02 October 2011

Employment and tax evasion: a Spanish timebomb

Spain

It goes without saying that this blog would be punching above its weight a tiny bit if it even tried to analyse complex economic circumstances and possible causes behind the recent global crisis. We simply wouldn’t have a clue.

But I tell you one thing. I don’t know how Spain is going to manage when the twenty, thirty and forty-somethings of today approach their retiring age. Forget today’s mammoth crisis, either the country will collapse to bits or most Spaniards will be forced to work full-time into their eighties and nineties until the day they snuff it.

And this is because millions and millions of Spaniards today are being forced, certainly against their free will, to contribute between little and nothing to the state’s coffers.

I explain...

In Spain, tax evasion on the part of low to mid-scale employers is absolutely endemic.

Unless you work for big companies and/or multinationals (the only ones who seem to be subjected to regular and thorough inspections from the Hacienda, which is not Manchester’s former music club, but the Spanish equivalent of the Inland Revenue), your social security contributions will be systematically dodged by your boss.

A concrete example. Imagine you verbally agreed with your employer a monthly salary of €1,000.

When it comes to the contract, however, the crook will get you to sign a sheet saying that your salary is, say, €700 but not to worry, the remaining 300 will be handed out to you under the table. Cash in hand, of course, which means the bastard will pay less tax on each single employee. As far as the taxman is concerned, your official salary is €700 and not a penny more.

This is happening endemically up and down the country and the only variable factor is the proportion of your salary which you will receive in cash, which can vary from roughly 20 per cent to the whole thing (which means you’re officially on the dole and doing work illegally).

Your boss will likely justify this scam by saying that it’s only thanks to this that you can earn €1,000 per month and, if he or she was to pay everything legally, salaries would have to be much lower in order to accommodate all proper tax deductions.

And yet salaries in Spain remain amongst the most miserable in Western Europe (see table), while the cost of living is now totally on a par with countries like Germany or France.

So why is it that this type of scam doesn’t happen nearly anywhere else in Europe, certainly not on such a ridiculous scale? Go to Germany, France, England, Holland and most other countries and bosses still make plenty, but plenty of dough, while still paying salaries legally as well as tax and social security contributions.

Quite simply, an alarming number of Spanish “entrepreneurs” are having a laugh and are showing total disdain for their own country. The trouble is that, in one fell swoop, the country is witnessing three devastating facts:

1) if a business gets used to generating profits through dodging legal salaries and tax, at the first sign of potential shockwaves the whole edifice will find itself drastically weakened; 2) millions of people are being deprived of what is their legal due; 3) the Government too is being robbed of massive amounts of precious public money that could be used instead to pay for pensions, social security and all sorts of things.

The scam is particularly appalling because it means that each month your personal contributions to your unemployment benefits, pension or health insurance are lower than they should have been. Most Spanish workers don’t see much wrong with it, as –courtesy of the cash handed out to them in a brown envelope - they still net the grand that was verbally agreed.

The problem though, is that sickpay in Spain is calculated proportionally to your official income, so if you call in sick you’ll be entitled to less than you would be if things had been done by the book. The same applies to your dole money (which is a direct proportion of your official salary) and, of course, in the long run, to your pension.

Now, here’s the thing. There are literally millions and millions of Spaniards that are being paid this way. And, no, unlike other countries such as England, the scam is not just confined to jobs on building sites or in the hospitality and catering industry.

As well as tons of waiters, barmen, hairdressers and TEFL teachers, I have personally met qualified engineers, accountants, computer technicians, secretaries and so on who have to put up with being ripped off in broad daylight by their dear boss.

The government knows about it. Everyone knows about it, but nothing is being done on the basis that it would be electorally unwise to pick a fight with the “wealth creators”.

But this is not even half of it.

The scandal reaches even more epic proportions when you look at what the Spaniards call temporalidad abusiva, which is none other than the obscenity of dodging the law (on the bosses’ part) by forcing members of staff to sign one temporary contract after the other. The reason, again, is to pay less tax, what else, and shirk the natural obligations that come with permanent contracts (holiday pay, maternity, redundancy payouts and all that you would be otherwise entitled to).

Like in most countries, in Spain too the law says that if you keep contracting out a person on a temporary basis it means that the relation is not actually temporary at all. The limit was recently extended by the Socialist government (from two to four years), but what the wealth creating thieves do anyway is pretend that you stopped working for them for a period. That is…when each temporary contract expires, in the time between them you will still work for the same company entirely cash in hand so that no evidence exists that the relación laboral, or work tie, was actually a continuous one.

The most frustrating bit is that it would only take a small number of workers to dispute this in court and it would also take very little to prove all of the above before a judge. After all, there are crippling fines in place and the law is actually extremely protective (if they cared to apply it, of course).

In fact, your boss will shit his pants the moment you threaten any action and –this is a promise- it won’t take long before you’ll be negotiating the amount he's got to cough up in compensation. They may try the cuntish approach for a day or two, but any veiled mention of a tribunal to claw back what is legally yours will do the trick finely.

However, I’m sorry to say, don’t underestimate how supine far too many Spaniards can be, which means that the status quo will go on unchecked for many years to come and that the wealth creators can continue to cream off their employees’ dues in peace.

Italy

Italy too is the theatre of obscene employment practices. The difference with Spain is that fifteen years of almost-uninterrupted Berlusconi rule ensured that employment guarantees were done away with to the point that there’s actually little left to dodge on the part of the employers.

In 2003, Italy introduced a legal monstrosity called contratto a progetto. This is basically a piece of paper saying that you’re only working for a company to complete a time-defined “set project” and that there are no ties whatsoever between boss and employees aside from receiving a wage (which is not even guaranteed to come in monthly, as the frequency is at the employer’s discretion and can even come in the guise of a final lump sum only).

Needless to say, it wasn’t long before a disproportionate amount of Italian employers, from small shops to large-size companies started milking the new legal framework. After all, someone on a contratto a progetto, will not be able to demand any sickpay, holiday money, maternity leave or even a penny in redundancy pay. More, they can be disposed of at a moment's notice, which is why the last ten years have witnessed the rise of a new Italian word, "precario" (precarious, haphazard, insecure), to label large swathes of the workforce.

Social security contributions on contratti a progetto are also close to nowt with the result that, in common with their Spanish cousins, an entire generation or two of Italians can expect to retire in abject poverty when they hit old age.

When the contratto a progetto was introduced, the government justified it by saying that the Italian economy was in dire need of a kick up the backside and that, by turning what was deemed an inflexible job market into a beacon of cheap hiring and firing (remember again that there is no redundancy money whatsoever that a progetto employee can be entitled to), unemployment would come down in a flash. After all, isn’t it better, the rhetoric goes, to have an unprotected job than none at all?

The reality, however, is that the intervening eight years have seen Italy’s economy stagnating to fuck and, of course, jobless rates unimproved.

The only significant difference is that millions of jobs that involved a degree of safety net have been quickly replaced by the most insecure contracts the Western world has seen since the Victorian era, with the result that there are masses of qualified Italians in their prime who are radically impoverished and with significantly reduced spending power.

And, although the Italians have traditionally been the most reluctant Europeans to leave their parents’ roof (in some case, until their 30s!), the current situation is guaranteeing that now more than ever more people are still living with mamma e papá.

England

Recent years in England have also seen some Dickensian practices exposed. Unlike Southern Europe, however, illegal forms of employment are generally confined to the catering industry or seasonal work (i.e. fruit pickers, hotel cleaners, the food packaging industry and so on).

The fact is that, after decades of liberalisation and successive governments championing policies in the name of flexibility, employers in Britain can today enjoy some of the cheapest and most advantageous conditions when it comes to hiring (as well as firing) staff.

For permanent contracts, for instance, statutory redundancy pay is around a quarter of what it is in Spain and – on top of the probationary period, where you can literally tell an employee to “get their coat” - there are also no ties whatsoever if you want to dismiss staff within the first year (with the current Tory government about to double the period).

Go for a stroll around any English high street and you will be struck by the sheer amount of employment agencies. And that is because casual or agency work in the UK is common practice at all levels. This means, again, less to no protection as there are no ties between the worker and the company he or she is working for via the agency.

Recent years have also seen the exponential rise of so-called zero-hour contracts, which is basically the translation into harsh reality of Tony Blair’s repeated mantras during his first term in office that “we’re all freelancers now”.

A zero-hour contract means that you lend your availability to a company and that they may call you or not except that, even if your phone never rings, you will not be entitled to unemployment benefits.

The only protection that workers in the private sectors enjoy in Britain is the minimum wage, a concept which is either redundant or lacking altogether in many other European countries.

Introduced in 1999, the minimum wage (currently around £6-00 an hour) is designed to ensure that, if no to little protection is there to burden the employer, they must at least guarantee that the hourly rate of pay doesn’t take the piss.

At least, the sorry spectacle of waiters, barmen, receptionists and builders being paid a ridiculous £2 or £3 quid an hour (as was the case until the late 1990s) is no longer a common sight in most British workplaces.

Of course, when the Minimum Wage Bill was introduced, opponents on the right end of the political spectrum screamed and shouted that the economy was going to collapse as companies were not going to afford to pay people any more than the price of a McDonald’s burger an hour. Bollocks, it turned out, as the jobless rate kept going down significantly for the next decade (until, of course, the economic crash struck in 2008).

As for unemployment benefits, workers in Britain are entitled to a contribution-based rate (calculated on the basis of the amount of National Insurance paid in while in employment) for up to 182 days.

After that, their dole amounts to the same flat rate the long-term jobless and people straight from school are entitled to. Don’t believe the crap hosed around by the country’s tabloids: the current Jobseekers’Allowance stands at a lavish £67-50 a week. Mouthwatering indeed.

Germany

The trend towards casualisation and temporary work is also on the rise in Germany.

Illegal employment practices are sometimes present amongst the low-paid (ie building sites) and in certain parts of the country (the former East Germany in particular), but you try and mess with the German taxman and they’ll come down on you like a ton of bricks with extra helpings of dung nestled all over your head.

In other words, any tax dodging in Germany is extremely uncommon and not even remotely on the scale you will witness anywhere in Spain.

The fact remains that more permanent employment is still significantly higher in Germany than in either Spain, Italy or the UK and that the notion of continuity in the workplace as something benefiting both employee and employer is still prevalent.

The idea too of a safety net for almost everyone is also embedded within the national consciousness and, still in the Noughties, you won’t find that many people, even those on the right-end of the political spectrum, ready to sing the praise of widespread deregulation and ultra-cheap hiring and firing.

In Germany, temporary contracts guarantee significant pension contributions, holiday entitlements and sickpay, which amounts to 100 per cent of your salary for the first 8 weeks of absence.

The only significant difference between a temporary and a permanent contract (apart from the obvious notion of job security and continuity) is that the latter entitles you to a thirteenth month of pay.

In common with Scandinavian countries, Germany doesn't currently have a minimum wage. The reason lies in the country's tradition of consultation in the workplace, meaning that collective agreements covering large numbers of workers made the notion of a minimum wage almost redundant.

However, this is no longer the case. Partly due to "reforms" introduced by the old Schröder government ("Hartz IV"), while twenty years ago 70 percent of workers were under the protection of a collective agreement, today the figures go no further than 50 percent.
Recent studies suggested that close to five million workers are currently under the poverty line as they are not covered by a statutory minimum as defined by collective agreements ("lohnuntergrenze").

On another level, unlike the UK or Spain, people are entitled to their Arbeitlosengeld (unemployment benefit, around 60 per cent of your last salary) even if they resign, as long as they inform the local Social Security office (Arbeitsamt) at least three months before they decide to do so.

Even during the probationary period, a worker is entitled to a minimum notice of two weeks, meaning that – though with no obligation to pay an indemnity- a boss is not 100 per cent free to get rid of you on a whim.
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THE LOWDOWN:

Germany
England
Italy
Spain

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