State to hold employers responsible for foreign labor

Photo: Kristjan Teedema

A bill to introduce stricter rules for hiring foreign short-term labor is once more on the government’s agenda. Even though the details are still being debated, the aim of the changes is to hold entrepreneurs responsible for illegal workers from third countries.

This means that in addition to short-term workers from third countries and their employers, the obligation to prove workers are employed legally would also fall on companies making use of rental labor. The same requirement would also apply to companies receiving posted foreign workers. The Police and Border Guard Board (PPA) could not say how many Estonian companies use foreign labor without an in-depth analysis.

Government rushing changes

The draft legislation from the Ministry of Internal Affairs aims to put a stop to violations of working rules in Estonia and ensure companies cannot avoid taxes or pay foreign workers less than the national average salary.

The government is in a hurry to introduce the changes. Demand for foreign labor has spiked, including for Ukrainian labor brought to Estonia through Polish companies not paying taxes here.

If the PPA issued a total of 19,806 short-term work permits in 2018, such cases were up to 32,262 last year, with the figure expected to grow to at least 36,000 in 2020. The PPA only issued 7,509 short-term work permits in 2017.

More foreign labor means more employers who ignore the law, the bill’s explanatory memorandum reads. Labor tax avoidance is another major problem, costing the state €8.7 million in just three months last year.

To remedy the situation, Minister of the Interior Mart Helme (EKRE) introduced planned changes to foreign labor legislation last summer that the ministry wanted to enter into force already in December. Things did not go that smoothly, however.

The initiative drew the strongest criticism from the Ministry of Social Affairs. Minister Tanel Kiik (Center) criticized the plan for lack of a proper effects analysis. Kiik says there are still plenty of loose ends when it comes to technical aspects of the bill now, after the Ministry of Internal Affairs has presented the complemented version of the bill to the government.

“When creating new bureaucratic mechanisms, it should be attempted not to bring about new legal disputes or insensible bureaucratic obligations for all entrepreneurs, including companies that operate in accordance with the law. It is a matter of striking a balance,” the minister explained.

Even though the bill suggests there might be 1,000-5,000 people working in Estonia illegally, the burden of proofs falls on everyone equally and affects a plethora of companies making use of foreign labor and tens of thousands of workers. The changes could make Estonia a less attractive business environment. The Ministry of Internal Affairs believes checking workers should be easy and work through e-inquiries on the PPA website. If a worker does not have the right to work at the company, it is possible to apply for a short-term work permit for them electronically using the PPA’s self-service portal.

Executive Manager of the Estonian Employers Confederation Arto Aas and Director of the Estonian Chamber of Commerce and Industry Mait Palts do not understand why companies using rental labor that are operating in good faith and complying with all the rules when dealing with labor mediators are to be held responsible on the same grounds as employers. “Why cannot watchdogs simply check whether the person has a legal basis for working in Estonia instead of inspecting labor users?” they wrote in an address to the interior ministry. They pointed to the idea of an employee card system for workers in the construction sector, including rental labor.

The changes would also hold companies using rental labor responsible for making sure their people are working in Estonia legally and based on a contract or other agreement between the employer and the final labor user.

That said, companies using rental labor are already obligated to make sure foreigners that work for them have the right to stay and work in Estonia. Employers who hire illegal immigrants, make it possible for foreigners to violate Estonian working rules, withholding salary or paying foreigners less than the law requires.

Failure to comply could bring a fine of €1,200 for physical persons and €32,000 for companies. The same fine amounts are in effect today.

For example, if the employer or labor broker registered a foreign worker for seasonal work but the latter actually works at a construction site or for a company using rental labor, their activity is not in accordance with the conditions of their work permit (seasonal work) and the employer is obligated to register the foreigner as a general short-term worker.

Polish companies to lose tax advantage

In addition to amending the Foreigners Act, the ministry also plans to amend the Income Tax Act and the Taxation Act. This would also place income tax obligation on foreign companies offering Estonian companies rental labor. The current situation has given them an advantage as they can rent out labor cheaper than companies that have to pay taxes on workers’ salary. In addition to better control of foreign labor, the ministry also hopes to favor creating equal opportunities for Estonian firms.

The additional income tax obligation could hike the price of rental labor, meaning that foreign rental labor might become less attractive. At the same time, the possibility of hiring rental workers whose income has not been taxed in any country disappears.

The Ministry of Finance estimates that the amendment could yield the state €4.5 million if taxes are paid on an additional 500 foreign workers in 2020.