Latvia: Latest working life developments – Q1 2018

Unemployment fears in the financial services sector, the enactment of the EU General Data Protection Regulation, the shadow economy in the catering sector and solutions to labour shortages are the main topics of this article. This country update reports on the latest developments in working life in Latvia in the first quarter of 2018.

New tax legislation enters into force as economy grows

There were no changes in the political environment and labour laws during the first quarter, although new tax legislation entered into force on 1 January 2018. Economic activity improved and the outlook for the future has been positive overall.

Financial services in the spotlight after bank collapse

In February 2018, 300 people lost their jobs after Latvia’s third-largest bank (ABLV) collapsed. The bank went into self-liquidation after the United States Financial Crimes Enforcement Network (FinCEN) linked ABLV to international money laundering, illicit shell companies and abetting North Korea’s weapons programme.

In response, the government ordered that the share of shell companies served by Latvian banks be reduced to 5%. Experts believe further bank closures are likely, given the large numbers of foreign account holders served by Latvian banks. Financial services have been given a grace period to reorganise their assets, although concerns remain that the move away from serving shell companies may have consequences for the economy.

The government also began its reorganisation of the so-called obligatory payment component system in the energy sector, thus hampering the operation of several small energy businesses that rely on renewable resources.

Data Protection Directive enters implementation stage

Latvia’s businesses have been getting ready to comply with the EU General Data Protection Regulation - GDPR (Directive 95/46/EC), which will enter into force on 25 May 2018. GDPR will harmonise data protection regulations throughout the EU, thereby making it easier for non-European companies to comply with the law. The new data-protection regime strengthens individual data privacy rights and introduces penalties for non-compliance of up to 4% of worldwide turnover or €20 million, whichever is higher.

Firms will be required to have in place corresponding data management systems and to ensure employees understand how to process personal data according to the rules.

Early signals suggest that many entrepreneurs remain unclear on the data protection procedures required of them and on the consequences of breaching the rules.

New working group to combat shadow economy in catering services

The shadow economy occupies a substantial part of the catering sector, accounting for around 25% of total salary payments. To combat the problem, the State Revenue Service (VID) has set up a new working group to develop incentives to encourage catering firms to comply with the law. The group will be led by the Association of Latvian Restaurants  and the Association of Latvian Hotels and Restaurants (LVRA) and includes representatives from the Ministry of Finance and the Ministry of Economics. There were some positive signs that the sector’s situation improved in the first quarter, with an increase in tax receipts, improved turnover among registered taxpayers and improvements in average pay levels.

Government considers immigration policy reform to resolve labour shortages

On 13 February 2018, the government discussed a review of immigration policy. The report calls for more flexible immigration rules to help ease Latvia’s labour shortage. Reform plans are expected to focus on a list of the 237 professions most in need of migrant workers.

Commentary

At the end of the quarter, the financial sector looked especially vulnerable. Strict legislation surrounding foreign account holders will not only affect several small banks, but other businesses too (such as the shell companies at the heart of the controversy).

In the next quarter, the government is likely to focus on improving state finances and may decide to reduce or freeze public sector wage growth. And trade unions will be preparing for discussions on forthcoming school reforms, which are likely to entail school closures and teacher redundancies.