Foreign labour and the shadow economy

Finland competes for foreign labour and international experts with the rest of the world. However, many of those from the foreign workforce have not completed higher education. The skill levels of employees may vary widely, particularly in labour-intensive fields. The EU upholds free movement of workers. An increasing number of people are coming to work in Finland from neighbouring countries such as Estonia. In addition to their own personnel, companies make use of leased employees and subcontracting. In order to work in Finland, self-employed persons and employees from third countries must have a residence permit for an entrepreneur or an employed person.

Use of foreign labour poses numerous risks of abuses. It may involve working illegally, such as without a work permit. The employer might violate the minimum terms and conditions of employment contracts by underpaying wages. The employer may be motivated to use cheaper foreign labour to avoid taxes and other statutory payments, in order to obtain financial benefits.

Foreign labour abuses typically occur in the subcontracting chains of foreign companies on construction sites. Use of illegal foreign labour is also seen in other fields of business where the risks of the shadow economy are high, such as the restaurant, cleaning and transportation businesses. It has also been observed at horticultural farms, berry farms and in shipbuilding. Both Finnish and foreign companies are culpable of such abuses – the persons responsible may be Finnish or foreign.

Foreign labour abuses are linked to other financial crime

Foreign labour abuses often involve payment of wages under the table, employment without a work permit, failure to pay pension contributions, identity misuse, and abuse of social benefits and other types of support. The employer may have agreed that part of the wages will be paid in the form of Finnish social benefits. An employer that uses foreign labour in violation of the rules may be guilty of a number of different crimes at the same time. For instance, the act may fulfil the constituent elements of tax fraud, social insurance fraud, and industrial and work safety offenses.

Movement of workers introduces an international dimension to the phenomenon

The number of foreign companies and employees has been on the rise during the past two years. The number of employees coming from outside the EU has increased substantially. In particular, large construction projects such as the Turku shipyard have led to a significant increase in foreign labour.

During the past two years, it has been observed that an increasing number of foreign employees who come to Finland are working in several countries at the same time. This phenomenon is evident in all of the EU. Certificates (A1 certificate of coverage) that indicate which country’s social security legislation shall be applied to the person in question are increasingly often granted based on work in two or more countries. Immigration control operations have become aware of a new phenomenon in which a citizen of a third country is sent to work in Finland as a posted employee of a company registered in another EU country. This employee’s right to work has been granted on incorrect grounds in a country that s/he has never visited.

Suspicions of abuse related to entrepreneurs’ residence permit applications handled by the Centre for Economic Development, Transport and the Environment have brought to light professionally organised operations, particularly in applications from citizens of Russia, China and the Baltic and Middle Eastern countries.

Cheaper labour distorts competition and erodes tax morale

Foreign labour abuses cause market disturbances and harm competition when some actors use cheaper labour on incorrect grounds. Undeclared labour causes losses of taxes and social security contributions. In addition, claiming various benefits provided by the welfare state, such as unemployment benefits, causes additional expenses for society. Unskilled labour may pose a danger to occupational safety on sites, and incorrectly performed work may harm the client.

These workers also suffer – for instance, they do not accrue an occupational pension from undeclared wages. Third-country citizens are in an especially vulnerable position and are at higher risk of being exploited on the labour market. Lack of language skills together with an unfamiliar culture and dependence on the employer increase the risk of exploitation. The authorities have observed that individuals whose asylum application has been rejected and those working without a residence permit are at particular risk of becoming victims of human trafficking.

Co-operation to prevent foreign labour abuses

Key ministries – such as the Ministry of Economic Affairs and Employment, the Ministry of Social Affairs and Health and the Ministry of Finance – participate in the development of legislation to help prevent foreign labour abuses. For instance, the government programme includes an entry in accordance with which the tax number already in use in the construction industry will be implemented on shipyards.

Co-operation between the authorities plays a key role in preventing illegal foreign labour. Co-operation is carried out at both the national and international levels, especially with the other Nordic countries and the Baltic countries. Guidance, advice and development of e-services are important in the prevention of abuses. Authorities carry out joint inspections of sites and other control targets.

The Tax Administration utilises risk analyses and targets control towards high-risk clients. The construction industry uses a tax number register and submits employee information to the Tax Administration in reports on construction work. This information is used in the monitoring of both Finnish and foreign labour. It is also used by other authorities that monitor foreign labour.

For instance, the Occupational Safety and Health Administration monitors the right to work of foreign labour and compliance with the minimum terms and conditions of employment contracts. The enhanced access to information granted to the Occupational Safety and Health Administration has introduced new tools for inspectors in the past few years.

The authorities also engage in co-operation with employees’ and employers’ associations to prevent foreign labour abuses. There is a long tradition of effective co-operation with the construction industry.

The EU is establishing the new European Labour Authority (ELA) with the aim of promoting fair movement of labour in the internal market. Read more about the ELA’s objectives on the International Co-operation page.