the many small businesses are most frequently those where unregulated employment has spread;
- the low level of competitiveness of most businesses, which leads many to try to 'raise' their competitiveness by saving costs, including the costs of providing a safe and healthy working environment etc; and
- the ease of 'evasion' of regulations – the legislation does not provide sufficient mechanisms to prevent violations, while the control exercised by the various state institutions is inadequate to deal with the number of businesses and is not flexible enough in the light of great 'inventiveness' of the offenders.
Even though the two new measures were introduced on the government’s initiative, they were broadly discussed and supported by the representative trade unions and employers’ organisations. Their expectations are that the introduction of these two mechanisms will lead to greater social security for workers and employers and a fairer business environment. As a result of introducing minimum social insurance thresholds and the registration of employment contracts, the revenues of the social insurance funds increased by about BGN 120 million in the period up until 30 April 2003, compared with the same period in 2002, according to NSSI. At the same time, the average income on which social insurance contributions are calculated was 11% higher in the first quarter of 2003 than in the same period in 2002. (Ivan Neykov, Balkan Institute for Labour and Social Policy)