Opinion of the Economic and Social Committee on the 'Communication from the Commission on undeclared work` (1999/C 101/09)

On 17 April 1998 the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the above-mentioned communication.

The Section for Employment, Social Affairs and Citizenship, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 7 January 1999. The rapporteur was Mr Giron.

At its 360th plenary session (meeting of 27 January 1999), the Economic and Social Committee adopted the following opinion by 119 votes to four, with five abstentions.

1. Introduction

The Committee very much welcomes the Commission's desire to initiate a discussion on undeclared work so as to enable the European Union to develop a strategy for combating a problem that affects all its Member States.

The Committee endorses the Commission's decision to approach the problem of undeclared work from the perspective of employment, since undeclared work clearly undermines the funding of public services and social security, hinders the functioning of other joint welfare systems (training funds, pension funds and paid holiday schemes, etc.) and distorts competition in general. Curtailing undeclared work should also mean that undeclared workers can be brought back into the formal economy, as well as reducing the risks posed to existing declared jobs.

The Committee considers this initiative to be particularly expedient given that undeclared work affects mainly small businesses which, as the Commission pointed out in its communication of 26 October 1995, are the keys to growth and employment in Europe.

The Committee notes the Commission's request that all the Member States, Community institutions and the social partners should be mobilized with a view to increasing awareness of the causes and extent of undeclared work, identifying better ways of combating it and possibly mounting joint European Union action.

The Committee also approves the approach that allows Member States to take different measures, depending on the particular situations encountered.

2. General comments

2.1. Definition of undeclared work

2.1.1. The Committee considers the definition of 'undeclared work` as 'any paid activities that are lawful as regards their nature but not declared to the public authorities` to be acceptable given the need to have one definition for all the Member States.

2.1.2. The Committee thinks that this definition should be brought closer to the more familiar concept of moonlighting in order to avoid confusion with charitable or voluntary work, or with work undertaken in a family context, particularly occasional domestic work.

2.1.3. On the other hand, it goes without saying that the practice of employer or employee not declaring part of the work carried out also constitutes a form of undeclared work.

2.1.4. However, the Committee notes that other types of paid activity may exist that are lawful in principle but unlawful when conducted in a certain way, and are therefore not declarable and should be dealt with appropriately.

2.1.5. In view of the ILO discussions on child labour and the draft convention due to be adopted in 1999, it might also be appropriate for the Commission to focus rather more on this issue in its proposed analysis of undeclared work ().

2.1.6. In any event, the Committee can only reiterate its aversion to any type of child labour and its support for a framework stipulated by national law and international standards.

2.1.7. The Committee also wishes to raise the issue of sub-contracting (), which in practice, if abused, can create a real problem of tax and contributions evasion and undeclared work (whether self-employment or employment by firms).

2.1.8. The Committee suggests that the Commission should discuss this problem, which has never been specifically addressed.

2.2. Types of undeclared work

The Committee is pleased first of all that the Commission has approached the issue of undeclared work from the perspective of both businesses and individuals, since it is necessary to address the issue from the angle both of the person (natural or legal) doing undeclared work and of whoever is employing them (business or individual).

2.2.1. Main reasons

2.2.1.1. The Committee fully agrees with the Commission's analysis that the main attraction of undeclared work is economic.

2.2.1.2. This assumption should make it possible to demonstrate the burden that taxation and social costs on labour represent for both individuals and companies, particularly small enterprises. It also highlights the tax burden on private individuals, who are often the 'buyers` of undeclared work.

In this respect, the Committee has already recognized the need to reverse the trend in taxation and shift the main burden away from labour ().

It is clear in this context that, while the market for illegal employment can be seen as a general problem, the less difference there is in financial terms between declared and undeclared work, the less attractive undeclared work will become. In the meanwhile, ways of at least lowering tax and social security costs for labour-intensive businesses is a major avenue to be explored.

2.2.1.3. Although the Committee believes that a number of historical factors have contributed, or could still contribute, to the existence of undeclared work, its main causes nevertheless seem to be:

- the burden of taxation and social contributions;

- regulatory and administrative burdens;

- inflexible labour laws;

- the influx of illegal immigrants.

2.2.1.4. The Committee points out that undeclared work is mainly seen in sectors (e.g. small business, retail, services) dominated by small enterprises, which are disproportionately burdened by a fiscal, social, regulatory and administrative environment, as reported in the White Paper of Commission President Delors ().

2.2.1.5. As the Commission observes, a whole series of other factors may also favour or facilitate the development of undeclared work (cultural acceptance, low competitiveness, lack of interest in the service required, etc.).

However, the Committee does not agree with the Commission that 'the existence of craft corporations may also be conducive to undeclared work` (), especially since these are generally private organizations, membership of which is certainly not necessary to exercise a commercial activity.

2.2.1.6. The Committee also thinks that the Commission is not adequately addressing the problem posed by systematic undeclared work and its potential implications for whole spheres of activity. For example, such employment is regularly encountered, at least in most Member States, on a large in the construction sector (building and public works), also in a cross-border context.

2.2.2. Who are the undeclared workers?

2.2.2.1. The Committee notes that the Commission identifies four groups of undeclared workers as a frame of reference:

- multiple job holders,

- 'economically inactive` persons,

- the unemployed,

- third country nationals.

2.2.2.2. However, the Committee feels it is necessary to draw up another definition aimed at distinguishing between those who should have employee status and those who have decided not to declare their activities.

Such a definition would make it easier to decide on appropriate responses.

2.2.3. Which sectors are the most affected?

2.2.3.1. The Commission reports that traditional sectors characterized by labour-intensive production and local economic networks are one of the types of activities most affected by undeclared work, especially work and/or activities carried out at home in a family context.

2.2.3.2. The Committee thinks that these traditional sectors should also include personal commercial services (care, childcare, care of the elderly, etc.) that are not at present a truly structured sector in terms of supply.

2.2.3.3. The Committee also thinks that attention should be paid to teleworking, where the conditions of work may make it easier not to declare activities.

2.2.3.4. The Committee would ask the Commission to be clearer about what it calls innovative sectors.

2.2.4. Illegal immigrants

The Committee thinks that even if the employment of illegal immigrants is an issue that must be addressed in individual Member States as part of a general strategy to combat illegal immigration, it is nevertheless an integral aspect of the problem of undeclared work.

The Committee therefore feels that this issue should also be tackled at European level with the aim of achieving more convergence.

2.3. Impact of undeclared work

2.3.1. Social security and the impact on public finances

The Committee notes the very negative impact of undeclared work on public finances, both in terms of social security funding and the loss of tax revenue.

The vicious circle this engenders is unacceptable because it ultimately harms declared workers and businesses. Moreover, given that there is generally open access to these services, it is not always possible to identify fraudulent beneficiaries.

2.3.2. Impact on individuals

2.3.2.1. Undeclared work places those concerned in a more precarious social position than declared workers. However, the lower level of social and labour protection may have less serious consequences, depending on which of the Commission's categories the undeclared worker falls into.

2.3.2.2. Thus it seems that, in some cases undeclared workers do not see their own level of social protection as being fundamentally different from that of declared workers. Furthermore, it should be noted that 'highly qualified` undeclared workers do not appear to suffer in this respect, since it is apparent that such people choose to do this type of work and often enjoy quite favourable working conditions.

2.3.2.3. Thus the Committee observes that undeclared work can be very financially attractive to some people whilst for others, and not just illegal immigrants, it is 'vitally` necessary.

This may explain why people often do two jobs but declare only one of them.

2.3.2.4. The Committee also welcomes the Commission's view that undeclared work does not offer consumers the same level of protection and guarantees in terms of the quality of the goods and services provided as declared work. However, it should be noted that consumers resort to undeclared work most often as the result of a calculated decision, or indeed need, in cases where they might not be able to obtain the good or service concerned under normal market conditions. This again raises the issue of labour costs.

2.3.2.5. Finally, the Committee wishes to emphasize how extremely unfair the situation is for people who are paying all their taxes and social security contributions.

2.3.3. Effects on competition

2.3.3.1. The Committee agrees with the Commission's analysis that undeclared work has only a moderate effect on international trade, given that it is quite difficult to conduct trade on the basis of undeclared work. Surveillance may also be easier with international trade than with local transactions. Undeclared work thus seems mainly to involve proximity services.

2.3.3.2. The Committee believes that businesses which employ undeclared labour do so only in small fringe areas of their operations which may vary from one situation to another. It is also important to mention the case of independent undeclared workers, or groups of workers, whose activities compete directly with the operations of registered businesses. At all events the Committee points to the substantial distortion of competition - notably in terms of the cost of products and services - of providing a good or service through declared or undeclared labour.

2.3.3.3. Although the Committee agrees that undeclared work affects public finances, it is also difficult to ignore the fact that undeclared work can actually distort competition in a way that is harmful to businesses that have declared their activities. Many businesses are evidently losing markets and even face the threat of closure as undeclared work increases.

2.4. Policy options proposed by the Commission

The Commission considers that two types of approach - prevention or sanctions - can be adopted, depending on the way the problem of undeclared work is seen.

2.4.1. Sanctions

Sanctions are targeted at people or businesses who take advantage of the system. The measures proposed are:

- ensuring greater enforcement of the rules;

- favouring systems where the rights to social protection benefits are linked to contributions actually made;

- awareness-raising campaigns.

2.4.2. Prevention

Prevention consists in adapting existing legislation to new types of work. The Commission proposes the following measures:

- liberalization of product and service markets and simplification of procedures for setting up small businesses;

- promoting structured supply in certain sectors (care, cleaning, etc.) and recognizing new occupations and areas of responsibility;

- greater involvement of the social partners in information, enforcement and control;

- adaptation of inappropriate labour legislation to new types of work;

- reform of social protection systems to cover short spells of work, irregular work, people in and out of employment, care, etc.;

- decreasing taxation on labour both for the employer and for the worker;

- decreasing rates of VAT on labour-intensive services () .

2.4.3. The Commission identifies two dimensions to the problem of undeclared work that call for two types of complementary, but distinct, action:

- the issue of people taking advantage of the system and so undermining social solidarity, where intervention should take the form of sanctions and awareness-raising campaigns;

- the issue of greater labour market flexibility and slower adaptation of existing legislation, which calls for preventive measures (adapting inappropriate legislation to reflect new labour market conditions) as well as measures to reduce costs and obstacles.

2.4.4. The Committee feels that there is a contradiction in this policy approach formulated by the Commission.

2.4.4.1. In paragraph 4.1, the Commission calls for 'greater enforcement of the rules`, but this is inconsistent with its view that inappropriate labour legislation should be adapted to new types of work.

2.4.4.2. How can the Commission talk about the need for basic legislation and at the same time call that legislation into question? And on what basis does the Commission judge existing labour laws to be inappropriate to new activities or types of activity?

2.4.4.3. Moreover, given that all the member states have stepped up their surveillance over the past few years, is it enough to apply sanctions to those who are taking advantage of the system? Can we still consider that they bear sole responsibility for undeclared labour?

2.4.5. The Committee does not share the Commission's opinion that adjustment and preventive measures concern only new activities or types of activity.

Does this not tend to overlook the fact that nowadays necessary adjustments should be made on a general basis? The Commission also fails to define anywhere what it means by 'new forms of work`.

2.4.6. The Committee suggests that the Commission should present the package of measures proposed in chapter 4 in a more structured way, describing more clearly and precisely the different measures and their proposed level, i.e. including whether or not it proposes measures or activities at European level.

2.4.6.1. If it does propose European measures, the remit of the European Community and legal basis could be, for example:

- Article 100a (functioning of the internal market) in order to avoid the distortions of competition caused by undeclared work;

- and/or Articles 118 and 118a (working conditions, health and safety of workers) in order to promote decent working conditions.

3. Specific comments

Overall, the Committee endorses the Commission's analysis of the market for undeclared work.

The Committee sees undeclared work above all as the result of inappropriate administrative provisions and labour costs. It has made this point on several occasions in previous opinions.

In almost every case, the problem of undeclared work develops for economic reasons provoked by factors on both the demand and the supply side.

It is therefore crucially important to develop a strategy that helps to reduce the financial gains resulting from undeclared work.

At the same time it is also important to think about how to structure personal services while promoting entrepreneurial spirit, and about how to adapt certain rules.

In this respect, the Committee feels that it would make more sense to consider preventive measures before sanctions, given that the Commission's analysis of undeclared work points up the need to adapt legislation to economic and social conditions. It is only secondarily that sanctions can play an effective role in combating undeclared work.

3.1. Preventive measures

3.1.1. Liberalization of product and service markets and simplification of procedures for setting up small businesses

The Committee has regularly championed a spirit of enterprise and investment among SMEs and the very small businesses that create new jobs, and in this connection has welcomed the European Investment Bank's special Amsterdam action programme.

The Committee is therefore in favour of simplifying procedures for setting up small businesses; however, the whole legal and administrative environment for small businesses must be improved in the spirit of the White Paper.

The Committee has also proposed targeted training programmes to help SMEs and very small businesses better understand how to adapt to the Community directives that affect them.

3.1.2. Favouring the structuring of the supply for some sectors (care, cleaning ...) and the recognition of new occupations and competencies

The Committee has already expressed its support for the proposal to improve the structure of job-creating sectors, which are often informal, e.g. care, home help or care, and cultural activities.

It is essential to prevent the development of a parallel economy and black market for labour.

3.1.3. Greater involvement of the social partners in information, enforcement and control

The Committee feels that it is necessary to increase the involvement of all the relevant social partners in information and prevention of undeclared work.

However, it questions the merits of in all cases involving the relevant social partners in control measures. That said, the social partners can help to expose illegal types of employment and, by working together with the appropriate authorities, can help ensure compliance with legal and collectively agreed provisions. They can shoulder responsibilities, e.g. by setting up bodies to deal with arbitration and internal discipline and developing new deterrent procedures or new surveillance mechanisms in liaison with the public authorities.

As mentioned above, therefore, the Commission could be more precise as to what enforcement and control measures it advocates at sectoral, local and European level. It should also take into account the role of other actors and socio-economic players in the measures to be promoted.

3.1.4. Adaptation of inappropriate labour legislation in line with the evolution of new types of work

The Committee would ask the Commission to be more circumspect, or at least more specific, in what it says about inappropriate labour legislation.

In what sense is labour legislation more inappropriate to new types of work than to traditional activities? Should this question concern only new types of work?

Here, the Commission could do more to encourage the social partners to discuss labour legislation in the Member States, e.g. as it affects small businesses.

As the Commission communication points out, undeclared work affects mainly small businesses, which is why the discussion must be conducted from their perspective. It is now clear that some small businesses are afraid to recruit staff.

The appropriateness of the whole legal, fiscal, administrative and regulatory environment to the situation of small businesses should be subject to a general review.

3.1.5. Reform of the social protection system to cover short spells of work, irregular work, people in and out of employment, care, etc.

President Delors' white paper already introduced the idea of better adapting social protection systems to irregular, short-term employment. For example, it advocated 'restructuring national government income support schemes in ways which enable income from work to be topped up with income from social security by developing integrated taxation and income support systems with appropriate safeguards` (). The declaration at the Dublin Summit on employment also urged member states to develop 'social protection systems capable of adapting to new patterns of work and of providing appropriate social protection to people engaged in such work`.

The Economic and Social Committee has also given its opinion on this matter, calling for declared employment to be promoted and recognized on the basis of partnerships between the public and private sectors in the spheres of care, transport, energy and the environment, with the help of non-wage income support mechanisms and accompanying safeguards and involving the social partners, the social economy, relevant NGOs and local and regional government ().

However, such an approach must not pose a threat to the market sector. The same applies to start-up firms and other intermediary organizations.

3.1.6. Decreasing taxation on labour both for the employer and for the worker

The Committee feels that this proposal largely addresses the main cause of undeclared work.

The white paper also recommended lowering or exempting employers' social security contributions for less skilled, low-wage labour, with costs being offset by compensatory measures such as environmental taxes, excise duties on consumer products that are damaging to health and taxes to make productive investment more attractive ().

The Committee's Opinion of November 1996 on the future of social protection () and its Opinion of 9 July 1997 on taxation in the European Union () both advocated such alternative sources of finance.

The Committee would also like to mention another approach, which would consist in looking at the extent to which changing the basis for calculating social security contributions would be an appropriate step.

Obviously such an approach must not result in secure jobs being replaced by insecure ones, nor should it undermine the rights of social security beneficiaries ().

3.1.7. Reducing rates of VAT on labour-intensive services

The Committee has already said on several occasions that it favours reducing VAT rates on labour-intensive products, activities and services, as this may be a way to create jobs.

The Committee reiterates its support for this initiative which aims to boost employment and make undeclared work less financially attractive.

Furthermore, in the conclusions of the Vienna Summit, held on 12 December 1998, the Commission 'is invited to allow those Member States who so desire to experiment with reduced VAT rates on labour intensive services which are not exposed to cross-border competition ().`

3.2. Sanctions

3.2.1. Ensuring greater enforcement of the rules

The Committee certainly considers it important to continue and step up enforcement, e.g. using the customs authorities.

The Committee is indeed expected to help ensure that 're-distribution of income and provision of welfare services is valued in society`, as the Commission puts it. There is still the question of how far the rules must be enforced. And what is the role of the European Union?

If it is crucial to encourage people and businesses to abandon undeclared work, it is just as important to maintain or reinforce sanctions. And sometimes these measures must include providers as much as seekers or beneficiaries of undeclared work.

This is because undeclared work not only distorts competition but also has effects on the legal employment market, and on law-abiding companies and workers. The representatives of companies and employees are trying to improve the situation by formulating codes of conduct and at the same time calling for tougher sanctions.

ILO conventions form the frame of reference for joint agreements. In terms of sanctions, the Committee would suggest the exclusion of companies that fail to respect their social obligations from tenders for public procurement contracts and applying measures to ensure social responsibility (along the whole chain of production).

However, the Committee would warn the Commission against the dangers of imposing harsh but misplaced administrative controls, which would be harmful. It is too often the case that substantial resources are invested in scrutinizing declared businesses, while undeclared activities are not subject to proper investigation.

3.2.2. Favouring systems where the rights to social protection benefits are linked to contributions effectively made

The Committee considers the link between contributions and benefits - however tenuous - to be crucially important.

But can countries that now have a system of universal social benefits revert to such a system?

The Committee would also point out that undeclared work may involve people who are in some cases already covered, e.g. through having two jobs, being entitled to claim certain benefits, or being unemployed and collecting benefit.

Finally, the problem of non-active workers who are economically excluded from society must be better analyzed.

3.2.3. Launching awareness-raising campaigns

The Committee could support this proposal - even at a political level - through the leading players it represents. The Commission should envisage a specific role for the social partners and other economic players in promoting coordinated campaigns. It could also sponsor and/or co-finance such campaigns. Likewise the Commission should introduce the concept of awareness-raising and prevention of undeclared work as a method of benchmarking in the guidelines for employment? Why was this point not raised in its recent communication on employment ()?

Brussels, 27 January 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

() Cf. ESC opinion of 2 July 1998 on the exploitation of children; OJ C 284, 14.9.1998.

() OJ C 126, 23.5.1989; OJ C 159, 17.6.1991; OJ C 49, 24.2.1992; OJ C 133, 31.5.1995; OJ C 157, 25.5.1998.

() OJ C 73, 9.3.1998, point 2.2.5.1.

() White Paper entitled 'Growth, Competitiveness, Employment - the Challenges and Ways Forward into the 21st Century`, COM(93) 700 final, point 8.8, paragraph 4, indent 4.

() COM(1998) 219 final, point 2.2, second indent.

() Already proposed by Commissioner Monti.

() White Paper entitled 'Growth, Competitiveness, Employment: the challenges and ways forward into the 21st century`, COM(93) 700 final, 8.8 (c) 3.

() OJ C 73, 9.3.1998, p. 85, paragraph 2.2.2.

() White Paper, op. cit., paragraphs 9.4 and 9.5.

() OJ C 66, 3.3.1997, p. 58, paragraph 5.

() OJ C 296, 29.9.1997, p. 37, paragraph 2.2.3, fourth indent.

() OJ C 73, 9.3.1998, p. 85, paragraph 2.2.5.

() Presidency conclusions, SN 300/98, point 35.

() Communication from the Commission - From guidelines to action: the national action plans for employment.