Government plans to regularise undeclared work

Spain has a long-term problem of undeclared work and the government recently passed new legislation to try and regularise the situation. The new plan is divided into two phases, with the first phase offering an amnesty period, free of sanctions, for employers who regularise undeclared employees before 31 July. In the second phase, existing sanctions will become more severe and new measures will be taken to encourage employers to register their workers with social security.

Background

The problem of undeclared work in Spain – where employers and workers pay no social security contributions – has been the subject of media discussion and political debate for the last few years. Several initiatives have been launched to combat undeclared work but they have led to little improvement.

The law that established sanctions against undeclared work was the Law of Infractions and Sanctions in the Social Order, enacted in 2000 by Royal Decree 5/2000. Other measures have included the establishment in 2007 of the Fraud Observatory, and the Comprehensive Plan for the Prevention of Tax, Labour and Social Security Fraud enacted in 2010.

Recent research studies estimate that undeclared work accounts for approximately 17% of gross domestic product (GDP) (Arrazola et al, 2011) and the government maintains that it is bad for both businesses and employees.

As for businesses, it generates unfair competition with companies that carry out their activities legally, and it denies employees the social insurance protection they would get if they were in regular employment, which is particularly important at a time when workers are becoming more vulnerable.

The government has also emphasised how undeclared work will make it even more difficult for the economy to recover and for public deficit goals to be fulfilled.

Measures to regulate employment

On 26 May 2011, the Spanish parliament enacted a Royal Decree (5/2011) aiming to push forward the regularisation of undeclared work. The plan will be carried out in two phases.

First phase

According to Royal Decree 5/2011, undeclared work is defined as paid work undertaken outside the social security system. It does not include other illegal activities or comprise the regularisation of working conditions in a broad sense (wages, working time and so on).

Under the new measures it will be up to employers to take the initiative to register any undeclared workers they employ with the social security authorities. Then they must sign a contract lasting at least six months, although it can be either for a fixed term or open-ended.

Businesses that follow these procedures for any undeclared employees within their workforce before 31 July 2011 will not be penalised and will not have to make any retrospective social security contributions to cover the time that employees have been working undeclared. They will only have to pay social security contributions from the point of registration onwards.

Second phase

As of 31 July 2011, new measures and sanctions will be applied to businesses employing undeclared workers. These will modify the Law of Infractions and Sanctions in the Social Order (Royal Decree 5/2000) as follows:

• there will be new obligations on all businesses to monitor the contracts of employees hired through subcontractors before they begin work. Failure to do so will now be considered a ‘serious infraction’, leading to a sanction for every undeclared worker;

• existing sanctions under the decree will become stricter;

  • ‘serious offences’ will be punished with a fine from €3,126–€6,250 for minor infractions, €6,251–€8,000 for medium offences and between €8,001 and €10,000 for major infringements. Previously the penalty applied varied from €626 to €1,250 for minor breaches, €1,251 –€3,125 for medium infractions and €3,126–€6,250 for major breaches;

  • the fines for ‘very serious offences’ will not change. They will remain at €10,001–€25,000 for minor infractions, €25,001–€100,005 for medium offences, and €100,006–€187,515 for major breaches;

• new sanctions will be linked to the financial help the government gives firms as part of its labour market policies to promote employment, such as discounts in employers’ social security contributions. Any enterprise sanctioned as a result of a very serious offence will be deprived of all such benefits for two years and, in the case of a serious offence, for one year;

• any enterprises sanctioned as a result of a serious or very serious offence will not be eligible to bid for public contracts for a period of five years.

Reaction of social partners

The most representative unions and employers’ organisations are opposed to the plan for different reasons. According to a press release (in Spanish) by the General Workers Confederation (UGT), the plan benefits employers rather than employees by not taking into consideration any time already worked and not obliging employers to repay missed social security contributions, thereby depriving such workers of the social protection rights they ought to have earned.

The Spanish Confederation of Employers’ Organisation (CEOE) and the Spanish Confederation of Small and Medium Sized Enterprises (CEPYME) argue in a press statement (in Spanish) that the plan should include measures to reduce business costs. They have also criticised the new obligations placed on businesses to monitor the contracts of employees hired by subcontractors. They believe this measure means responsibilities that ought to rest with public work inspectors will end up being shouldered by business.

Pablo Sanz De Miguel, CIREM Foundation