Government seeks to combat undeclared work
In January 2004, the Latvian Ministry of Welfare issued guidelines on the elimination of undeclared employment, and is preparing an action plan on the issue, covering 2005-9. Undeclared work of various kinds is a relatively widespread problem, and the issue has gained prominence as Latvia's EU membership approaches.
In January 2004, the Ministry of Welfare submitted guidelines for elimination of 'undeclared' employment to the cabinet, and is now drawing up an action plan on the issue for the period 2005-9.
Undeclared work has attracted attention in connection with Latvia’s coming EU membership, and the difficult budgetary situation that has led the government to seek to exploit the sources of public income as fully as possible. Over the past two years, the government has taken measures to address the evasion of personal income tax and social security contributions levied on income from work. Furthermore, amendments to the Administrative Offences Code have provided stiffer penalties for the promotion of undeclared work since 24 July 2003.
Clandestine employment of both Latvian citizens and foreign nationals is thought to be common in sectors such as construction, trade, industry, agriculture and sport. According to experts, the problem is complex and arises due to a number of underlying reasons. Undeclared work takes a number of forms, such as: unpaid overtime work; fully or partly hidden paid work (whereby the employee receives payment in cash, off the record); and employment without employment contracts, or based on invalid contracts. Violations of employees’ rights and lost taxes for the state are the most evident consequences of such undeclared work. Moreover, this clandestine work distorts competition between businesses and leads people knowingly to agree to be employed illegally.
Many employers argue that in the current situation, when starting or modernising a business requires intensive investment, their businesses would be impossible without illegal work. They hope to switch to legal employment as soon as the main problems of setting up and expanding their businesses are solved.
Another factor is that social security contributions are high in Latvia, mainly due to an extremely unfavourable demographic situation. For every 1,000 people of working age, there are 603 people either above (347) or below (256) working age. The figures hold out unfavourable prospects for the future as well. To meet the resulting high social expenditure needs, the government has sought a compromise by increasing social security contributions and lowering taxes. Taxation of work income is moderately high, while social benefits are low. Pay is subject to a 25% rate of personal income tax, plus social security contributions totalling 33%, and a 0.09% unemployment insurance contribution and insolvency levy (LV0309101N). Personal income tax receipts are divided between local governments (71.6% of income tax revenue) and the healthcare budget (28.4% of income tax revenue). Social security contributions are used for pensions, social insurance and social assistance. Overall, the real cost of every 100 units of net pay is 181 units.
The economic benefits of tax evasion, which are the main purpose of illegal work, are also important for employees. Many argue that, given the instability of the social insurance system, they do not see any motivation to put possible future gains (from making tax and social contributions) before present gains. In addition, paying full taxes would cut their net income, which is low in any event.
In its new guidelines on undeclared work, the Ministry of Welfare plans to develop activities in several directions, notably: informing employees about their rights and the effects of undeclared work; holding a dialogue with the social partners and mass media; and increasing the number of labour inspectors and thus improving control at workplaces. Dagnija Stake, the minister of welfare, emphasises that individual workers should know that, by working without a contract and not paying taxes, they lose social protection in the event of dismissal, injury at work, occupational disease or retirement. Information about labour law and the negative after-effects of undeclared work should be provided in schools.
Consequently, the three main thrusts of the Ministry's action plan are to: increase control and monitoring at workplaces; increase the capacity of the State Labour Inspectorate (Valsts Darba inspekcija, VDI); and disseminate information about labour law. The Ministry plans to establish lists of industries and activities where the risk of being illegally employed is high.
Specialists believe that illegal employment of foreign workers - notably from Moldova. Ukraine and Russia - may increase after 1 May 2004, when Latvia joins the EU.