Users of undeclared workers conceal work to avoid employer obligations
The salary for undeclared work is usually paid in cash. The salary or part thereof paid to a worker is not declared to the Tax Administration and the employer does not pay the employee’s social insurance payments, such as employment pension, unemployment insurance and accident insurance premiums. In such situations, the employer often also fails to comply with other regulations governing working life or the industry’s collective agreement. Undeclared work is often agreed upon between the parties of an employment relationship.
Undeclared work may also include artificial arrangements, in which the employee’s employment relationship is concealed as practice of a trade. The purpose is to avoid employer obligations. A person in charge of the company may also withdraw funds for themselves contrary to the law as remuneration for the work they have carried out to avoid the obligations related to the payment of wages. The new platform economy based on digital platforms is changing the forms of working and employment relationships at the same time as responsibility for taxes and statutory payments may become unclear.
Undeclared work is an international phenomenon
The use of undeclared workers is an international phenomenon involving both domestic and international operators. In Finland, the risk of the abuse of workers increases in step with an increase in foreign employees. In the most serious cases, the use of undeclared workers may involve extortionate work discrimination, forced labour and trafficking in human beings when the work is carried out in unlawful conditions.
Foreign labour has arrived in Finland recently particularly from the Baltic countries, but increasingly also from Ukraine and other countries that were a part of the former Soviet Union. The cleaning and restaurant sectors have large numbers of foreign born entrepreneurs who employ citizens of their country of origin. These employees often lack language skills and are unfamiliar with legislation or their own rights. The employer and employee may have an understanding that the terms and conditions applied to wages and the employment relationship are agreed upon in line with the practices of their country of origin, despite Finnish legislation.
The use of undeclared workforce often involves professional characteristics, meaning that undeclared workers are recruited abroad professionally. Organised crime or corruption may also play a role.
Undeclared work almost always involves criminal activities
An employer relying on undeclared workforce may be guilty of a number of different crimes at the same time. The act may fulfil the constituent elements of tax fraud, a fraud concerning social insurance as well as industrial and work safety. The employee may also be guilty of a tax fraud by concealing the undeclared income in taxation.
A deficit of hundreds of millions in state funds from undeclared work
Based on the observations of several authorities, the amount of undeclared work in Finland has been on the rise over the past two years. The increase is indicated in, for instance, increased contacting of industrial safety authorities and the inspection observations collected by authorities at construction sites. More people without a right to work have also been met during inspections than before.
The growth of undeclared work is influenced by a number of factors, including the free movement of foreign workers within the EU, recent developments in the number of asylum seekers and the consequential growth in the number of undocumented people residing in the country without authorisation. Elsewhere, long subcontracting chains enable the concealment of the actual employer. In some industries, the recurring bidding competitions over contracts is driving companies to financial difficulties, due to which savings are sought even through illegal means, by paying undeclared wages, for example. The phenomenon of undeclared work is particularly visible in labour-intensive industries, which include the construction, restaurant and cleaning sectors as well as temporary work agencies.
The Grey Economy Information Unit has investigated undeclared work and estimated its value in 2014–2020.The annual value of undeclared work is estimated to be €900–1,400 million in Finland. Undeclared work also causes losses of taxes and social insurance contributions totalling €300–480 million.
The use of undeclared workers distorts competition and erodes tax morale
Companies that employ undeclared workers gain undue competitive advantages and cause indirect damage to companies operating in the same sector legally. Unpaid insurance premiums, for example, are paid for by employers who have taken out the insurance in the form of higher insurance premiums.
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 use of undeclared work causes damage to society in the form of lost taxes and social insurance payments. In addition, the use of undeclared workers involves the misuse of social support, such as funds granted by Kela.
Undeclared work results in a variety of risks to the company, involving the company’s reputation, for example, as well as the quality of work and the liability for errors.
Undeclared work is prevented through the cooperation of authorities and companies
Authorities engage in close cooperation to prevent undeclared work both at home 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. Bringing foreign criminals to justice is often more difficult than bringing Finnish criminals to justice because the offenders are often hard to reach after the fact.
Open communication by authorities and cooperation with collective industrial organisations has had a positive impact on the prevention of undeclared work. Legislative amendments concerning the construction industry, extensive monitoring and active cooperation have had an effect on the amount of undeclared work and thereby the growth in the industry’s total payroll.
Further development of the legislation enables increasingly effective prevention of undeclared work. The Act on Public Procurement and Concession Contracts, for example, prevents the use of undeclared work by exclusion grounds related to competitive bidding. The authorities also distribute information about employer obligations and the disadvantages of undeclared work. These measures aim to encourage companies to make legal choices.
The nearly real-time payment-specific payroll information in the Income Register will provide authorities with new ways to prevent undeclared work.
Information on whether a company has joined the employer register or the withholding tax register is available online at YTJ-register [.fi]›.