Thematic feature - industrial relations and undeclared work

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

In Latvia, undeclared work is defined as any paid activities that are lawful as regards their nature but not declared to the public authorities. In practice this means work for which payment is not registered and taxes not paid. Undeclared work is usually linked with the issue of 'under the table' wages - ie wages paid in cash without the working time and payment being recorded, and without taxes being paid.

The most common forms of undeclared work are: work performed without an employment contract for payment in cash; work performed with an employment contract, but with part of the wages (ie in excess of what is laid down in the contract and declared) paid in cash; and work performed with an employment contract, but with the employee performing unrecorded work, paid in cash, outside the hours laid down in the contract.

There has been no official assessment of the scale of undeclared work in Latvia. Estimates given in various unofficial reports vary, claiming that undeclared work makes up 15%-45% of total employment, with the scale of 'under the table' wages used as the basis for these assertions. On the basis of comparing the actual expenditure of the population with their official income, economists (according to press reports) have calculated that in 2003 some EUR 1,265 million was paid 'under the table'. The State Revenue Service (Valsts Ieņēmumu dienests, VID) states that 'under the table' payments exist, but considers that it is difficult to prove their extent. The VID made 15,000 inspections in 2003, of which 43% uncovered infringements, but only around 7%-8% resulted in the discovery of 'under the table' payments. The VID has calculated that the possible amount of 'under the table' payments is the difference between the minimum wage and officially received wages - ie EUR 153 million. These calculations were based on the idea that all employees receive at least the minimum wage and, according to official data, in 2003 some 195,000 employees received less than the minimum wage. On the other hand, the Central Statistical Bureau (Centrālā Statistikas pārvalde, CSP) reports that in October 2003 only 2,400 employees were actually paid less than the minimum wage. The social partners have differing views - some believe that the amount of 'under the table' payments cited by the VID is too high, while others consider it too low.

The Free Trade Union Confederation of Latvia (Latvijas Brīvo Arodbiedrību savienība, LBAS) has made calculations about undeclared work, based on the principle that private sector employees who receive wages that are lower than the statutory minimum wage receive the difference up to the minimum under the table. It states that there are 137,100 such employees or 22.4% of the total number of employed people (114,000 in the private sector and 23,100 in the state and local government sector). This calculation is not exact, but trades unions believe that 25% of total employment is undeclared work.

The magnitude of undeclared work differs between sectors of the economy and its prevalence is linked to company size. There are few studies on undeclared work in Latvia, but there is research on the observance of employment and labour regulations and wage rules. Indirect evidence of the prevalence of undeclared work is provided by the significant difference between wages in the public and private sectors. Based on this evidence, undeclared work is most prevalent in public sector healthcare institutions, construction, agriculture and forestry, hotels and restaurants, commercial services and retail. The prevalence of undeclared work in public sector healthcare institutions is connected with the inability of the state to provide funding for healthcare. Undeclared work is more common in small companies, and this helps to determine the prevalence of undeclared work in the various sectors. Employment and labour regulations are observed most closely in large companies and companies with strong trade unions, usually former state enterprises and enterprises with state capital.

The employment of company owners is a particular problem. Because dividends are not taxed in Latvia, owners are usually paid dividends rather than wages. However, these cases are not usually classified as undeclared work because there are no criteria for determining whether an owner actually works in his or her company or just oversees it.

The gender aspect is important insofar as there are differences in the gender structure in the sectors that are more affected by undeclared work. However, given a lack of specific research, it cannot be said that that women or men are more strongly affected.

The relationship between undeclared work and migration has not been studied in Latvia. Legal migration in Latvia is insignificant (95% of total migratory movements are within the country), so there are grounds for believing that it has no impact on undeclared work. It has been observed that undeclared work is more connected with illegal immigration, the extent of which is unknown, and with complex forms of employment (for example the conclusion of contracts between Latvian companies and foreign ones), but this form of organised employment may not be undeclared work in the home country of the foreign enterprise. The State Labour Inspectorate (Valsts Darba inspekcija, VDI), which oversees the employment of migrant 'guest workers', has uncovered numerous infringements in the forestry, agriculture, industrial, construction and sport sectors - the fields where such workers are usually employed.

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.

The legislative framework for undeclared work is provided by the Labour Law, the main item of legislation regulating individual and collective relations at work (LV0405103F). The Labour Law states that employment contracts are the basis of all lawful work. This means that working without an employment contract is a labour law infringement and is considered to be undeclared work. The Labour Law sets out norms for the observance of employment contracts and penalties for infringements of employment contracts. Tax laws and the Administrative Infringements Code are also applied to cases of undeclared work. The definition of undeclared work is as given above (under 'Nature and extent'). For workers, working without an employment contract means that they do not benefit from the guarantees provided for in employment law, such as sickness benefits, unemployment benefits, benefits in the event of work-related injury or industrial illness, pensions and maternity benefits.

Sanctions and penalties for undeclared work are provided for by the Labour Law and by the legislation on tax evasion or administrative infringements. The VID, the VDI and the Economic Police (Ekonomikas Policija) cooperate in combating 'under the table' wages and each of these bodies uses the various sanctions at their disposal. For example, during 2003, when the fight against 'under the table' payments was especially active, the following penalties were imposed for uncovered infringements: verbal warnings were issued in accordance with Article 21 of the Administrative Infringements Code; fines were levied for administrative infringements; there were almost 40 cases of property confiscation; there were several hundred cases where the VID issued warnings that business activities would be suspended if a repeat infringement were uncovered; business activities were suspended in 30 cases; and additional payments to the state budget were levied (ie unpaid taxes and penalties for tax evasion).

Undeclared work has a direct connection with the tax system and benefits, because people’ incomes are the basis of personal income tax and social contributions, and tax revenues are used to fund education, healthcare and social benefits.

No attempts at administrative or fiscal simplification aimed at preventing undeclared work have been made in Latvia. There have also been no recent legislative changes in this area.

In January 2004, the Ministry of Welfare submitted guidelines for elimination of undeclared employment to the cabinet, and stated that it was drawing up an action plan on the issue for the period 2005-9 (LV0402101N). In its new guidelines, the Ministry of Welfare plans to develop activities in several directions, notably: informing employees about their rights and the effects of undeclared work; holding a dialogue with the social partners and mass media; and increasing the number of labour inspectors and thus improving control at workplaces. Dagnija Stake, the minister of welfare, emphasised that individual workers should know that, by working without a contract and not paying taxes, they lose social protection in the event of dismissal, injury at work, occupational disease or retirement. Information about labour law and the negative after-effects of undeclared work should be provided in schools. Consequently, the three main thrusts of the Ministry's action plan are to: increase control and monitoring at workplaces; increase the capacity of the VDI; and disseminate information about labour law. The Ministry plans to establish lists of industries and activities where the risk of being illegally employed is high.

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.

Collective agreements as such do not deal directly with undeclared work issues, though their norms on pay and working time and implementation provisions are likely to assist the fight against undeclared work. However, the Free Trade Union Confederation of Latvia (LBAS) (LV0403104F) and the Latvian Employers’ Confederation (Latvijas Darba Devēju konfederācija, LDDK) have concluded a general agreement on joint action to fight undeclared work.

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).

Both the LBAS trade union confederation and LDDK employers’ confederation organise measures such as information campaigns, training for their members responsible for negotiations, and conferences.

The social partners have made regular appeals on undeclared work to the government since at least 1995. In 2001 a working group was established under the auspices of the National Tripartite Council (Nacionālās trīspusējās sadarbības padome, NTSP), which conducted a small survey on the prevalence of undeclared work, and on the basis of this a framework was created for reducing undeclared work. The framework was approved by the cabinet, but not implemented.

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?

There is no information about demonstrations, strikes and other initiatives by workforce representatives to highlight the problem of 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).

The main initiative taken jointly by public authorities and social partners in order to address undeclared work is the framework for fighting undeclared work drawn up under the auspices of the NTSP by a special working group of the social partners and approved by the cabinet (see above under 'Social dialogue'). However, the framework has not been implemented.

Trade unions inform the State Employment Agency (Nodarbinātības Valsts aģentūra, NVA) if they have suspicions about undeclared work or if they have received reports from their members. The NVA is not always able to prove the fact of undeclared work, reportedly because the workers involved do not want to reveal their actual work relationship out of fear of losing their jobs.

The main forms of partnership over undeclared work are agreements on cooperation - tripartite (between LBAS, LDDK and the government), bipartite (between LBAS and the LDDK), and between LBAS and the Union of Local and Regional Governments of Latvia (Latvijas Pašvaldību savienība, LPS). These reflect the social partners' interest in reducing the prevalence of undeclared work. However, their implementation often founders, due to the passivity of state institutions, according to commentators.

In 2003, the Doctors' Consultative Service (Ārstu konsultatīvais dienests, SIA) organised a campaign entitled Frankly speaking, colleagues, which sought to uncover the extent of undeclared work and 'under the table' wages in healthcare. The campaign included a survey on doctors’ additional (undeclared) payments, their amount and prevalence in various healthcare sectors, and their significance for the upkeep of the healthcare system. The survey results were discussed at a conference entitled Economic aspects of improving the work of doctors, organised by SIA, Riga City Council (Rīgas Dome, RD) and the Latvian Association of Medicine Practitioners (Latvijas ārstu biedrība, LĀB).

Two of the largest food retail enterprises, Kesko Food and RIMI Latvia, have launched an initiative to combat 'under the table' wages in their sector.

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?

Latvia's NAPs on employment (LV0409101N) have provided for a comprehensive partnership on undeclared work, in line with the EU employment guidelines. No special tripartite arrangement on undeclared work has been concluded, but the NTSP, which is the basis for tripartite agreements, operates within the context of the NAP and undeclared work is within its remit. However, trade unions claim that Latvia's NAP is a relatively formal document that is never fully implemented.

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?

Cross-country collaboration is provided for in the NAP, but in practice this happens through participating in joint EU events. There is no information available on any special inter-governmental activities (collaboration between two or more countries, neighboring or otherwise) or cross-border initiatives taken by social partners.

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.

Trade unions and employers’ organisations share the same views about the possibility of immediately reducing undeclared work. The LBAS union confederation and LDDK, which mainly represents large enterprises, believe that an intensive fight against undeclared work must be started immediately. The LBAS chair, Pēteris Krīgers, recently told the press that in order to reduce the prevalence of 'under the table' payments, the minimum wage must be raised and the tax-free threshold for personal income tax must be increased (LV0406101N). Both of these measures are already included in the government’s plans, and procedures for raising the minimum wage have been set (LV0408101N).

However, employers’ associations representing small enterprises - for example the Latvian Traders’ Association (Latvijas Tirgotāju asociācija, LTA) - are more guarded. They are concerned that the wage tax burden on enterprises is too great, and observance of the law could lead to mass bankruptcies. LTA states that no mechanism has not been created by the state whereby small enterprises could legalise undeclared work, though it has not indicated what such a mechanism could be.

LBAS’s motivation for fighting undeclared work is its very negative effect on that part of state and local government budgets allocated for social objectives, as well as the infringement of the rights of people working illegally. On the other hand, LDDK is motivated by a desire to fight unfair competition, since enterprises that utilise undeclared work practices can set 'dumping' prices and thereby distort the market.

LBAS believes that state institutions are not doing everything possible to restrict undeclared work. It alleges that political parties are interested in maintaining the status quo because it permits enterprises to free up funds, and that in exchange for this passivity in fighting undeclared work, companies divert some of the money saved to fund political parties. This, it is claimed, explains the fact that the government often finds excuses for the slow progress in fighting undeclared work - institutional weakness, officials being occupied by other work and so on.

However, some trades unions believe that the penalties for undeclared work practices are excessive.

Commentary

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

The causes of of undeclared work and the passivity in fighting are mainly: the economic difficulties faced by enterprises and individual; a weakness of civil society that permits tolerance by state institutions towards socially-damaging situations; and the currently unstable state social insurance system, which prompts individuals to look after themselves without taking into account the wider interest.

Reducing the prevalence of undeclared work is thus difficult because such work has the support of society. Because of the unstable social security scheme, people prefer to receive payment for their work immediately rather than paying contributions and taxes and waiting for services from the state. This widely held philosophy is boosted by the increasing requirement for people to pay for vital social services such as education and healthcare. Changes to the pension system also create mistrust toward the state as the guarantor of security in old age, and increase people's desire to take care of their own future.

However, reducing undeclared work is a concern of the government. Also, as the national economic situation improves, the individual economic activity of individuals is increasing, as people improve their living conditions, make homes and purchase real estate. These activities are connected with the use of banking services, which are not available to people on low incomes. These processes should also lead to a reduction in undeclared work.

Trade unions are facilitating the reduction of 'under the table' wages, including through an expansion of the practice of concluding collective agreements. Large enterprises that want fair competitive conditions are also fighting against such wages. (Raita Karnite, Institute of Economics, Latvian Academy of Sciences)

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