Drastic punishment for undeclared work

Recent amendments to Romania’s Labour Code, which came into effect on 1 May 2011, set out new and more severe penalties for undeclared work. Recent data published by the government suggest that the new regulations have had a spectacular effect. The number of employment contracts grew by over 580,000 in two months, and more than 1,700 employers were penalised following site inspections. However, employer organisations and trade unions are sceptical about the figures.

New penalties for undeclared work

Recent changes to the Romanian Labour Code, which took effect on 1 May 2011, mean that undeclared work will now be treated as both a civil and criminal offence.

Act 40/2011 makes substantive amendments to the Labour Code’s provisions for the control of undeclared work.

Under civil law, both employer and employee are now liable for undeclared work.

• Employers who use the services of up to five persons without a valid individual employment contract are liable for fines of between RON 10,000 and RON 20,000 (about €2,350 to €4,700 as of 10 August 2011) for each person that has been illegally hired. This is around five times higher than the fines imposed by previous regulations.
• Individuals found working without a valid individual employment contract are liable for fines of RON 500 to RON 1,000 (€117 to €235).

Under criminal law, employers are liable for using undeclared workers. The new regulations provide for:

• jail sentences of one to two years or a criminal fine for the use, without a valid contract of employment, of more than five individuals, irrespective of their citizenship;
• the same penalties for hiring an individual illegally staying in Romania, while knowing that the person is a victim of human trafficking, and where the type of work they are performing is of a nature that could jeopardise their life or health, the jail sentence may go up to three years;
• jail sentences of between six and 12 months, or a fine, for repeated denial of access to company premises for labour inspectors, or the refusal to produce company records on request.

For any of these offences, a court may also impose one of the following punishments:

• total or partial forfeiture by the employer of the right to receive public services, aid, or subsidies, including European Union (EU) funding managed by the Romanian authorities, for a period of up to five years;
• loss, by the employer, of the right to take part in public procurement tenders, for a period of up to five years;
• total or partial payback by the employer of public services, aid or subsidies, including EU funding managed by the Romanian authorities, paid to the employer over a period of up to 12 months prior to the offence;
• temporary or final closure of the outlet(s) where the offence was committed, or the temporary or final withdrawal of a licence for the scope of business concerned, if the seriousness of the offence so recommends.

In addition, the employer is required to pay:

• any outstanding wages owed to the illegal workers (presumed to be equivalent to the gross national average salary);
• all charges, taxes and social insurance contributions that the employer would have paid if the persons had been hired legally, including surcharges for overdue payment;
• any related administrative fines.

If the offence(s) were perpetrated by a subcontractor, the contractor may be held liable jointly with the subcontractor.

Employers are also committing a criminal offence, punishable by imprisonment or fine, if they repeatedly pay workers below the gross national minimum wage as set by law.

Practical effects of the new rules

More than 19,000 joint inspections of companies from various sectors were conducted between 1 May and 30 June this year by the Labour Inspection Office (IM), the General Inspectorate of the Romanian Police (IGPR), the Romanian Gendarmerie (JR) and the Financial Guard (GF). They uncovered more than 3,900 people working without legal papers.

As a result 1,733 employers were fined a total of €5.5 million for petty offences. Another 525 employers are being investigated under criminal law for using more than five workers without an employment contract.

During the same period, the IM received more than 587,000 new employment contracts for registration, a 10% increase on the number of employment contracts registered before this date. Most, 66.1%, were open-ended contracts.

The distribution by economic sector of new employment contracts issued included 19.5% in manufacturing, 19% in commerce, 17% in construction, 8% in real estate and 8% in hotels and restaurants.

Social partners’ reactions

The opinions of employer organisations are divided.

The President of the Building Employers’ Organisation (PSC), Cristian Romeo Erbasu, said that, as might be expected, fear of criminal indictment accounted for the large increase in employment contracts. However, he said that it was also worth noting that in the construction sector, work suspended over winter resumes in April and May and therefore new contracts could not be assumed to be related to new workplaces or jobs.

The Romanian Food Industry Federation ROMALIMENTA (Federaţia ROMALIMENTA) claimed that the new Labour Code rules required old contracts to be adjusted and this ‘explains the wave of new contracts’.

The Romanian Tourism Employers Federation (FPTR) stated that no new tourism businesses had been opened, and that the number of employees in the sector had decreased from the same period in 2010.

The trade unions, through the voice of Bogdan Hossu, the leader of the National Trade Union Confederation Cartel Alfa (CNS Cartel Alfa), argued:

In May, the season started on the Romanian Black Sea Coast, where over 25,000 persons are employed for seasonal work, and also construction work has been relaunched.

Dumitru Costin, the President of the National Trade Union Bloc (BNS) admitted he was stunned by the large number of new employment contracts registered with the Labour Inspection Office and said that, unfortunately, ‘nobody can explain how so many new contracts popped up all of a sudden’, and that it is rather ‘a number for marketing purposes’.

Trade union leaders pointed out again that, before the labour law was amended, the authorities had a perfectly good legal instrument against the use of undeclared labour, the Tax Evasion Act. Under this act, failure to enter into a legal employment contract was punishable by eight years’ imprisonment, which is more severe than the new rules of the Labour Code.

Commentary

The new labour law regulations do account for part of the increase in newly registered employment contracts. However, it is difficult to demonstrate how much of the increase relates to new jobs that may have been generated by the country’s slow economic recovery.

Social partners tend to play down the much-trumpeted effects because they opposed the new version of the Labour Code being imposed by the government. Meanwhile, the government has its own reasons, including electoral ones, to show that the number of employment contracts is growing, even though not all of them relate to new jobs.

Luminiţa Chivu, Institute of National Economy, Romanian Academy