Illegal foreign services distort competition and create disturbances in the labour market

(Helsinki 15.06.2005 - Juhani Artto) Before the EU enlargement in May 2004 Finland imposed a two year transition period for the free movement of labour from the new EU Member States. In practise, this piece of legislation has remained ineffective, as it is possible to circumvent the planned restrictions. That is due to a loophole in the legislation that allows enterprises, registered in the new Member States, to offer freely services for customers in Finland. That includes the right to send to Finland the personnel that produces the services.

In most cases the concerned service providers have been enterprises registered in Estonia. Many of these enterprises have either Finnish owners or managers or both. According to the latest surveys there are, in the Estonian business register, about 2 700 enterprises with that kind of connections with Finland. Since May 2004 the amount has increased rapidly. Quite many of those enterprises have registered themselves in Estonia only to be able to utilise - or abuse - cheap Estonian labour in work done in Finland.

"Finland begins to be full of enterprises, registered in Estonia or other Baltic States, that send their labour to Finland for subcontracting", says Markku Hirvonen who is the manager of the Ministry of Finance project exposing secrets of grey economy.

Poor wages and neglect of social security

As the control of service provisions from abroad has been rather limited several types of illegalities has taken place in the service provision from the new Member States.

One of the major forms is to pay to the employees much below the minimum wage, defined in the respective Finnish collective agreement, even though the agreement would be of generally binding character. Paying too small wages and salaries, often connected with neglect of the social security fees, gives services providers, registered abroad, unfair advantage in competition of assignments. Honest enterprises and their employees suffer of this.

Often, also the governments belong to the losers. If the work done by a sent employee lasts less than six months he or she is not obliged to pay income tax in Finland. In such cases the employee should pay tax in his or her own country, such as Estonia, but according to Hirvonen, a large proportion pays there only a little or no tax at all. The same problem concerns the Finnish tax collection in cases of the foreign employees' work in Finland lasting more than over six months. Especially difficult to collect income tax from them it is when employees frequently change their employers, Hirvonen says.

The illegal practices create disturbances also in the labour market. Most serious the situation is in the construction industry where thousands of foreign workers work illegally. The construction workers' union monitors actively doubtful construction sites but its resources do not suffice to check all doubtful sites. Hirvonen is satisfied with the close co-operation the project, led by him, has with the Construction workers' union.

Also co-operation between different authorities, such as police, tax and customs authorities, is in international comparison exceptionally smooth.

Construction sites, dockyards, horticulture

Hirvonen estimates that in the construction industry the number of foreign workers who do not pay tax is closer to 10,000 than 5,000. Roughly half of them utilise the loophole in the legislation, the other half work purely illegally.

Other industries that suffer of illegal activities of enterprises registered abroad are ship building and other engineering industry, horticulture and agriculture, where there is demand for seasonal labour, and catering. The latter one differs from the others, as demand for foreign labour concentrates in so called ethnic restaurants and in most cases concerns individuals, not subcontracting enterprises.

The Ministry of Labour estimates about the amount of foreign labour in grey economy are lower than the figures given by trade unions and the project, led by Hirvonen. The Ministry of Labour makes this understatement to avoid the image that foreign labour or its users would be accused of being guilty of fraudulent practices, Hirvonen explains.

This article was first published in English in Trade Union News in Finland.