Controversy over organised 'social fraud' in construction industry

During January and February 2003, several media reports of illegal employment practices have supported suspicions of large-scale, organised social security and tax fraud in Austria, in particular in the construction sector. The country's growing informal economy is estimated to represent 10% of GDP, depriving the state of EUR 7 billion in taxes and social insurance contributions. The Chamber of Labour (AK) is thus demanding a set of measures to combat illicit work, particularly in terms of companies' practices.

In early 2003, one year after revelations about illegal employment practices at several Austrian road haulage companies (AT0202203F), the mass media and the Chamber of Labour (Arbeiterkammer, AK) have made new allegations about other forms of illegal employment relationships in other sectors. In particular, some employers in the construction industry are accused of founding and registering 'pseudo-companies' for the sole purpose of exploiting employees and defrauding the tax authorities. Whereas the main problem related to illegal employment in Austria has hitherto been wrongly declared or undeclared employment (usually of foreign workers) - as in hotels and catering as well as road haulage - new illicit employment practices by an apparently increasing number of construction companies are now gaining in importance.

'Pseudo-firms' acting as subcontractors

Since autumn 2002, several cases of construction companies having committed 'social fraud'- ie non-payment of social contributions and/or taxes - have been alleged by newspapers. The methods of these companies appear to follow the same pattern. First, a person or persons intending to act fraudulently founds one or more private limited liability companies, which is possible with a statutory minimum capital of EUR 35,000 and if two managing directors are appointed. This capital is then spent (eg paid back if it was a loan or bank credit) and the two managing directors resign as a preparation for the planned fraud - the company thus has no assets in the event of liability and no responsible managers.

The next step is that the 'pseudo-company' obtains a subcontract with a well-established company in order to work on behalf of the latter firm. Meanwhile, an intermediary hires the required number of workers for this work without giving these workers any information about their employer. To maintain an (incorrect) impression of legality and seriousness, all these employees are registered with the social insurance institutions by the 'sub-employer' (ie the pseudo-company). Nevertheless, the sub-employer does not actually pay any social insurance contributions, while the employees involved remain uninformed about this practice. Wages are paid – if at all – sparsely and in cash at the building site, without any receipts. No later than the work concerned is completed, the pseudo-company declares itself bankrupt. Some three or four months later, the adjudication in bankruptcy begins, and the official receiver fails to find any property assets. The fraudulent employer, however, has charged the contract sum long before from the contracting company and disappeared with no forwarding address.

AK demands efficient counter-measures

At a press conference held on 12 February 2003, Herbert Tumpel, the chair of AK, contended that these illegal practices are widespread and increasing. Every day, Mr Tumpel stated, three new 'pseudo-firms' in the construction sector are founded, and eight out of 10 construction companies which go bankrupt are such pseudo-firms. Moreover, most fraudulent employers set up several such pseudo-companies, allowing them repeatedly to move their employees from one company to another by deregistering and reregistering them. Since these employers normally do not pay standard wage rates in line with the relevant collective agreements or to pay statutory social insurance contributions, the damage to the national economy caused by these practices is estimated at several hundred millions of EUR. As Mr Tumpel emphasised, in 2002, AK's Vienna regional organisation (Arbeiterkammer Wien, AK Wien) had to plead the cause of about 2,500 deceived employees in the construction industry in court.

In order to address effectively such organised fraud methods, AK has suggested four measures, to be realised as soon as possible.

  1. Existing loopholes in the company law should be closed. The EUR 35,000 of capital required to found a private limited liability company should have to be deposited or guaranteed by securities. At present, a short-term bank credit which can be reimbursed immediately after the registration of the company is sufficient for a firm to be founded. Moreover, the current possibility to run a company for six months after the managing directors' resignation should be abolished. In the event of the managing directors' resignation, the commercial court should appoint an auxiliary manager who would then be responsible for the continuing business.
  2. Employers should be obliged to register employees with the social insurance institutions before they start work. To cope with practice among some employers of constantly changing the identity of the employees' employing company, the social insurance institutions should be obliged to immediately inform employees of any change in registration.
  3. Companies which are subcontracting work to other companies should be liable for the discharge of the subcontractors’ social insurance contribution obligations.
  4. Controls and fines should be tightened up. Instead of monitoring only possible breaches of the Foreign Persons Employment Act (Ausländerbeschäftigungsgesetz, AuslBG), the relevant authorities should expand their activities to control employees’ correct social insurance registration by their employers. Moreover, the existing provisions of criminal law should be applied to illegal social insurance payments evasion, in particular relating to cases of fraud (§ 146 of the Criminal Code, Strafgesetzbuch, StGB) and non-payment of employers’ social insurance contributions (§ 114 of the General Social Insurance Act, Allgemeines Sozialversicherungsgesetz, ASVG). Due to the prevailing interpretation of the law by the courts, virtually all employers which act illicitly go unpunished.

Employers deny widespread illegal practices

The Chamber of the Economy (Wirtschaftskammer Österreichs, WKÖ), representing employers, regards the accusations made by the Chamber of Labour as an unacceptable over-generalisation. Unlike AK, it considers the 'traditional' forms of illicit work (such as paid work carried out by employees without a formal business-operating licence) as much more of a problem. As Reinhold Mitterlehner, WKÖ’s executive secretary, stated on television on 14 February 2003, the problem of illegal employment should be tackled by easing the tax burden and reducing non-wage labour costs (AT0209201N). These measures would, he claimed, reduce the economic incentives for illegal work more effectively than any legal threats (AT0203201N).

Commentary

Illicit work and the so-called 'shadow economy' tend to expand notably in periods of economic downturn. According to a recent estimate by Friedrich Schneider, an economist at the University of Linz, in 2002 the turnover of Austria's informal economy amounted to approximately EUR 22 billion (one 10th of Austria’s GDP). Some EUR 7 billion of taxes and social insurance contributions were thus lost from the state’s budget. Mr Schneider suspects that about half a million Austrians (ie 10% of all persons of employable age) are engaged to a greater or lesser extent in illicit economic activity. These facts support WKÖ’s position that illicit work is not only caused by the employers’ side and that cuts in corporate and income tax would probably reduce the number of illegal employment relationships.

However, as AK argues, there is a great difference between organised social fraud committed by an increasing number of unscrupulous employers which defraud the tax authorities on a large scale on the one hand, and individuals illicitly performing work such as cutting their neighbour’s hair in a spirit of mutual assistance on the other hand. Like WKÖ, AK can also point to (other) experts who regard the measures proposed by AK as an appropriate means of containing illegal employment practices. (Georg Adam, University of Vienna)

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