Economically dependent workers in Estonia
In Estonia, the use of economically dependent work is increasing, particularly in certain sectors of the economy, such as construction. As a new Employment Contracts Act is currently being drafted, the debate focuses on why employers seem to prefer contracting self-employed persons instead of employees, and which legal changes are required to encourage employers to use standard employment contracts.
The boundaries between dependent employment and self-employment have increasingly become blurred in some sectors in recent years, in a context of changing labour markets and the spread of practices such as outsourcing and contracting-out. This process has led to a growing interest in ‘economically dependent workers’ – workers who are formally self-employed but depend on a single employer for their income.
Certain employment arrangements in Estonia could be classified as economically dependent employment. Those in this type of employment are self-employed persons who are dependent on one employer for their income, and their roles are not clearly distinguishable from employees. These workers can be self-employed persons who were previously employees of the same employer or who simply replace existing employees.
All persons registering themselves as self-employed are treated the same, with no specific category for economically dependent workers. If a person is working as self-employed, they are considered to be entrepreneurs, and therefore their situation is different from that of a regular employee. The main differences are that self-employed persons must file and pay their taxes, including social and income tax, which are normally filed and paid by the employer for the regular employee. However, self-employed persons can deduct many of their expenses from their income; the remaining income can be substantially less so the tax contributions are not as high as they would be if this person were a regular employee. This is also beneficial for an employer who uses self-employed persons, as the labour costs are reduced. At the same time, self-employed persons lose out on benefits that are connected to social tax contributions, such as parental benefits and old-age retirement pension. Moreover, self-employed persons in Estonia are not covered by the unemployment insurance system which is obligatory for employees.
Different acts that regulate an employee’s working conditions do not apply to self-employed persons, for example the Republic of Estonia Employment Contracts Act, the Holidays Act, the Working and Rest Time Act. In theory, self-employed persons regulate their working time and vacations themselves; their contracts are not legally protected and can be terminated without advance notice periods and also without redundancy benefits.
A recent amendment to the Occupational Health and Safety Act has meant that self-employed persons must abide by this act, and are obliged to implement certain health and safety measures.
There is some evidence to suggest that the use of economically dependent workers is growing. The media have touched on this type of employment arrangement, particularly with regard to those working in postal services, taxi-driving and the construction sector.
According to the Employment Contracts Act, an employee is a person who undertakes to do work for the employer in subordination to the management and supervision of the employer, while the employer undertakes to remunerate the employee for such work and to provide the working conditions prescribed in the agreement between the parties, a collective agreement, law or administrative legislation. The decision as to whether the employment contract should be concluded, as in whether a person can be considered an employee, is dependent on the answers to the following questions:
- Who owns the work equipment?
- Who determines the place and time of working?
- Who bears the entrepreneurial risks of the work, that is, who bears the losses?
- Is the worker a member of staff?
- Is the worker obliged to follow internal work procedure rules?
A new Employment Contracts Act is currently being developed (EE0309101N; EE0405103F;EE0604029I); the present version, which has been in effect since 1993, is considered too old and outdated. The Ministry of Social Affairs (Sotsiaalministeerium) considers it necessary to bring more flexibility into contractual relations in employment. The new act will provide employees and employers with greater freedom to negotiate and agree on issues in relation to the employment relationship than is currently possible.
The Estonian Employer Confederation (Eesti Tööandjate Keskliit, ETTK) has pointed out that employment legislation needs to provide for greater flexibility. Inflexible employment laws seem to encourage employers to use self-employed persons instead of concluding employment contracts.
In 2006, the Tax and Customs Board (Maksu- ja Tolliamet) took measures to distinguish the actual self-employed from economically dependent workers. According to the Manager of the control unit in the Tax and Customs Board, Egon Veermäe, a service contract is not consistent with its content when a self-employed person continues to work under the control of a single employer. In such a case, the Taxation Act (Maksukorralduse seadus) gives the tax authority the right to regard the business income of that self-employed person as an employee income. Basically, the Tax and Customs Board can decide to treat the incomes of economically dependent workers as salaries and not as business gains; therefore, they will be taxed accordingly. Consequently, no deductions that are typical for business gains can be made from the incomes of this type of self-employed person. In addition, the employer may end up having to pay the obligatory social tax contributions for the self-employed person (EE0611029I).
In October 2006, some 1,700 self-employed persons could be classified as economically dependent workers, according to the Tax and Customs Board. To date, no detailed data are available on this type of worker.
However, some information on the total number of self-employed persons can be presented. In 2004, the Tax and Customs Board recorded about 50,000 economically active self-employed persons, who declared gross earnings for the same year. The total number of registered self-employed persons in 2004 was approximately 75,000 people. Around 30% of these workers were active in agriculture, a sector in which the large-scale use of economically dependent employment is unlikely.
According to the Tax and Customs Board, a further 7,000 people registered themselves as self-employed between January and September 2006. In 2004, this number stood at 2,894 people who registered as self-employed over the same period.
Looking at the years 2002–2004, the most important growth in self-employment occurred in the construction sector, where the number of self-employed persons increased from 1,420 people to 2,215. This sudden increase of over 50% in self-employment could indicate some trends of forced self-employment in this sector, as overall growth of economically active self-employed persons was about 17% over the same period. Underlining this point, the entrepreneurship consultant Olavi Kärsna claimed in the daily newspaper Postimees that many construction workers were compelled to become self-employed. At the same time, there was also a general growth of the sector.
There have not been any studies on economically dependent workers in Estonia.
Legislative regulation and proposals
No specific regulations currently pertain to economically dependent workers; the legislation covers all self-employed persons equally.
However, due to the increasing number of self-employed persons who work together with other workers – under supervision and in an employer-created environment – an amendment of the Occupational Health and Safety Act (Töötervishoiu ja tööohutuse seadus) was passed in parliament (Riigikogu) at the end of 2006. Previously, accidents affecting self-employed persons were registered as domestic accidents, even though these may have happened while working. With the new legislation in place, accidents befalling self-employed persons will be investigated as work accidents, but only in a situation where the self-employed person is working together with other people. In this case, the employer for whom the self-employed person works must report the accident. Accidents happening to self-employed persons who are working individually are not to be reported in the same fashion. The Labour Inspectorate (Tööinspektsioon) expects the reported number of accidents at work to increase by 10% as consequence of this legislative amendment.
If a self-employed person works with other employees for one employer, they must participate in joint ‘work and safety’ activities with these other workers.
The rise in the minimum reference rate for social tax contributions, which has been under revision for the last few years, is also of concern to economically dependent workers. Replacing employees with self-employed persons gives the employer the possibility to transfer some tax obligations to the self-employed person. Self-employed persons can deduct their expenses from their income, thereby reducing their income and thus their tax burden. Despite paying low amounts of tax contributions, self-employed personsstill receive social guarantees, such as public health insurance. Nevertheless, they lose out in benefits which depend on the level of tax contributions.
This can be a ‘win-win’ situation for the employer and employee as long as tax payments remain lower than they would be in case of an employment contract. In order to bring the self-employed persons’ tax contributions up to the minimum contributions of other employees, the minimum income basis for calculating tax contributions was raised last year from EEK 700 (€45 as at 21 April) to EEK 1,400 (€90) and, at the beginning of 2007, it increased from EEK 1,400 to EEK 2,000 (€128) (EE0605019I).
National policy debate
The debate on the status and rights of economically dependent workers has gained momentum of late. The issue has been raised during discussions on the protection of employees and unfair competition.
In 2006, two major aspects regarding the use of self-employed persons in preference to employees were under discussion: the first one concerned the Tax and Customs Board initiative on reviewing employers’ payments to self-employed persons, while the second discussion focused on the increase of the minimum reference rate for tax contributions. Both the employer confederation ETTK and the Confederation of Estonian Trade Unions (Eesti Ametiühingute Keskliit, EAKL) have expressed the opinion that the situation where people are forced into a self-employed status, while in reality acting as employees, creates unfair competition. Therefore, both organisations supported the increase in the minimum reference rate for tax contributions.
Information and consultation
The latest amendment in the Occupational Health and Safety Act aims to provide self-employed persons with information and consultation in cases where they work together with other employees.
The increase in the minimum reference rate for tax contributions will result in greater social benefits, which are connected to tax contributions. Social benefits include parental benefits and old-age pension rights.
Health and safety
ETTK has also emphasised the need to change the Employment Contracts Act, insisting that more flexibility is required to ensure that employers are willing to conclude employment contracts instead of using self-employed people as employees.
All social partners are of the same opinion that economically dependent employment is a negative phenomenon of today’s labour market conditions. EAKL highlighted that some years ago when there was a trend in the transport sector to have self-employed persons working for one employer, it created unfair competition. It was seen as a negative tendency by the sector representative trade unions and the employer organisation, the Union of Estonian Automobile Enterprises (Autoettevõtete Liit).
Given that trade union representation is relatively low, at 9% according to the Statistics Estonia Labour Force Survey 2005, and collective bargaining is only of minor importance in industrial relations, the issues concerning economically dependent workers are not considered to be a high priority in Estonia. Some arrangements may exist in certain companies, but these are not widely known or debated. Moreover, these arrangements are not reflected in the media.
Social partner views
According to the Chair of EAKL, Harri Taliga, the issue of economically dependent workers is not as relevant in Estonia as it is in some other parts of Europe. Since the coverage of collective agreements in Estonia is very low, using economically dependent workers to breach provisions of collective agreements – as happens elsewhere in Europe – is not necessary and the issue is not relevant. However, for the unions the legal questions raised over forcing people into the status of being self-employed or replacing employees with self-employed persons – who have lower social guarantees and social protection especially in relation to pension rights – are important considerations.
On the other hand, ETTK has emphasised that self-employed persons contribute poorly to medical insurance financing and finds the situation unfair. As self-employed individuals can deduct their business expenses from their income and usually indicate their income as being as low as possible, they therefore contribute very little to the medical insurance fund, but receive the same medical care services as employees, for whom employers pay the social contributions.
In Estonia, it is generally assumed that economically dependent employment is related to either forced self-employment or tax evasion. In some occupations, it is common practice to use self-employed persons instead of employees, as is the case, for instance, with taxi drivers, postal workers or hairdressers. It is also assumed that economically dependent workers are not fully aware of their rights or indeed ofthe shortcomings of being self-employed rather than being a regular employee.
Therefore, it is important to inform people of their rights and the consequences of being self-employed instead of being an employee. The Tax and Customs Board has published a reference book on being self-employed, which represents an essential step in this process.
It is felt that having economically dependent workers creates unfair competition and forces people who would otherwise enjoy greater security and social protection as employees into the status of being an entrepreneur. This situation should be thoroughly assessed while the new draft of the Employment Contracts Act is under preparation. In particular, the following questions should be considered: why employers prefer to use economically dependent workers instead of employees, and which legal changes are required to make employers use standard employment contracts.
Concerning the collective representation of economically dependent workers, it is unlikely that there will be any significant developments in the foreseeable future.
A comparative overview of the situation in 16 European countries (15 Member States and Norway) was published in 2003 and is available online: Economically dependent workers, employment law and industrial relations. This article, compiled from the same questionnaire, serves to highlight the situation in one of the new Member States.
Epp Kallaste, PRAXIS Center for Policy Studies