Evaluating the Illegal Employer Practice of Under‐Reporting Employees’ Salaries
| Published date | 01 March 2017 |
| Author | Ioana A. Horodnic,Colin C. Williams |
| DOI | http://doi.org/10.1111/bjir.12179 |
| Date | 01 March 2017 |
British Journal of Industrial Relations doi: 10.1111/bjir.12179
55:1 March 2017 0007–1080 pp. 83–111
Evaluating the Illegal Employer Practice
of Under-Reporting Employees’ Salaries
Colin C. Williams and Ioana A. Horodnic
Abstract
This article advances understanding of the prevalence and distribution of the
illegal employer practice of under-reporting employees’ salaries, explains this
practice and evaluates policy approaches. Analysing a 2013 Eurobarometer
survey of 11,025 employees in 28 European countries, one in 33 employees
receive under-reportedsalaries, mostly in small businesses and vulnerable groups
(e.g. unskilled workers, with lower education levels and financial diculties).
Explaining this practice, not as an individual criminal act that increasing the
risk of detection can tackle, but as a symptom of systemic problems, which
require improvements both in tax morale at the individual level and in the formal
institutional environment at the country level to resolve, we then discuss the
implications for theory and policy.
1. Introduction
Understanding illegal labour practices lies at the very heart of the study
of industrial relations. Unless the various illegal labour practices pursued
by employers to reduce their labour costs are tackled, such as the use of
undeclared labour and sub-contractingto the ‘bogus self-employed’, the result
will be a diminution of state control over the quality of working conditions,
weakened trade union and collective bargaining and pressure on legitimate
businesses to evade regulatory compliance due to the unfair competition
(Andrews et al. 2011; ILO 2014; TUC 2008). To advance understanding of
illegal labour practices, this article evaluates the fraudulent employer practice
of under-reporting employees’ salaries to the authorities in order to evade
their full social insurance and tax liabilities (Chavdarova2014; Williams 2009;
Woolfson 2007). The aim is to analyse the prevalence and distribution of this
practice, to explain its existence and explore how to tackle it.
Colin C. Williams is at the University of Sheeld. Ioana A. Horodnic is at the AlexandruIoan
Cuza University of Iasi.
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2016 John Wiley& Sons Ltd/London School of Economics. Published by John Wiley & Sons Ltd,
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84 British Journal of Industrial Relations
Here, therefore, we advance understanding of illegal wage practices in
three ways. From an empirical viewpoint, we report Eurobarometer survey
data from 28 member states to determine the prevalence and distribution
of salary under-reporting. Secondly, and theoretically, we then explain its
prevalence and distribution as a symptom of not only individual-level
variables, notably the acceptability of non-compliance, but also systemic
problems by documenting the country-level determinants that lead to its
greater prevalence. Finally, and from a policy perspective, we show how
the currently dominant deterrence approach based on improving detection
does not reduce this illegal wage practice. Instead, tackling this illegal wage
practice requires a more indirectapproach that both changes attitudes towards
compliance at the individual level and resolves specific systemic problems at
the country level that lead to its greater prevalence.
To show this, Section 2 briefly reviews the previous literature on the illegal
practice of under-reporting formal employees’ salaries. The outcome will be
a set of hypotheses regarding the association between salary under-reporting
and who engages at the individual level, whether under-development, over-
interference or under-intervention by the state causes salary under-reporting
and how to tackle this practice.To test these hypotheses,Section 3 then reports
the data used, namely a 2013 Eurobarometer survey comprising 11,025 face-
to-face interviews with formal employees in the 28 member states of the
European Union (EU-28), and the analytical methods employed; a staged
multi-level logistic regression model utilizing the hierarchical nature of the
data (individuals within countries). Section 4 reports the findings regarding
the association between salary under-reporting at both an individual- and
country-level and who does it, whether under-development, under- or over-
regulation determines the level of salary under-reporting and what needs
to be done to reduce it. Section 5 then discusses the theoretical and policy
implications of the findings along with the limitations and future research
required.
2. Illegal under-reporting of wages
Over the past decade, a small but growing literature has drawn attention to
how formal employers often reduce their tax and social security payments
and therefore labour costs by paying their formal employees two salaries;
an ocial declared salary and an additional undeclared (‘envelope’) wage
which is hidden from the authorities for tax and social security purposes.
The instigation of this illegal labour practice usually occurs at the job
interview stage. Alongside the agreement to pay an ocial declared wage
detailed in a formal written contract, the employer at the same time reaches a
verbal unwritten agreement with the employee to payan additional ‘envelope
wage’ not declared to the authorities for tax and social security purposes
(Chavdarova 2014; Williams 2009; Woolfson 2007). Salary under-reporting
thus arises from fraudulent labour contracts where the conditions in the
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2016 John Wiley& Sons Ltd/London School of Economics.
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