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
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
Construction sites, dockyards,
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
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
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.