Thematic feature - industrial relations and undeclared work

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

The phenomenon of undeclared work - within the wider context of the informal or 'shadow' economy - started to receive attention in Hungary in the late 1970s. The size of the shadow economy grew over the 1980s and exploded in the wake of the economic crisis of the late 1980s and early 1990s, following the transition to a market economy. According to estimates by Mária Laczkó, the size of the shadow economy grew from 18% of GDP in 1987 to 34% of GDP in 1990. Another estimation by Ildikó Ékes concluded that in 1991 informal incomes generated in the shadow economy reached 23% to 24% of GDP. Estimates suggest that the size of the informal economy did not change in the 1990s, and is still likely to be as great as 25% to 35% of GDP. This figure is higher than that generally found in the 15 pre-May 2004 'old' EU Member States, whose informal economies are thought to range between 7% and 16% of their respective GDPs.

According to a survey conducted by ECOSTAT in 2002, about one third of Hungarian households reported that members of that household performed undeclared work. Another ECOSTAT survey of undertakings in 2003 reported that 58% of the undertakings interviewed were aware of the existence of undeclared work in their sectors. As far as different forms of undeclared work are concerned, 30% of undertakings used various forms of undeclared work, 20% used services provided by other companies without invoices, and 17% mentioned certain forms of tax evasion, such as the use of non-declared overtime or paying minimum wages officially while in reality paying higher wages undeclared. Another survey, conducted by Endre Sik, found that in 1999 some 62% of local governments were aware of the widespread existence of undeclared work. Typically, the eastern and southern regions of Hungary have a higher level of undeclared work than western Hungary. Households including younger people and having higher unemployment levels have a higher propensity to undeclared work. The most affected sectors are agriculture, construction and services.

A two-day central inspection campaign by the Labour Inspectorate (Országos Munkabiztonsági és Munkaügyi Felügyelet, OMMF) in 2003 found that about 20% of the inspected agricultural enterprises employed people in violation of the relevant legal regulations. The inspections highlighted the widespread illegal employment of migrant workers from neighbouring countries, such as Romania. A two-day inspection campaign in restaurants and bars found that 50% of inspected undertakings employed people in violation of legal regulations, although only 5% of the undertakings employed people without an employment contract. The use of various forms of undeclared work is especially widespread among small and medium-sized enterprises. There is a significant level of illegal employment of people from the Roma community, who participate very little in the formal labour market - partly due to structural and educational mismatches and partly due to widespread discrimination. Roma people mostly work in low-paid jobs in industries that employ a large casual and unskilled workforce, such as construction and agriculture.

Most recently, the June 2004 draft version of Hungary's National Action Plan (NAP) on employment estimated that about half a million people are performing undeclared work, which means that about 15% to 20% of employees are not reported to the tax authorities and to statistical services.

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.

In recent years, the widespread use of undeclared work has become a major issue in political debate. Several measures have been taken to reduce the level of undeclared work. In 2001, the new Labour Code extended the list of formal criteria concerning employment contracts. Most importantly, employment contracts must now be in written form and include certain elements, such as the amount of the basic wage, a job description and the location of the work.

While illegal employment on a 'double contract'- a formal contract providing for pay at the national minimum wage and an informal contract reflecting actual pay - was widespread in the early 1990s, the late 1990s increasingly saw a new trend towards 'bogus' civil law contracts - these are contracts not governed by labour law, whereby a client commissions, for example, a lawyer or a builder for a specific task (see below). Instead of an employment contract, undertakings also conclude service contracts for 'employment-like work' with self-employed people acting as micro-enterprises, who are in fact in a position of dependent employment ( 'forced entrepreneurs'). Given that employment attracts a considerable tax and social security contribution burden, and that there is a lower tax and social security payment regime for enterprises, it is the short-term interest of both employers and employees to evade employment contracts. Additionally, employers gain important flexibility advantages in using informal agreements or civil contracts instead of employment contracts.

The role of the Labour Inspectorate (OMMF) is of primary importance in fighting undeclared work. It can inspect undertakings, especially concerning compliance with employment law. When a breach of regulations is discovered, OMMF can call on the employer to observe the legal rules governing employment relationships. In more serious cases, OMMF can serve the employer with an order to stop illegal practices; it can also prohibit further employment if the breach of law is very serious or lawful practices cannot be reinstated. In cases of illegal employment of non-residents (migrant workers), OMMF can fine the employer. In cases of undeclared employment of an unemployed person, it can request the suspension or even the termination of the payment of unemployment benefits to the unemployed person concerned. It can request that a fine, of between HUF 50,000 (approx. EUR 200) and HUF 1,000,000 (approx. EUR 4,000), be levied on the employer. Finally, it can start 'transgression' procedures. The major practical problem for the Labour Inspector is poor staffing. It can inspect no more than 3% to 5% of undertakings each year, and its reach is thus fairly limited.

One of the major components of undeclared work is tax evasion. Legal regulations authorize the State Tax and Control Office (Adó és Pénzügyi Ellenörzési Hivatal, APEH) to investigate the nature of contracts, and if it finds that a civil contract is being used instead of an employment contract it can require the establishment of an employment contract and modify accordingly the tax obligations of the undertaking and the employee. However, this option is practically never used by APEH.

An important role of labour courts (HU0403101T) is to investigate and establish the real nature of contracts at work and modify the contract between the parties where necessary. Nonetheless, there is so far no unified pattern of decision-making by the courts concerning these cases. This hinders the reduction of undeclared work.

Recent years have seen various efforts on behalf of the authorities and legislator to increase the effectiveness of the fight against undeclared work. In July 2003, in an attempt to reduce the number of people performing work on the basis of 'sham' civil law contracts - ie contracts not governed by labour law (HU0310102F) - the government amended the Labour Code. Furthermore, a new Unified Labour Register (known as EMMA) came into operation in on 1 May 2004. All employers must now register new employees before they start work and provide information on matters such as pay rates and working hours. The idea underlying the new system is to make the labour market more transparent by making relevant data accessible to employers, employees and the authorities (HU0406101N).

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?

Collective bargaining hardly deals with issues related to undeclared work as such. The decentralised nature of Hungarian collective bargaining (HU0401103F), the weak administrative capacities of employers’ associations and trade unions at the sectoral and national level and their highly fragmented nature inhibit any major joint action to combat undeclared work. Nonetheless, in several sectors, most importantly in baking, the food industry and the construction industry, the main employers’ associations and trade unions have initiated joint efforts to reduce undeclared work and, among other aims, improve health and safety standards. In these industries, the main employers’ associations are aware of the negative impact of using undeclared work on the competitiveness of the industry and thus are seeking cooperation with unions to combat it. Those involved hope that the consolidation of sectoral collective bargaining through recently established sector-level bipartite social dialogue forums (HU0212106F), and the extension of voluntary multi-employer collective agreements, will open new opportunities for joint regulation and effective joint institutions to reduce undeclared work.

Within the framework of the tripartite National Interest Reconciliation Council (Országos Érdekegyeztető Tanács, OÉT) (HU0209101N), national-level trade union confederations and employers’ associations have on several occasions called for legislation on more effective measures to combat undeclared work. Furthermore, employers’ associations and trade unions share a view that reduction of taxation on employment will have a positive impact and encourage employers and employees not to evade contractual employment relationships. Recent legislative changes (see above under 'Law') are partly based on recommendations by the social partners. However, there has been no mobilisation of their rank-and-file members to combat undeclared work.

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).

As outlined above (under 'Social dialogue'), the major joint efforts in this area are taking place at the national level and are aimed at improving the regulatory environment.

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?

The draft version of the Hungarian NAP on employment, published in June 2004, deals extensively with the problem of undeclared work. It plans to increase the staffing of OMMF by 30% in order to enable it to perform more effective inspection activities. The NAP forecasts a further decrease of taxation on employment in order to lessen incentives for evading employment contracts. The Plan includes further flexibilisation of the Labour Code's rules in order to reduce the incentives for employers to avoid employing workers in relationships that fall within the framework of the Code. Further, the tax burdens relating to the various forms of contractual relations will be compared in order to prepare a reform aimed at narrowing the differences between them. In the context of a reform of welfare services, there are plans to reinforce the relationship between contributions to social security funds and the right to benefits from these funds (ie reinforcement of the insurance principle). The NAP also highlights the importance of raising the awareness of citizens concerning compliance with the law.

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.

Both trade unions and employers’ associations take the view that the widespread use of undeclared work is a obstacle to the further development of Hungary. Undeclared work is in many cases interlinked with low health and safety standards, and lack of training and continued training, which hinder the long-term development of the 'human infrastructure'. Employers’ associations representing major companies are especially concerned about the impact on fair competition of the widespread use of undeclared work by small and medium-sized enterprise, and its negative impact on the technological upgrading of the production infrastructure. Also see above under 'Social dialogue'.

Commentary

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

The widespread use of undeclared work in the early 1990s certainly made it easier to overcome the economic crisis of the transition from the former system. Nonetheless, the very high level of undeclared work, and the size of the shadow economy in general, is an increasing concern and represents a 'trap' that hinders the further upgrading of both the production and the human infrastructure. The social partners and the government are seeking a balance between maintaining welfare services while reducing the taxation level on economic activities, which requires extension of the tax-paying base by reducing undeclared work. The widespread occurrence of undeclared work has a negative effect on the overall tendency to abide by the law in Hungary. The extent of undeclared work and the pressing short-term interests in maintaining this informal and cheap way of using labour are major obstacles to the development and the implementation of a coherent national policy. Further measures must be taken to develop more cohesive legal regulations and a greater implementation capacity among public authorities. The uneven state of regional and sectoral development and the widespread informal employment of migrant workers also highlight the need for more decentralised, regional, local and sectoral policies and for more cooperation between local authorities and local social and civil partners. The latter development requires reinforcement of the regional, sectoral and local bodies of the social partners. (András Tóth and László Neumann, Institute of Political Science, Hungarian Academy of Science)

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