Thematic feature - industrial relations and undeclared work

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This article gives a brief overview of the industrial relations aspects of undeclared work in Poland, 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 Polish 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 'shadow economy' and undeclared work are pervasive phenomena in Poland, particularly in sectors such as commerce and repairs, hotels and restaurants, construction and real estate services. Research in this area is conducted by the Central Statistical Office for Poland, (Główny Urząd Statystyczny, GUS), although such data as are available should be regarded as estimates only.

Polish GDP in 2000 with the shadow economy factored in corresponded to 114.6% of GDP without the shadow economy; the same figure for 2001 was 114.3%, and for 2002 113.4%. Undeclared work plays a significant role. In the adjusted GDP for 2000, undeclared work accounted for 4.0% of the aggregate figure; for 2001, this value fell slightly to 3.9%; and for 2002 it remained unchanged. However data garnered from other sources puts the scale of the shadow economy and of undeclared labour in Poland at a higher level than that estimated by GUS. For instance, one recent estimate put the shadow economy’s contribution to Polish GDP in 2000 at 27.4%, and illegal workers at 20.9% of the entire workforce in 1998/9 (The size and development of shadow economies in 22 OECD countries and 21 transition countries, F Schneider, IZA Discussion Paper, No. 514).

Statistical data concerning the number of clandestine workers varies significantly depending on the research methodology relied on. In 1995 and 1998, GUS carried out module studies involving a sample of 11,000 households (another edition of this study is planned for 2004); the results put the number of 'unofficial' workers at, respectively, 2,199,000 and 1,430,000. Estimates published on an annual basis paint a somewhat different picture; they assess the number of shadow economy workers at 805,000 in 1995, 885,000 in 2000, 895,000 in 2001 and at 910,000 in 2002, which would account for some 7% of all employed persons.

Chief among the most frequently cited reasons for the wide prevalence of undeclared work in Poland is the high level of aggregate labour costs (remuneration plus all payroll taxes and other extras), which is seen as dragging down the creation of new jobs and prompting companies, particularly the small and medium-sized ones, to hire workers without registering their recruitment. There is also a marked tendency to prolong the working time of existing employees, a way of obtaining labour that is considerably less expensive than creating a new position and hiring to fill it. Furthermore, the unemployment insurance regime (based until very recently on the Act regarding combating and counteraction of unemployment) has so far provided little incentive to seek legal work; it has been more profitable to draw unemployment benefits while working in a job in the shadow economy. A recent independent study, Social diagnosis 2003, based the classification of a respondent as unemployed on an additional criterion, namely a monthly income lower than PLN 850 (at that time, the minimum monthly remuneration was PLN 800). Applying this condition, the registered unemployment rate of 19.6% in March 2003 shrank to 13.5% of the active population, with the difference deemed to comprise the 'ostensibly unemployed', who were presumed to have undisclosed additional sources of revenue.

Following the introduction, in 2003, of visas for citizens of the former Soviet Union countries arriving in Poland, the flow of economic migrants from that part of the world has abated to some extent. Nationals of the former Soviet countries nonetheless remain visible in Poland’s labour market, most particularly in the service sectors (domestic help) and in construction and agriculture - especially during the spring and summer months.

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.

Employing workers without employment contracts renders the employer liable to a number of legal consequences. The single most important statute regulating establishment of the labour relationship is the Labour Code (PL0311108F) whose Article 29 imposes an obligation to conclude a written employment contract (PL0210109F). This contract must expressly state the type of relationship and set out its terms and conditions. Article 281, meanwhile, catalogues a series of transgressions against workers' rights that are punishable by a fine; these include failure to confirm the execution of an employment contract in writing. An employer hiring workers on an informal basis can also incur penalties under other statutes, such as the Act regarding the social insurance system (for failure to make contributions on behalf of the employee - with a fine of up to PLN 5,000) or the Criminal Fiscal Code (for failure to declare a tax obligation).

An employer benefiting from unregistered labour may face a fine of up to PLN 3,000 and similar penalties may apply for failure to pay into the Labour Fund (Fundusz Pracy, which finances benefits and measures for people losing their jobs - PL0212106F). Criminal sanctions may also extend to the undeclared workers; a person engaging in gainful employment while registered as unemployed and who neglects to notify the state labour office of this fact may be fined PLN 500, and a foreign national working in Poland without the appropriate work permit may be fined PLN 1,000.

Verification of compliance with employment law is the responsibility of control and inspection bodies referred to as the 'labour police'. These, until recently, operated on the basis of the Act regarding combating and counteraction of unemployment, but now work under the legislative Act regarding promotion of employment and labour market institutions (PL0405105F). Inspection personnel, working on behalf of regional (voivodship) authorities, may carry out controls with respect to all employers, persons pursuing business activity in their own name and other institutions and individuals, in relation to their employment of Polish or foreign workers. Employment agencies are also subject to control. The regional inspection bodies cooperate with the State Labour Inspection (Państwowa Inspekcja Pracy, PIP), the police, the Social Insurance Institution (Zakład Ubezpieczeń Społecznych, ZUS), the border police, the internal revenue authorities and the social partners.

Control functions with respect to the employment relationship are also provided, on a parallel basis, by the PIP. In 2002, improprieties concerning the abovementioned legal duty to confirm the type of employment contract and its terms in writing were discovered in 17% of the employing entities inspected by PIP.

There is much to suggest that the penalties at the disposal of labour law compliance and inspection authorities are not severe enough to effectively discourage violations by employers or employees. The regional 'labour police' bodies lack the legal authority to impose fines of their own accord. PIP, for its part, chiefly resorts to fines, only sporadically referring violations for prosecution before the courts.

In recent times, there has been an intensification of legislative efforts geared at liberalising the economy, aimed in part at curtailing the shadow economy and undeclared work. Examples include the new Act on promotion of employment and labour market institutions, mentioned above, and a new Act regarding 'economic freedom'.

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?

Successive policy documents adopted by the Polish authorities make much of the need to address the issues of increasing employment and developing human resources through social dialogue, bipartite as well as tripartite, and actively to involve the social partners in labour market activities. Despite these statements, the issue of undeclared work has not so far been a focal point of social dialogue. No collective agreements are reported on the matter. It should be borne in mind that Polish trade unions do not have a very strong position beyond their traditional strongholds in larger industrial operations and the public sector - sections of the economy where undeclared employment is comparatively rare, unlike in small private companies. Employers' organisations, for their part, are increasingly seeking to eradicate the phenomena associated with the shadow economy, adopting the view that they represent a detriment and a risk to those businesses that make a point of operating legally. Another relevant development is the growth of social dialogue at regional level, in evidence since 2003. In at least some regions, non-governmental organisations representing unemployed people are becoming involved in the regional social dialogue structures (PL0307105F). Issues such as unemployment, the employment of workers from abroad or the situation in the construction industry have recently been on the agendas of some regional commissions for social dialogue.

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?

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?

Partnership to tackle undeclared employment is not included among the solutions that have so far been attempted in Poland (see previous section). Initiatives of this sort may begin to appear following adoption of the NAP for employment

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.

Employers' organisations consistently decry the shadow economy as a form of unfair competition. In terms of potential methods for decreasing its size, they are in favour of effective inducements for enterprises operating in the shadow economy to 'come out from underground'. Such inducements would include a simplified tax regime, greater 'economic freedom' (with the state dismantling licencing systems in some areas of the economy), and an improved legal environment (greater transparency and clarity of the law, reducing the discretionary element in administrative proceedings).

In this context, many employers viewed a recent harmonisation of the corporate income tax rate at 19% as a step in the right direction. By some estimates, this development prompted as many as 100,000 business entities to admit labour law and fiscal irregularities that they had committed. However, some 95% of companies operating in Poland are single-person operations, ie self-employed individuals who pay personal income tax subject to a progressive scale, rather than corporate income tax. Some hopes have been attached to the new Act regarding economic freedom, adopted in May 2004; among other provisions, it simplifies the procedures for registering new companies and reduces the number of inspections with which enterprises must reckon. On the other hand, some disquiet has been caused among small businesses by proposals for increasing mandatory social insurance contributions. They argue that if the government takes this step, it may conceivably push some businesses into the shadow economy.

Recent shifts in labour market policy, such as the enactment of new legislation regarding promotion of employment and labour market institutions (PL0405105F), have the goal of changing state labour offices (as well as other public labour market institutions) from welfare distribution outlets to dynamic centres working to restore unemployed people to employment and to motivate those drawing unemployment benefits actively to seek jobs.

Commentary

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

Undeclared work is an important element of the Polish labour market. While it is difficult to measure or assess, there is widespread agreement that the scale of the phenomenon is quite large. The main reason why people take up illegal jobs is the high level of unemployment (PL0401105F), which translates into slim chances of finding a regular job. While current brisk economic development should halt the increase in unemployment, it is unlikely that any significant reduction can be achieved in the coming few years.

It would be unreasonable to expect any dramatic reduction in the scale of undeclared work until such a time as the overall situation in the labour market has improved. At the moment, a sort of vicious circle is manifesting itself. High levels of unemployment are encouraging the growth of an underground economy that relies on unregistered labour; this amounts to unfair (by simple reason of its illegality) competition, which puts pressure on those enterprises that operate legally, paying all taxes. There is little dispute that the high incidence of undeclared work is related to Poland's high payroll taxes, including social insurance contributions and other mandatory payments. The cost of employing workers, and of taking on new workers, is high, but this in itself does not translate into bigger pay-packets for the workers themselves. Reason for optimism is provided by recent changes of fiscal policy and in the new thinking now informing labour market policies; tangible effects, however, will be some time in coming. (Jan Czarzasty, Institute of Public Affairs [Instytut Spraw Publicznych, ISP] and Warsaw School of Economics [Szkoła Główna Handlowa, SGH])

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