Estonia: Employment register to tackle undeclared work

Since 1 July 2014, all workers in Estonia, whether paid or working on a voluntary basis, are obliged to be registered by their employers. During the first few months of the new registration system, an extra €5.1 million of tax revenue was collected. The register is also being used to determine eligibility for certain allowances and benefits.

Background

An employment register, introduced in 1 July 2014, obliges all employers in Estonia to register their workers, whether paid or working on a voluntary basis. The purpose of the register is to reduce undeclared work, since workers must be registered before their employment starts. The aim is also to make monitoring by taxation officials easier. During the first few months of the new registration system, an extra €5.1 million of tax revenue was collected. The register is also being used by several state institutions to determine workers' employment status and eligibility for certain allowances and benefits.

Gaps in previous system

Up to July 2014, employers had to submit information about new employees to the Estonian Health Insurance Fund (Eesti Haigekassa) within seven calendar days of the date on which the employee started work. This made undeclared work and payment by 'envelope wages' possible, since during an inspection by tax officials an employer could claim that a worker had only just been employed or was only working short term, and their registration had not yet been organised. Checking the veracity of this was a difficult and time-consuming process.

For example, of 4,386 workers who were recorded as working in the construction sector at the time of a tax inspection in 2012, 32% were declared either by themselves or their employers to be in their first day of employment or working short term. In fact, they could have been working undeclared for months.

According to the Estonian Institute of Economic Research (Konjuktuurinstituut), the share of 'envelope wages' has been somewhere between 8% and 16% since 2002, meaning that the state has been losing over €100 million of tax revenue annually (in 2012 the loss was estimated at over €146 million). The sectors most affected are construction, accommodation and food services.

New employment register

Amendments to the Taxation Act to introduce the employment register were approved by Estonia's Parliament on 26 March 2014 and entered into force on 1 July 2014. The register is operated by the Estonian Tax and Customs Board (EMTA).

All legal and natural persons (that is, all legal entities and individuals) who provide work are required to register their employees, irrespective of the form or the length of their employment contract. Data about those working on a voluntary basis must also be recorded in the employment register. To avoid the 'first day of employment' excuses, all employment must be registered on the day the employee starts working. Termination of employment must be registered within 10 calendar days.

Registration is possible either online through the e-Tax Board/e-Customs environment, through the personnel management programmes of a company or agency, or by visiting an EMTA office in person. It is also possible to use a simplified procedure for first registration by telephone or text message, although this must be supplemented with full registration details within seven calendar days.  

If the employer does not register the start or the end of employment as required, the tax authority may impose a penalty of up to €1,200 for the first time this happens and €2,000 for the second time.

Purpose of the register

The register is intended to reduce undeclared work, increase tax revenue by requiring registration of employees before their employment starts, and make supervision by taxation officials easier. The aim is also to increase the amount of electronically gathered data for administrative decisions and to ease the data exchange between different state institutions.

Main users

The database is used by the following bodies:

  • EMTA for monitoring compliance with tax liabilities by taxable persons;  
  • Estonian Unemployment Insurance Fund (Eesti Töötkassa) for registration of the unemployed, termination of unemployment and for granting unemployment allowances and other unemployment insurance benefits;
  • Estonian Social Insurance Board (SKA) for verification of employment status;
  • Estonian Health Insurance Fund for granting health insurance benefits;
  • Police and Border Guard Board (PPA) for exercising supervisory control over the working conditions of foreigners;
  • Labour Inspectorate (Tööinspektsioon)  for making register entries about the decisions of labour dispute committees.

Everyone can check their own data in the system to make sure that their employer has registered them correctly, payments are declared and all taxes are paid.

Initial results

Since the implementation of the register on 1 July 2014, tax revenue has increased by around €5.1 million and the number of people receiving declared income has increased by 9,000. A few penalties for non-registration have been imposed, but the exact number has not been revealed.

However, there are some doubts about whether the wages that employers have declared in the register are correct, as most are at the level of the national minimum wage. It is assumed that full undeclared work and wages have been replaced by partial undeclared wages.

On construction sites,  a number of people have been registered as volunteers. This does not seem credible and suggests that some employers are still trying to find ways to bypass the system.  Although these 'volunteers' make up only around 0.2% of all employees, taxation officials consider this to be a serious problem.

Social partners’ reactions

The main concern of the Estonian Chamber of Commerce and Industry (EKT) and Estonian Hotel and Restaurant Association (EHRL) was that the requirement to register employees before the start of employment would be  burdensome for employers, especially in construction, accommodation and food service companies during the summer, when a lot of additional workers are employed temporarily and many leave their jobs after a few days.

However, both the Estonian Trade Union Confederation (EAKL) and the Estonian Employers’ Confederation (ETTK) have welcomed the new registration system. EAKL has also urged people to check whether they have been registered by their employers.

Commentary

Overall, the employment register has been accepted by employers and employees. Compared with the previous system, it is much easier for employers to register their employees and for taxation officials to supervise them.

State institutions now have more information without having to ask for additional documentation on employees and workers, and as a result the register reduces administrative burdens. However, there is still a long way to go towards the initial goal of reducing undeclared work.

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