Thematic feature - industrial relations and undeclared work

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

According to information from Infostat (an organisation that is close to the Slovak Statistical Office), in 2001 undeclared work in Slovakia was estimated to involve about 140,000 persons, more than 5% of the workforce (the figure was estimated on the basis of a comparison between labour demand - the number of people recorded as being employed by employers - and labour supply - the number of people in work according to labour force survey sample data) (Odhad nelegálnej práce pri meraní HDP, V Hajnovičová, Infostat, Bratislava, 2003). According to a 2003 survey by the Friedrich Ebert Foundation (Friedrich Ebert Stiftung) office in Bratislava, experts estimate the volume of the 'shadow economy' in Slovakia to be much higher, at up to about 18% of GDP (Nelegálna práca v podmienkach slovenskej spoločnosti, R Bednárik, M Danihel and J Sihelský, Friedrich Ebert Stiftung, Bratislava, 2003). A more detailed picture of undeclared work is provided by information provided by 166 respondents to this survey from the public administration - taxation offices, trades departments at district authorities and labour offices. These officials indicate that tradespeople and small, rather than large, enterprises are typical users of undeclared work. The companies involved are mainly in construction, retail, tourism, hotels, restaurants and, in some cases, agriculture. A particular aspect is occasional and seasonal work mainly performed by unemployed people with a low level of qualifications, mostly aged 25-35 years (or 35-50 years). According to trade union representatives, undeclared work in construction represents about 10% of the sector's output, mainly outside large construction sites.

Levels of legal immigration are relatively low and legal immigrants usually do not participate in undeclared work. Some undeclared work is performed by foreign workers employed without work permits and without long-term residential permits allowing employment.

No official data are available on the gender breakdown of those involved in undeclared work. This breakdown probably depends on the occupations and sectors involved.

Employers are thought to be motivated to make use of undeclared work mainly by their high social security contributions in respect of their employees (amounting to 35.2% of gross earnings). Undeclared work is more common in regions with high unemployment (the unemployment rate reaches 30% in some areas, compared with an average of around 15%). The motivations for the workers involved are mainly a need to make a living and increase their income. Some employees have second jobs at weekends or in the evening, or perform additional self-employed work. Undeclared work is also encouraged by the fact about 10% of the population live on social benefits and the national average wage is low - at SKK 14,365 (EUR 360) per month in 2003.

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.

Undeclared work takes various forms and there is currently no legislation defining it precisely. Some employers employ people without employment contracts, with no tax or social insurance contributions made on their wages. Some people perform such undeclared work while registered as unemployed, others practice business activities without the relevant licence. Employees performing undeclared work lose the protection of the social security system.

Labour inspectors monitor undeclared work and companies that use it can be punished. Relatively high penalties are possible and companies can even lose their operating licences. In 2002, Act No. 95/2000 on labour inspection was amended and labour inspectors were given the right to ask for identification of all people found at employers’ workplaces. The employer is obliged to explain the reason for the presence of all such people and show relevant documents confirming the legitimacy of their employment. Current legislation does not enable labour inspectors to perform inspections of private non-commercial property where undeclared work is suspected. The labour inspectors are widely considered to be too thinly spread around the country and their control activities are often regarded as insufficient.

A relevant change was made to the Act on employment from 1 January 2003. In the framework of a general tightening of the conditions for registering as unemployed and obtaining unemployment benefit, unemployed people are now obliged to prove to the labour office that they are looking for a job every two weeks instead of once a month, as was previously the case.

Neither the taxation system nor the social protection system currently work directly to eliminate undeclared work. However, a 19% flat rate of income and profit tax, introduced in 1 January 2004, has reduced the taxation burden of entrepreneurs and self-employed people (SK0406101N). In general, the motivations to perform undeclared work - high unemployment and high social security contributions - are considered to be strong. At the same time, uncovering undeclared work is rather difficult, and the sanctions are either weak or not applied.

At present the government is preparing new legal regulations on undeclared work and illegal employment, which are awaiting submission to parliament. The draft legislation states the necessity of eliminating undeclared work, mainly in order to cut unemployment and to increase state budget revenues. Undeclared work and illegal employment are defined in the draft as work without an employment contract. The draft contains a direct ban on performing undeclared work and illegal employment, provides for inspections and lays down criminal sanctions for breaking this ban. Inspection procedures would also be strengthened.

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.

Sector- or company-level collective agreements (SK0210102F) usually do not include explicit provisions concerning issues related to undeclared work. However, certain measures aimed at preventing undeclared work are included in some collective agreement - eg the agreement for the construction sector provides that employers will inform local trade union organisations about newly hired and dismissed employees. Companies without a trade union presence (mainly those with a small workforce) and not involved in bargaining or social dialogue are thought to be likely to have a higher rate of 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).

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 have been no major initiatives on undeclared work by trade unions or employers' organisations in terms of information campaigns, training of negotiators or drafting and implementation of codes of conduct. No strikes or demonstrations inspired by undeclared work are known to have occurred.

The general view is that elimination of undeclared work is wholly in the competence of the public administration. In the abovementioned survey by the Friedrich Ebert Stiftung (see under 'Nature and extent'), experts pointed to an insufficient involvement of the business and employers' associations and municipal authorities in the fight against undeclared work. Representatives of business and employers' associations stated that they did not make great use of their influence in order to combat undeclared work. One of the reasons cited was the businesses have a low awareness of the need to undertake such activities. Other reasons, according to employers' representatives, include insufficient legislation and the attitude of some entrepreneurs that find the present situation convenient and use undeclared work themselves. In the opinion of the experts surveyed, local authorities in towns and villages make little or no use of their influence in order to combat undeclared work. Some regional administrations are not aware of their duties in this area, according to the study, and there might also be a certain fear among politicians of losing the votes of people found guilty of working unlawfully.

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).

In April 2000, the various official inspection bodies adopted an agreement on cooperation in the coordination and execution of the inspection of illegal work. The police, labour offices, taxation offices, trades departments, health and safety inspectors and municipal authorities thereby agreed to cooperate in order to uncovered undeclared work within regions. The social partners did not participate in these activities (there is no information available about the involvement of non-governmental organisations in combating undeclared work). The agreement was valid until the end of 2002. The experiences gained during its implementation were reflected in the subsequent government Decree No. 366/2001, adopting an integrated programme for the elimination of illegal work in legislative and institutional terms.

Slovakia's last tripartite 'general agreement', covering 2000, did not include any particular provisions regarding the elimination of undeclared work.

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 2003 NAP on employment (SK0401110F) gives no particular role to the social partners in terms of reducing or eliminating undeclared work, and all the relevant tasks are assigned to state administrative bodies. According to a summary report on fulfilment of the tasks set out in the 2003 NAP, the Ministry of Interior (Ministerstvo vnútra Slovenskej republiky, MV SR) conducted 16,113 inspections through its trades departments, imposing fines or revoking business licences where undeclared work was detected. The police inspected 1,844 subjects, in many cases in cooperation with labour inspectors, taxation offices, trades departments and district authorities. However, the exercise found only 31 cases of undeclared work. Labour inspectors visited up to 30,085 employers - 83 cases of undeclared work were found and 50 employers were given fines of up to SKK 5.4 million.

Generally, in 2003, the government and especially the Ministry of Labour, Social Affairs and Family (Ministerstvo práce, sociálnych vecí a rodiny Slovenskej republiky, MPSVR SR), in cooperation with the National Labour Inspectorate (Národný inšpektorát práce, NIP) (SK0311103F), taxation offices and other organisations, paid increased ongoing attention to the issue of undeclared work, resulting in several new measures (see above under 'Law').

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?

According to the information available, the there is no particular bilateral or multilateral cross-border cooperation dealing specifically with undeclared work..

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.

The social partners welcome the activities of the public authorities in tackling undeclared work, especially those of the National Labour Inspectorate, the Ministry of Interior and the control sections of the Ministry of Labour, Social Affairs and Family and Ministry of Finance (Ministerstvo financií Slovenskej republiky, MF SR). According to employers' bodies, the public administration plays a crucial role in combating undeclared work. However, they consider its operation to be in need of improvement and want more frequent and more effective controls. Trade unions too think that the effective prevention of undeclared work is mainly the public administration’s task. They consider its elimination to be important in improving working conditions and employees' wages, as those people not working legally usually have worse working conditions and are paid lower wages. In addition, they occupy jobs that registered unemployed people could fill.

The employers and trade unions' attitude to the role of the taxation system role is identical - they believe that lower taxes would weaken the incentive for employers to make use of undeclared work. The effect of the recent implementation of flat-rate taxation of incomes and company profits (see above under 'Law') cannot be evaluated yet. The employers believe that lower tax will enable them not only to invest more in developing their firms but also to reduce the amount of undeclared work. However, trade unions have criticised increases in indirect taxation (consumer tax and value added tax), which they think lower the population’s standard of living and, consequently, increase the motivation for undeclared work in order to increase family incomes.

The employers' attitude to the social security system has long been that their compulsory contributions to the insurance funds should be lowered. They thus supported recent changes made by Act No. 461/2003 on social insurance (sickness, unemployment, old age and accident insurance), which lowered their contribution rate from 39.0% to 35.2% of pay, with the expectation of further reductions in the near future. High employers' contributions may represent a strong motivation for using undeclared work. However, the trade unions have pointed out that the new Act increases employees' contributions from 12.8% to 13.4%, arguing that this might support employees' motivation to work illegally and avoid making contributions. The employers also support government reforms of the social assistance system, while the trade unions' attitude to decreasing the level of benefits and services is essentially negative (SK0406102N). However, the unions do support government measures aimed at preventing misuse of this system by people working illegally. Inefficient use of public expenditure can cause a lack of resources affecting those who really need social assistance, the unions state.

Overall, the social partners have welcomed the government's recent activities to tackle undeclared work, though they want the forthcoming new legislation to produce better results than has been the case so far.

Commentary

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

Although the volume of undeclared work in Slovakia is not great in comparative terms, its reduction and elimination is monitored continuously. The current incentives to use undeclared work are being reduced and, at the same time, controls and sanctions are being strengthened (these sanctions apply to both the employers and the workers invovled). In order to minimise the motivation to use undeclared work, the government has started to decrease the taxation burden of employers and employees. At present, rates of consumption tax and value added tax remain high, but compulsory contributions to social security funds have been markedly reduced. The government also supports the creation of new jobs, and this is likely to reduce the scope for undeclared work created by an absence of available vacant jobs. Continuous growth in wages could also weaken the motivation of the employees to work undeclared. On the other hand, this might increase the incentive for employers to use such work.

The public authorities continuously seek out and punish the use of undeclared work. At present, the sanctions are being strengthened and a new Act on illegal work and employment will be submitted to parliament soon. However, the available financial resources for labour inspection, which restrict the number of inspectors devoted to combating undeclared work, might be an obstacle to effective implementation of the new legislation. According to the available information, it can be assumed that, in terms of eliminating undeclared work, the social partners still rely more on the actions of the public authorities than on their own initiatives. (Rastislav Bednárik, Bratislava Centre for Work and Family Studies)

Useful? Interesting? Tell us what you think. Hide comments

Eurofound welcomes feedback and updates on this regulation

Add new comment