Opinion of the European Economic and Social Committee on The role of civil society in helping to prevent undeclared work
Date: 2005-04-07
Institutions: European Economic and Social Committee
Subjects: European Employment Strategy, clandestine worker, fiscal policy, illegal migration, labour inspectorate, moonlighting, tax offence

14.10.2005

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Official Journal of the European Union

C 255/61

Opinion of the European Economic and Social Committee on The role of civil society in helping
to prevent undeclared work

(2005/C 255/12)

On 28 January 2004 the European Economic and Social Committee, acting under Rule 29(2) of its Rules
of Procedure, decided to draw up an opinion on The role of civil society in helping to prevent undeclared work.

The Section for Employment, Social Affairs and Citizenship, which was responsible for preparing the
Committee's work on the subject, adopted its opinion on 15 March 2005. The rapporteur was Mr Hahr.

At its 416th plenary session, held on 6-7 April 2005 (meeting of 7 April), the European Economic and
Social Committee adopted the following opinion by 112 votes to 1, with 2 abstentions.

1. Summary of the Council Resolution

1.1
On 20 October 2003, the Council (employment, social
policy, health and consumer affairs) adopted a resolution on
undeclared work (1). The Council's objective here is for the
Member States to consider adopting a measured strategy to
combat undeclared work in the Union. The strategy would be
an integral part of the European Employment Strategy. The
ninth guideline of
the 2003 Employment Guidelines was
directed exclusively at undeclared work (2).

1.2
The Council calls on the Member States to consider the
resolution as a frame of reference for framing and imple-
menting policies as part of the European Employment Strategy,
while respecting national circumstances and priorities. The
resolution builds largely on the content of
the Commis-
sion's 1998 communication on the subject (3).

the Member States are requested to take
1.3 Moreover,
account of
the actions outlined in the resolution when
reporting on the principal measures taken to implement their
employment policies in the light of the specific guideline on
undeclared work in their future National Action Plans.

1.4
It recommends cooperation in order to examine the
common features of undeclared work across the Member
States. This might best be addressed by a common approach
within the framework of the European Employment Strategy.

(1) Council document No. 13538/1/03.
(2) Council decision of 22 July 2003 on guidelines for the employment
‘Member States
policies of
the Member States, ninth guideline:
should develop and implement broad actions and measures to elimi-
nate undeclared work, which combine simplification of the business
environment, removing disincentives and providing appropriate
incentives in the tax and benefits system, improved law enforcement
and the application of sanctions. They should undertake the neces-
sary efforts at national and EU level to measure the extent of the
problem and progress achieved at national level.’

(3) Communication from the Commission on undeclared work,

COM(98) 219.

1.5 With regard to preventive actions and sanctions, the
Council recommends developing a comprehensive approach in
keeping with the European employment strategy based on
preventive actions, encouraging all employers and employees
to operate within the formal economy and in the context of
regular employment; these measures should respect the sustain-
ability of public finance and social protection systems, and may
include:

— the creation of a legal and administrative environment
which is favourable to the declaration of economic activity
and employment, through simplifying procedures and by
reducing the costs and constraints which limit the creation
and development of businesses, in particular start-ups and
small undertakings;

— strengthening incentives and removing disincentives
declare work on both the demand and the supply sides;

to

— reviewing and, where appropriate,

reforming tax and
benefit
interaction to reduce high
marginal effective tax rates and, where appropriate, the tax
burden on low-paid workers;

systems and their

— setting up suitable employment policies vis-à-vis benefici-
aries of social-protection measures which will help them to
participate in the regular labour market; and

— reducing the risk of unemployment and poverty traps by
eliminating undesirable interactions between tax and bene-
fits systems.

legislative

Surveillance of

implementation must be
1.6
stepped up, where appropriate with the active support of the
social partners, as should sanctions in the event of violations,
in particular in respect of those who organise or benefit from
clandestine labour. Social awareness of the negative implica-
tions of undeclared work for social security and the conse-
quences of undeclared work for solidarity and justice must be
raised. It is also necessary to improve knowledge of the nega-
tive consequences of undeclared work.

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To improve knowledge about the extent of undeclared
1.7
work,
it is necessary to estimate the scope of the informal
economy and undeclared work at national level. This can be
done on the basis of such data as is available to social security
institutions,
tax authorities, ministries or national statistical
offices. It is also important that the Member States contribute
to the development of the measurement of undeclared work at
EU level in order to gauge progress in achieving the objective
transforming undeclared work into regular employment.
of
Efforts should be made to seek cooperation between national
statistical offices on methodology and foster the exchange of
experience and know-how on this issue.

1.8
Finally, the Council calls upon the social partners to
consistently address the issue of undeclared work in the context
of their jointly agreed multi-annual programme and to further
deal with undeclared work at sectoral level in the context of
the social dialogue committees. At national
level, the social
partners should promote the declaration of economic activity
and employment and combat the incidence of undeclared work
through awareness-raising and other measures, such as collec-
tive bargaining undertaken in accordance with national tradi-
tions and practices, in ways which contribute to the simplifica-
tion of the business environment, particularly as far as small
and medium-sized enterprises are concerned.

2. Introduction

2.1
Undeclared work means that tax and social contribu-
tions are not paid into the public purse. Revenue is not
reported in economic activity and thus escapes taxation. VAT is
neither reported nor paid. Work is paid for ‘under the counter’.
Employer contributions are not paid on undeclared wages.
Neither do wage earners declare this income, so they pay no
income tax.

2.5
The first group is made up of businesses that engage
systematically in undeclared work — often in combination
with regular employment. Employees often get their wages
paid ‘under the counter’.

2.6
The second is made up of people with two or more
jobs, one of which might be undeclared. This group is made up
of well-educated employees, for example, who want to top up
the salary they get from their usual job in the regular labour
market with some extra money on the side.

Finally,

2.7
the third group is made up of unemployed
workers who, for various reasons, are forced to work in the
black economy because they are unable to secure employment
in the regular labour market. This group is particularly vulner-
able. They are often forced to work in poor conditions and for
low pay. They are not generally covered by social security
systems.

In addition to these three distinct main categories, unde-

2.8
clared work also takes place in other ways:

Unemployment or sickness benefits can be combined

2.9
with undeclared income.

2.10
For small repairs, homeowners and tenants turn to
workers who do not declare these jobs. They also do this for
removals, for example. The reason behind this type of unde-
clared work is often that the relevant firms consider these jobs
to be too small, so they suggest an employee who is prepared
to do the job in his spare time as long as he is paid ‘under the
counter’.

2.11
The situation in the new Member States is similar to
that in the EU15. However, the May 2004 Report on Unde-
clared Work in an Enlarged Union does highlight a specific
phenomenon: the employer officially declares only part of the
wage and the employee gets the remaining undeclared part as
‘envelope wages’ (4).

2.2
Consequently, society is deprived of a considerable
amount of the income, running into the billions every year,
that goes towards funding, inter alia, welfare systems.

It is important to point out that all these types of
2.12
undeclared work involve a not inconsiderable amount of tax
evasion.

2.3
Efficient, honest businesses are either pushed out or find
it hard to stay afloat and expand, whereas black economy busi-
nesses are able to stay in the market and even expand. This
threatens to undermine the efficiency of the whole economy,
and the productivity gains needed to continue to fund the
welfare state also fail to materialise.

Undeclared work occurs throughout society,

2.4
involving
both employers and employees. It can basically be divided up
into three groups.

This dishonesty undermines society's moral code and
2.13
that sense of responsibility that is essential
in a society in
which a not inconsiderable share of resources is used for redis-
tribution and social benefits. Tax evasion also leads to tensions
in society. A large proportion of the population pays tax while
others take it upon themselves to decide how much to pay in
tax and contributions.

(4) ‘Undeclared work in an enlarged Union’, European Commission,
for Employment and Social Affairs (2004),

Directorate-General
available in electronic format in English only:
http://europa.eu.int/comm/employment_social/employment_ana-
lysis/work/undecl_work_final_en.pdf

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2.14
Undeclared work does great damage to society as a
whole. However, the damage cannot be measured in monetary
terms alone. Trust is undermined at all
levels. Many people
accept or find excuses to do undeclared work; unemployment
benefit is too low; regular — i.e. tax-declared — home services
are too expensive, etc.

2.15
The rule of law and welfare systems are called into
question when respect for the law and for rules and regulations
cannot be maintained. It is therefore necessary to get to grips
with these problems, using comprehensive, targeted measures.
There is, however, a slowly growing recognition by the social
partners, politicians and society at large of the negative conse-
quences of undeclared work and the need to transform unde-
clared work into regular employment.

3. General comments

3.4.2
In its 1999 opinion on the Commission communica-
tion, the Committee endorsed the employment-based approach
to undeclared work. The Committee continues to adhere to this
view.

3.4.3
A whole range of measures is needed to achieve the
objective of transforming undeclared work into declared work,
or bringing black economy work into the legal
‘white’
economy.

3.4.4
First of all, we need to make a distinction between
those who ought to be employed in the regular labour market
and those who have chosen not to declare their activity.

3.4.5
It is also essential to understand which activities in the
informal black economy can be transferred to the formal,
‘white’ sector.

3.1
In 1999 the Committee issued an opinion on the
Commission Communication on undeclared work (5). The aim
of the Commission communication was to stimulate a wide-
ranging debate on this subject, both at EU level and in the
Member States. The Communication was followed by a study
carried out at the initiative of the Commission (6).

3.4.6
There is unlikely to be any demand for some types of
black economy activities or services in the legal economy. The
Committee therefore believes that this area requires special
attention. Support measures could perhaps be used to bring
these activities into the legal ‘white’ sector too.

The Committee welcomes the Council resolution aimed

3.2
at taking this issue forward.

At the same time, the Committee notes that in 2003,
3.3
the Commission embarked upon an extensive investigation into
undeclared work in the enlarged EU. The Committee believes
that the results of this enquiry, published in May this year (7),
make a valuable contribution to our understanding of unde-
clared work and how to combat it. The study thus provides
Member State governments and authorities with an important
basis for deciding the methods needed to tackle undeclared
work.

3.4 Part of the Employment Strategy

According to the Council, combating undeclared work
3.4.1
must be an integral part of the European Employment Strategy,
which aims to provide more and better job opportunities. The
Commission was already focusing on this objective and the EU
Employment and Social Affairs ministers expressed their views
at their informal meeting in Varese in July 2003. They recalled
that transforming undeclared work into regular employment
would contribute to achieving full employment,
improving
quality and productivity at work, strengthening social cohesion
and inclusion, eliminating poverty traps and avoiding market
distortions.

(5) COM(1998) 219 final; EESC opinion in OJ C of 12.4.1999, pp. 30-

37 (rapporteur: Mr Giron).

(6) Regioplan Research Advice and Information (Mateman, Sander &
Renooy, Piet): ‘Undeclared labour in Europe - Towards an integrated
approach of
(in English with
summary in French and German), Amsterdam, 2001.

combating undeclared labour’

(7) See footnote 4

The implementation of the Lisbon Strategy requires,
3.4.7
inter alia, new dynamic, competitive companies to be created
and developed in the European Union,
in order to provide
more jobs.

3.4.8
company with its own payroll
process.

Translating an idea into a functioning productive
is a very long, complicated

Consequently,

3.4.9
to create the right
climate for start-ups, i.e. one that is conducive to growth and
development.

is important

it

3.4.10
Employees must be able to expect the companies
they work for to be aware of and to comply with existing
labour market and tax legislation.

3.4.11
A balance needs to be struck between these two
requirements or there is a risk that a large number of compa-
nies will never see the light of day and that many good ideas
will never be translated into reality.

3.4.12
The visionary nature of the Employment and Social
Affairs Ministers' comments in Varese in July 2003 could easily
give the impression that bringing undeclared work into the
declared sector is merely an employment issue. Undeclared
work — particularly when it is organised systematically — is
often linked to other forms of economic crime. This crime calls
for specific societal initiatives and must be combated through
the usual channels.

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3.5 Definition of undeclared work

3.5.1
In order to separate undeclared work from other types
of economic activity, the Council uses the definition used by
the Commission in its 1998 communication: The Committee
took the view that the definition of undeclared work as ‘any
paid activities that are lawful as regards their nature but not declared
to the public authorities’ was acceptable in view of the need to
establish a common definition for all Member States. The
Committee endorses this approach.

3.6 Illegal immigration and undeclared work

The Committee has, on a number of occasions,
3.6.1
commented on the incidence and causes of illegal immigration,
and also addressed the relationship between illegal immigration
and undeclared work. Illegal immigrants do not have access to
the regular labour market nor to social security. They are there-
fore obliged to make a living somewhere else, and, more often
than not, they turn to the moonlighting sector. Moonlighting is
rife in industries such as the building trade and the agricultural
and gardening sectors. This often means illegal
immigrants
become heavily dependent on the irresponsible employers who
exploit them.

The EU Member States therefore need to take action
3.6.2
under the common immigration policy to combat illegal immi-
gration (8). This must be done using different strategies, which
could vary from Member State to Member State. One obvious
strategy is to make sure that illegal immigrants return to their
country of origin. Another is to step up border controls signifi-
cantly.

3.6.3
However, someone who is ready to give up everything
in his homeland in order to start a new life somewhere else is
possessed of an energy that is hard to counter.

3.6.4
There are also people whose papers are stolen or
confiscated in order to force them to pay back the costs of
their clandestine journey. Reduced to slavery, victims are
compelled by networks of people smugglers to repay their
‘debts’. Not only employees working for individuals (such as
servants) but also those working e.g. on building sites, in ship-
yards, on farms or in the catering industry are affected. It is
extremely disturbing to note that criminal activities are being
organised with the involvement of several social levels, before
our very eyes. In order to deal with the problem and to protect
victims by giving them rights and ensuring respect for such
rights, we must be aware of the situation and acknowledge that
it exists.

In a large number of cases of

3.6.5
immigration,
however, the person concerned cannot be sent back to his
homeland for humanitarian,
legal or practical reasons. Natu-
rally, in these cases the immigrant needs to be integrated into
society through various measures.

illegal

Future evaluation of transitional measures on the 'free
3.6.6
movement of workers' or rather, the lack of such freedom for
nationals of Member States which joined the EU on 1 May
2004, should discuss the unnecessary difficulties faced by
employers and workers, taking into account changing qualifica-
tions, demographic changes, cultural changes and changing
needs for mobility.

Otherwise there is a risk that

these groups will
3.6.7
become part of a moonlighting pool, with all the negative
repercussions this has for the regular labour market.

As the Committee pointed out in its own-initiative
3.6.8
integration and the role of civil
opinion on Immigration,
society organisations, an important complement
to other
measures to combat undeclared work is the use of various inte-
gration measures and eventually citizenship to admit the immi-
grant into civil society (9).

3.6.9
The authorities have a duty to clearly inform immi-
grants of their rights and duties, and ensure they have access to
the regular labour market and full access to training. Healthcare
and other services must be available to immigrants on the same
terms as the rest of the population. Housing segregation must
be avoided.

3.7 Preventive measures

3.7.1
In its resolution, the Council calls on the Member
States to create a legal and administrative environment that is
favourable to the declaration of economic activity and employ-
ment. More generally, the aim is to make undeclared work a
less attractive proposition.

3.7.2
some potential
together, can help to achieve the objective:

In this connection, the Committee would highlight
individually or used

solutions that, either

3.7.3
Comparative studies should be carried out in order to
ascertain which tax bases are particularly vulnerable to unde-
clared work and what potential exists to eliminate the problem.

3.7.4
The Member States must have properly functioning
legal systems in order to identify, prosecute and punish those
who engage in undeclared work. This is particularly important
where it takes place systematically and workers are exploited.

(8) See also Green Paper on An EU approach to managing economic

(9) OJ C 125 of 27.5.2002, pp.112-122 (rapporteur: Mr Pariza

migration, COM(2004) 811 final.

Castaños, co-rapporteur: Mr Melicias).

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3.7.5
Comprehensive information and education initiatives
must be implemented in order to show the damaging effect
that undeclared work has on society and on individual citizens.

3.8 Tax issues

Investigations

3.8.1
into the black economy generally
assume that undeclared work is a problem because it leads to
lower tax receipts.

Research carried out

in various countries into the
3.8.2
extent of
for the
the black economy provides no support
hypothesis that there is a statistical link between the size of the
sector and the overall tax burden.

3.8.3
The link between undeclared work and the tax burden
is complex. The Committee does not believe that low taxes
automatically lead to less tax evasion. The black economy also
exists in countries where tax and contribution rates are low.

The Committee would welcome a comprehensive
3.8.4
study to shed light on the link between taxes and contributions
and the extent of undeclared work.

Since experience shows that undeclared work often
3.8.5
firms with limited administrative
takes place in very small
resources, one might ask whether
this is
the reason for
unawareness of the rules in force, if the rules are too compli-
cated or if undeclared work is carried out deliberately in order
to gain competitive advantages.

3.8.6 We place much store by fairness. This is why our
systems of regulation are so detailed. The tax system is an
example of this. High expectations of fairness mean that large
resources have to be committed, not least for the authorities
tasked with ensuring that decisions are complied with.

3.8.7
If a not insignificant proportion of businesses and
employees in a certain sector chooses to withhold profits and
wages from taxation, the tax system can be perceived as unfair
by honest businesses, which can even be forced out by unfair
competition.

3.8.8
There is therefore a case for exploring whether greater
use can be made of flat-rate schemes in order to provide a
simpler system that makes life easier for both individuals and
the authorities. This would reduce the scope to manipulate
systems and free up resources
to pursue more serious
lawbreakers.

The Committee would add, here, that undeclared work must, of
course, be combated by means of more regulation and public
scrutiny. Failure to disclose paid employment should not be
seen as a minor offence. As stated in the current employment
guidelines, law enforcement capacity should be enhanced and
linked to effective sanctions, as a disincentive to illegal work.
Measures to curb undeclared work should always rest on the
twin pillars of sanctions and prevention. These two aspects are
mutually complementary, but neither can stand alone. A dual
strategy combining control measures and incentives is also set
out in the Council resolution and the current employment
policy guidelines. The EESC endorses this approach.

3.9.2
Individual business people often feel that regulation
and controls are patronising. Merely increasing the amount of
regulations issued by the authorities is unlikely to produce an
improved moral climate. Several sectors are currently cleaning
up their act and ethical considerations are gaining ground in
various organisations. Such voluntary action to combat illegal
work is to be welcomed, but it cannot take the place of moni-
toring by the relevant authorities.

3.10 The need for information and education

3.10.1
For a worker, a job in the black economy generally
involves a looser, more short-term type of employment, with
no chance of career progression. Black economy firms cannot
grow to any appreciable extent for fear that their fraud will be
discovered. Workers who go in for undeclared work will there-
fore be denied any career development opportunities. Wages
will not rise in line with the legitimate labour market, nor will
sickness and pension contributions be paid.

3.10.2
People who engage in or organise undeclared work
usually do so for a reason: to avoid paying taxes and social
contributions. It is extremely important to increase awareness
of the link between the payment of social contributions and
future social benefits.

3.10.3
The Committee believes that both these examples
show the need for comprehensive information and education
initiatives. This means illustrating the negative impact unde-
clared work has on the individual and society in the short- and
long-term.

3.9 Monitoring and control

3.9.1
One of the Council resolution's key arguments with
regard to transforming undeclared work into regular economic
activity is that monitoring and sanctions must be stepped up.

3.10.4
The social partners and industry organisations can
play a crucial role here. Undeclared work will be a less attrac-
tive proposition if the social partners see to it that wage agree-
ments are properly respected and if they ensure, together with
those representing business interests, that no-one is employed
to do undeclared work. Employer and industry organisations
could require their members to adhere to codes of conduct or
risk various forms of sanctions.

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3.10.5
However, the price of honesty must not be too high,
otherwise the black economy could spread like wildfire. The
black economy is more widespread in certain sectors. At the
same time, there is, of course, a risk that some sectors could be
singled out as a matter of routine because the black economy is
easier to detect there than in others.

3.10.6
must decide in matters of morality, ethics and justice.

In the final analysis, it is always the individual that

4. Summary and conclusions

it

is very difficult

Undeclared work takes place at all

4.1
levels of society.
to establish its overall extent.
However,
According to some studies, the informal sector accounts for an
average 7 % to 16 % of EU GDP. There is therefore much to be
gained by eliminating undeclared work and its underlying
causes.

4.2
The Committee would like to draw attention here to a
number of areas which need to be examined more closely and
taken into account in order to find appropriate ways to resolve
the problem:

— Incentives to declare work should be improved.

— Women are often in a vulnerable position when it comes to
low-paid, undeclared work. Therefore their situation needs
to be studied in greater depth so that appropriate measures
can be taken.

— Business rules and regulations should be changed so as to
cut red tape, especially with regard to start-ups. However,
start-up owners must also have basic business administra-

Brussels, 7 April 2005

tion skills. It is important that they should be aware of the
demands of society regarding the running of a business,
including in the area of labour law and social security for
employees.

— There is a need for an extensive public information
campaign to make producers and consumers aware of the
negative
impact of undeclared work on government
revenue and social security and protection schemes and its
negative consequences for solidarity and justice.

— Effective monitoring by the relevant authorities must be
stepped up, for example though enhancement of law enfor-
cement capacity, and cooperation between the relevant
authorities both at national and cross-border level.

— Illegal work should not be seen as a minor offence. Effective
sanctions must therefore be applied, in particular to act as a
disincentive for businesses to indulge in the practice.

— Lastly, the Committee points out that some third countries
do not adhere to generally accepted social standards and
recommends that EU companies operating in such coun-
tries take this into account.

4.3
Finally, the Committee would stress the importance of
getting the high unemployment rate down to a minimum in
the Member States, as this is largely responsible for the exis-
tence of undeclared workers and undeclared work. Conse-
quently, it is important to ensure that the European Employ-
ment Strategy is actually implemented, with the help of the
national action plans. A smoothly operating labour market
with full employment and quality jobs is the best antidote to
undeclared work.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND