New liability rules to tackle ‘social fraud’ in construction

In September 2009, new liability regulations came into effect in Austria’s construction industry. Accordingly, construction companies that are subcontracting work to other companies are now liable for the subcontractors’ social insurance payment duties. The new legislation aims to encourage companies to use only credible subcontractors, thus preventing the practice of ‘social fraud’. The social partners, who were involved in the drafting procedure, appear to be highly satisfied with the new regulations.

Legislation tackling social fraud

In recent years, the Austrian legislator has endorsed a series of laws seeking to tackle the problem of social security fraud in companies – particularly in the construction sector. For instance, on 1 March 2005, the Social Fraud Bill (Sozialbetrugsgesetz, SozBeG) came into effect, which extended the legal provisions of criminal law concerning organised tax and social fraud (AT0506201N). Moreover, in 2007, a legal obligation was introduced for employers to register their employees with the relevant social insurance institutions before the commencement of work. This legal initiative sought to combat fraudulent practices in companies, whereby employers had failed to register some of their staff in time for the sole purpose of evading taxes and social insurance contributions (AT0705019I).

‘Pseudo companies’ acting as subcontractors

Although the latter measure has been particularly effective in curbing the illegal practice of abusing the formerly flexible system of employee registration, the large-scale incidence of fraudulent ‘pseudo companies’ acting as subcontractors in construction could not be counteracted. This problem develops when a well-established company subcontracts another company to carry out labour-intensive work on behalf of the former enterprise. These so-called ‘pseudo companies’ are awarded the subcontract since they can often offer their services for a more reasonable price compared with legally operating companies. This is because ‘pseudo companies’ never plan to pay social insurance contributions on behalf of their workers and can thus offer their services for ‘dumping prices’. Once the social insurance institution has detected the fraud and wants to claim the contributions still due, the sub-employer – often a foreigner – has long before disappeared, leaving no forwarding address. As a consequence, the pseudo company has to be declared bankrupt, with the official receiver frequently failing to find any property assets, which have disappeared with the fraudulent ‘sub-employer’ (AT0302202F).

New liability regulations

In order to effectively thwart this kind of illegal employment practice, the social partners agreed in 2007 to make companies subcontracting work to other enterprises liable for the discharge of the subcontractors’ social insurance contribution obligations. A joint proposal issued by the peak social partner organisations in the autumn of 2007 was, in its general outline, adopted by the social democratic-conservative coalition government and, as a draft bill, eventually passed by parliament on 6 June 2008.

The new Contractee Liability Act (AuftraggeberInnen-Haftungsgesetz) aims to encourage construction companies to pay more attention to the trustworthiness of their subcontractors. The act came into effect on 1 September 2009 through a decree issued by the responsible Minister of Labour, Social Affairs and Consumer Protection, Rudolf Hundstorfer.

The legislation comprises the following main features.

  • In cases where a construction company is subcontracting work to another company, the former is liable for the discharge of the subcontractor’s social insurance contribution duties, up to 20% of the contracted amount of pay. Liability of the prime contractor will be effective if the relevant social insurance institution is unable to get the subcontractor to realise the outstanding contributions or if the latter has gone bankrupt.
  • Liability of the contractee may be omitted if the subcontactor is included in a list of credible construction companies. This list has to be compiled, administered and updated daily by a dedicated service centre on behalf of the social insurance institutions. To be awarded the status of a credible establishment and thus – at its request – to be included in the list, the company has to record a performance of regular construction services for at least three years and must not have any arrears regarding social insurance payments.
  • Moreover, liability of the prime contractor may also be omitted if they pay 20% of the contracted amount of pay directly to the service centre – which is in charge of administering both the list of credible construction companies and the entire contractee liability procedure on behalf of the social insurance institutions – instead of the subcontractor.

In terms of the effectiveness of the act in combating illegal evasion of social insurance payments, both the government and the social partners have praised it as a further important milestone.

Georg Adam, Department of Industrial Sociology, University of Vienna

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