Users of undeclared workers neglect employer obligations
The wages for undeclared work are usually paid in cash, in virtual currency or through foreign neobanks. All or some of the wages paid to the employee are not declared to the Incomes Register and the employer does not pay the employee’s social security contributions such as employment pension, unemployment insurance and accident insurance premiums. These situations also often involve not complying with the applicable collective agreement or other rules governing employment. Undeclared work is often agreed between the concerned parties, meaning the employer and the employee.
Undeclared work may also involve artificial arrangements where an employee’s employment relationship is concealed as practice of a trade or light entrepreneurship, for example. In these situations, the purpose is also to avoid employer obligations. A person in charge of a company may also unlawfully withdraw the company’s funds for themselves as compensation for the work they have done to avoid obligations related to the payment of wages. The digital platform economy has also changed the forms of working and employment relationships, which may further muddle the responsibilities related to taxes and statutory fees.
Undeclared work is an international phenomenon
In Finland, the use of undeclared work involves both domestic and international operators. The risk of the abuse of workers increases in step with an increase in foreign employees because they often have lack of language skills and are unfamiliar with legislation or their own rights. In the most serious cases, the use of undeclared workers may involve extortionate work discrimination, forced labour and human trafficking when work is carried out in unlawful conditions. The employer and employee may also have a mutual understanding that the agreed terms and conditions applied to wages and the employment are not compliant with Finnish legislation and collective agreements.
The rise in undeclared work is influenced by several factors, such as the free movement of foreign labour within the EU. The free movement of labour is also abused by posting citizens of third countries via one EU Member Sate to other EU Member States, which means that it is not genuine posting. It is challenging for public authorities to intervene in this phenomenon, called fake posting in Europe. In addition, recent years have seen an increase of cases where an employment relationship is converted into a commission relationship without the employee understanding the switch, while the terms of the arrangement still match that of an employment contract. This phenomenon has previously appeared in the construction and service sectors, but it has also expanded to include industry and forestry. It often leads to the neglect of employer obligations.
In addition to EU Member States, foreign labour has arrived in Finland in recent years from third countries such as Ukraine, the Philippines, Russia, India and China. According to the observations of the occupational safety and health authorities, there has been an increased number of workers from Kazakhstan and Uzbekistan at construction sites. In the cleaning and restaurant sectors, it is typical that foreign-born entrepreneurs employ citizens from their own country of origin.
Undeclared work is directly linked to criminal activities
An employer that uses undeclared workers may be guilty of several different crimes at the same time. Their actions may, for example, fulfil the constituent elements of aggravated tax fraud, accounting offences, pension insurance premium fraud and occupational safety offences. The employee may also be guilty of a tax fraud by concealing undeclared income in taxation.
The use of undeclared workforce often involves professional characteristics, for example in situations where employees are recruited from abroad. Organised crime or corruption may also play a role. It is often difficult to hold foreign actors liable for these crimes and damages because the perpetrators cannot be reached afterwards.
A deficit of hundreds of millions in state funds from undeclared work
Based on observations made by several public authorities, the amount of undeclared work in Finland has been on the rise, with more and more signs of employment relationships being disguised as commissioning relationships. This growth is indicated in, for instance, increased contacting of occupational safety and health authorities and the inspection observations collected by authorities at construction sites. More people without the right to work have also been encountered during inspections than before.
In some sectors, long subcontracting chains enable the concealment of the actual employer. Recurring bidding competitions over contracts is also driving companies to financial difficulties, and as a result, savings may be sought through illegal means such as paying undeclared wages. The phenomenon of undeclared work is particularly prevalent in labour-intensive industries, such as the construction, restaurant and cleaning sectors as well as temporary work agencies.
Undeclared work causes losses to society, for example as unpaid taxes and social insurance contributions. In addition, the use of undeclared labour involves the misuse of social benefits, such as ones granted by Kela.
The Grey Economy Information Unit has studied undeclared work and estimated its value in 2014–2020. According to the study, the annual value of undeclared work is estimated to be €900–1,400 million in Finland. Undeclared work causes losses of taxes and social insurance contributions totalling €300–480 million each year.
Distorted competition and eroding tax morale
Companies that employ undeclared workers gain undue competitive advantages and cause indirect damage to companies operating lawfully in the same sector. Companies using undeclared workforce can sell products or services more cheaply due their savings in taxes and fees gained by neglecting employer obligations. In addition, employers who take out appropriate insurance end up paying higher insurance premiums to compensate for others’ unpaid statutory insurance payments. Undeclared work results in a variety of risks to the contractor, involving the company’s reputation, the quality of work and liability for errors.
The undeclared worker is left without the security provided by the pension and social insurance offered by the employer, which has an impact on the amount of the employment pension accrued, among other things. Employees may also be underpaid or left without pay altogether. The invoicing by workers forced to bogus self-employment may be so low that the amount will not even cover tax payments or other compulsory contributions related to entrepreneurship.
Combating undeclared work through the cooperation of authorities and trade unions
Authorities engage in close cooperation to prevent undeclared work both in Finland and abroad. Functioning cooperation between the authorities has a preventive effect, as knowledge of the risk of being caught spreads among entrepreneurs. Serious cases always end up in a pretrial investigation carried out by the police, the consideration of charges and the assessment of a court of law. EU Member States cooperate actively, including under the leadership of the European Labour Authority (ELA), to combat undeclared work, for example by exchanging information on cross-border methods of undeclared work and how to combat them.
Communication about the phenomenon and cooperating with labour market organisations have been effective ways of combating undeclared work. For example, an RT instruction card on combating labour exploitation was published for the construction sector in autumn 2024. The aim is to establish guidelines and practices in the sector to combat this harmful phenomenon.
The development of legislation can promote the fight against undeclared work. One example is the Act on Public Procurement and Concession Contracts, which prevents the use of undeclared work by exclusion grounds related to competitive bidding. In addition, legislation on reporting obligations in construction and on shipyard tax numbers have been enacted to reduce undeclared work, especially in high-risk sectors.
The Incomes Register provides public authorities with nearly real-time earnings payment data, which makes it an important monitoring tool for detecting undeclared payment of wages. However, some notifications of payment to the Incomes Register have been found to involve misuse related to the payment of undeclared wages.
Public authorities have jointly implemented the Work Help Finland [.fi]› application aimed at foreign workers arriving and staying in Finland, offering information on workers’ rights and obligations.
Online at www.ytj.fi/en [.fi]› you can check whether a company is in the Employer Register or the Prepayment Register.