Thematic feature - industrial relations and undeclared work

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This article gives a brief overview of the industrial relations aspects of undeclared work in Cyprus, as of June 2004. It looks at: the nature and extent of undeclared work; the regulatory framework; the role, activities and views of the social partners; and partnerships between social partners and public authorities to tackle undeclared work.

The phenomenon of undeclared work - defined as 'any paid activities that are lawful as regards their nature but not declared to the public authorities'- is an issue which has been preoccupying the EU institutions for a number of years. In 1998, the European Commission issued a Communication on undeclared work, which was designed to launch a debate on the causes of such work and the policy options for combating it (EU9804197F). It suggested that there was a need to clarify the causes and extent, and concluded that combating undeclared work should be part of the overall European employment strategy.

According to the Communication on undeclared work, the main motivation for employers, employees and self-employed people to participate in the undeclared economy is economic. Working in the informal economy offers the opportunity to increase earnings and to evade taxation on income and social contributions. For employers, the incentive is to reduce costs. The same document mentions three factors contributing to undeclared work: i) demand for 'personalised services' to households; ii) reorganisation/restructuring of industry and firms; and iii) the impact of new technologies. Undeclared work has impacts on the social security systems, public finances, competition and industrial relations. At that time, studies estimated the average size of the informal economy at between 7% and 16% of the GDP of the then 15 EU Member States. The Commission has launched a number of studies on the topic, covering issues such as 'Measuring undeclared work' (the latter in collaboration with Eurostat). In July 2004, the Commission issued a new report on Undeclared work in an enlarged Union (EU0407204F). It looks at the incidence in each Member State, including the 10 new Member States that joined in May 2004, and examines the reasons behind the growth in undeclared work.

Since 2001, the issue of undeclared work has been included in the EU employment guidelines. The current version includes a specific guideline entitled 'transform undeclared work into regular employment'. This provides that Member States should develop and implement broad actions and measures to eliminate 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 necessary efforts at national and EU level to measure the extent of the problem and progress achieved at national level.

Finally, in October 2003, the Council of the European Union adopted a Resolution on undeclared work (EU0311206F), calling on Member States to address this issue and to work together to improve the situation. Suggested actions include preventative measures and sanctions aimed at eliminating undeclared work. The Resolution also invites the social partners at European level to address this issue within the context of their current multiannual work programme (EU0212206F) - indeed, the partners plan a seminar on the issue in 2005, with the aim of reaching a joint opinion - and to deal with it in the context of the sectoral social dialogue committees. The Council calls on the social partners at national level to promote the declaration of economic activity, to engage in awareness-raising and to promote the simplification of the business environment, particularly in relation to small and medium-sized enterprises.

Given this high level of interest in the subject, in June 2004 the EIRO national centres in 23 European countries were asked, in response to a questionnaire, to give a brief overview of the industrial relations aspects of undeclared work, looking at: the nature and extent of undeclared work; the regulatory framework; the role, activities and views of the social partners; and partnerships between social partners and public authorities to tackle undeclared work. The responses for Cyprus are set out below (along with the questions asked).

Nature and extent

Please describe briefly the nature and extent of undeclared work (ie 'any paid activities that are lawful as regards their nature but not declared to the public authorities') in your country. The aim here is not to provide very detailed statistical information or go into concrete calculation methods, but only to give what overall figures are available, plus broad estimates and indications where such figures are lacking. This should cover matters such as: the overall amount of undeclared work; gender aspects (ie are women more or less affected, and why?); the relationship between undeclared work and migration (please distinguish between legal and illegal migration); and sectoral aspects (ie which sectors are most involved).

There is a significant gap in knowledge relating to the extent of undeclared work in Cyprus (CY0401102F), and any available data are fragmentary. Such data derive from various sources, and the methods by which they were collected and processed are not known. In this context, it is problematic to cite any data. However, according to some estimates the phenomenon of undeclared work is more widespread in specific sectors of activity, in particular in construction and the hotels industry, as well as some other parts of the services sector.

Undeclared work is thought mostly to affect specific categories of workers who are more vulnerable generally, particularly foreign workers and Turkish Cypriots, and to a lesser extent women and new labour market entrants. Some indications of this are given by the latest available data on the construction industry, published in December 2003, which concern 789 inspections carried out by the Ministry of Labour and Social Insurance in November 2003. It was found that 11.3% of employers and 29.9% of workers inspected were not registered with the social insurance Scheme. Of the total number of employees not declared by their employers, two-thirds were Greek Cypriots and a third were Turkish Cypriots. These inspections formed part of an inspection campaign on the social insurance situation of Turkish Cypriots and Greek Cypriots and thus did not examine other categories of employees such as foreign workers. This inspection campaign was carried out in response to pressure from the employers' organisations and the trade unions in the sector.

Undeclared work is employment which is lawful in nature but is not declared to the public authorities. In Cyprus, according to estimates by the parties involved, apart from people whose employment consists solely of undeclared work - ie cases where undeclared work is the only source of income for the employee - another frequent phenomenon is partially undeclared work, which can take one of two forms: either part of the working time is not declared; or there is a second undeclared job with shorter working hours. Data from the labour force survey for 2003 show that 6.9% of all employees had a second job; in 2002 the figure was 4.9%.

Law

What is the legislative framework in your country concerning undeclared work? Please include here: definition; incentives for transformation of undeclared work into regular work; sanctions and penalties; connection with the tax system and benefits; any attempts at administrative or fiscal simplifications; and any recent legislative changes.

There is no special legislative framework directly relating to the definition and regulation of undeclared work. However, a reading of the legislation on social insurance might suggest that any form of employment contrary to the provisions in the relevant legislation should be regarded as undeclared work. Specifically, according to Article 4 of Social Insurance Law 41/80, as amended prior to and during 1997, 'for any contribution period during all or part of which a person was an employee, contributions must be paid by the employee, the employer and the Permanent Fund of the Republic of Cyprus'. A contribution period is defined as a calendar month or a calendar week, depending on how the employee’s earnings are calculated. Earnings of less than CYP 1 per week or CYP 4 per month are deemed to be negligible and do not entail an obligation to pay contributions. Also worth noting on the legislative level, since the employment of foreign workers in Cyprus (CY0311103F) is clearly linked to the phenomenon of undeclared work, is an April 2004 agreement by the social partners immediately to implement a December 2003 Ministerial Committee decision om medical care for migrant workers. This decision makes healthcare insurance for migrant workers mandatory and also makes such cover a precondition for issuing entry permits or renewing temporary residence and work permits to such workers (CY0405102N).

Social dialogue

Please provide an overview of any collective agreements dealing with the issue of undeclared work (at any level - eg intersectoral, sectoral, company, regional). If there are any such agreements, please outline their content and, if possible, their impact, giving examples. Where possible, please provide details on collective agreements in sectors particularly affected by undeclared work, such as hotels/restaurants/catering, agriculture, domestic/personal services, retail or construction.

To date, the problem of undeclared work per se has not been the subject of social dialogue. However, the social partners have dealt with it indirectly, in the framework of tripartite or bipartite meetings. More activity in the form of specific initiatives has been seen at sectoral level, particularly with reference to the building/construction industry. The sector’s most recent collective agreement was signed in April 2004 (CY0404101N). In Article 8, which is considered to be one of the agreement’s most important provisions, the two sides agree that they will hold discussions in a positive spirit in an effort to convince all employers to implement the collective agreement. To this end, the two sides agreed to prepare a joint memorandum, to be submitted to the competent bodies, containing recommendations on tackling two practices conducive to undeclared work - the non-implementation of the agreement by a large proportion of employers, and its violation by a number of employers who are members of the Federation of the Building Contractors Associations of Cyprus (OSEOK).

Please give details of any joint or unilateral initiatives on undeclared work taken by trade unions and employers’ organisations (such as information campaigns, providing training for their members responsible for negotiations, or adopting codes of conduct/ethics).

Another construction sector initiative has involved the submission of a joint framework of positions by OSEOK and trade unions affiliated to the Pancyprian Federation of Labour (PEO) and the Cyprus Workers' Confederation (SEK), regarding the employment of Turkish Cypriots in the areas controlled by the Republic of Cyprus. The memorandum states that Turkish Cypriots constitute 30%-35% of the total number of people employed in the construction industry and related sectors, and proposes measures to improve their terms and conditions of employment. Such measures include reinforced audits by the Ministry of Labour regarding mandatory social insurance contributions and audits by the Ministry of Finance regarding the mandatory payment of income tax.

Partnerships

Please outline any initiatives taken jointly by public authorities and social partners in order to address undeclared work, and their results. What types of partnerships exist in your country (eg involving local authorities or NGOs) and what tools or measures have been used to address the problem? Please refer to good and bad practices, indicating which policies have proved to be successful in the national context and why (such as a good mix of actors, cultural traditions or flexible tools).

Has a comprehensive partnership on undeclared work developed in the context of your country’s National Action Plans (NAPs) on employment (in response to the EU employment guidelines)? Have there been significant tripartite arrangements on undeclared work as a result or in the context of the NAPs? How have the social partners at various levels implemented the aspects of EU employment guidelines on the issue of undeclared work that are under their responsibility?

There has been no broader cooperation among the bodies concerned to address the problem of undeclared work. In view of the fact that 2004 is the first year that Cyprus is officially taking part in the NAP process, neither the government’s plans nor the positions of the social partners have been made public at the time of writing.

Views

Please summarise the views of trade unions and employers’ organisations on the issue of undeclared work. Please include their positions on the role of the administrative, tax system and social welfare regime, and their view/assessment of government initiatives.

As a whole, both the employers' organisations and the trade unions are against undeclared work. For the unions, the basic issue is ensuring the employment rights and social rights of all workers. For the employers' organisations, undeclared work sustains unfair competition among enterprises.

On the trade union side, PEO is examining possible amendments to the existing legislation, particularly as regards social insurance, and is planning to submit specific proposals. PEO also highlights a need to impose stricter penalties on employers that break the law. According to SEK’s official position, the problem of undeclared work in Cyprus is linked on one hand to the current system of industrial relations, and on the other to an inability on the part of the state to implement labour legislation. In this regard, SEK highlights its demand that collective agreements be made binding in law (CY0402102N), along with a demand for better staffing and support for the work of the labour inspectorates.

Commentary

Please give your own comments on the issue of industrial relations and undeclared work.

Although undeclared work is a problem in Cyprus, it has not been the direct subject of public dialogue. Those initiatives that are more specific in nature have concerned the construction industry, and in general neither the employers' organisations nor the trade unions have an integrated framework of proposals and positions on this question. A serious gap can be seen in the state’s existing labour inspection mechanism. A recent intensification of inspections has concentrated on the issue of payment of social insurance contributions, and mainly involves a comparison of the terms and conditions of employment of Greek Cypriots and Turkish Cypriots. Additional measures on the sectoral level and in the construction industry in particular will be of decisive importance for curtailing the phenomenon of undeclared work in the future, and any attempts to improve immigrants’ terms and conditions of employment will be of particular importance. Cyprus’s first National Action Plan for employment, which is expected to be the product of social dialogue, is awaited with particular interest. (Eva Soumeli, INEK/PEO)