Working on the edge of poverty: Slovenia’s self-inflicted wound over labour market reform

Flickr/Discosour
A graffito in Ljubljana, Slovenia

In a drive towards entrepreneurship
following Europe’s economic slump, workers have been encouraged to take
up EU-funded incentives for self-employment, so-called
sole-proprietorship, allowing many to trade a degree of job security and
social welfare provision for lower taxes and support starting their own
businesses.

But in too many cases the scheme has
turned sour, with some sign-ups pulling out and employers evidently
taking advantage of sole-proprietors. As a result, roles once filled by
employed workers who enjoyed workplace and social benefits are now done
by sole proprietors who get none. It’s a pervasive practice that’s had
the effect of increasing work precarity.

Some bad history

In the last decade, successive Slovenian
governments followed the anti-crisis strategies of many EU states.
Notice periods for permanently employed workers have shortened,
severance pay has decreased and work legislation has been deregulated.
However, at the same time the Slovenian Ministry of Labour, Family,
Social Affairs and Equal Opportunities developed another model for the
country’s socio-economic improvement.

It proposed a subsidy programme for
unemployed people wanting to start a business and re-enter the labour
market as sole-proprietors, a specific form of self-employment which has
become the most common form of precarious work in the country. The
ministry suggested Slovenia use EU funds to pay the subsidies and the
European Commission approved. In the period between 2007 and 2013, 97
million EUR was spent to subsidise new sole-proprietorships and other
forms of self-employment.

Out of this, 86 million EUR, almost 90
per cent, was a contribution from the EU. The money came from the
European Social Fund, Human Resources Development Operational Programme.
Ninety percent of those funds was used to subsidise
sole-proprietorships. Other forms of self-employment, such as limited
liability companies, were also financed, although on a much smaller
scale.

From 2007 to 2013, just over 23,300
individuals received a one-time subsidy to launch sole-proprietorships, a
high number when you bear in mind Slovenia’s population is just over 2
million: more than 1% of all Slovenians received the subsidy. The level
of subsidy increased over time. In 2007, it was 2,100 EUR. From 2008
until the first half of 2013 it rose to 4,500 EUR. Six months later it
was 5,000 EUR.

“Good news”

At the end of the 2007 – 2013 programme,
the ministry commissioned an evaluation. It was completed in January
2017 and, in its main conclusion, deemed the programme a success. In
some years, it claimed, the programme had contributed to around a
quarter of all new work placements.

The study also
estimated that 11 to 16,5 % of subsidy recipients had opened a
sole-proprietorship or other form of self-employment because they felt
it was the only way to remain with an employer seeking to lower
workforce costs by shedding permanent employment contracts and replacing
them with cheaper contractual workers, a practice known as fictitious
employment. Rather surprisingly, the report concluded that, in the wider
context, such fictitious employment is actually still preferable to the
loss of employment.

Not so “good news”

Other analysis suggests the results were
more mixed, for example on the scheme’s capacity to retain
sole-proprietorships.  According to the ministry’s report,
of 1,600 recipients of subsidies in 2008, 46% had closed their business
by 2013, with 54% remaining sole-proprietors. Of 5,150 people getting a
subsidy in 2010, 61% stayed with self-employment, while 39% folded.

Even though the report concluded the
subsidies programme was successful, the ministry decided to drastically
lower its scope in the current financial period, allocating 7 million
EUR to stimulate youth entrepreneurship and 3,7 million EUR for women
entrepreneurs.

As the ministry explained to investigative reporters at Pod črto,
one of the reasons for scaling back the programme was constant
criticism by a number of stakeholders. Many focused on complaints that
the subsidy system doesn’t work, as sole-proprietors are often not able
to pay their social security contributions, leading to the creation of a
class of “working poor”.

For example, based on data from the National Statistical Office,
the overall poverty rate in Slovenia in 2015 was just over 14%. Among
the non-active and long-term unemployed it was 26%. Strikingly, among
the new class of sole-proprietors it was more than 22%, just beneath the
poverty rate for permanently unemployed people.

Irreconcilable contradictions

Such an outcome was not unexpected. In
the past, student jobs and working through author contracts were popular
choices for people, despite the precarity of the work. Anyone with
student status could work for an employer with no limits. Many people
enrolled in educational programmes just to get student status. In
creative industries, including journalism, people worked for employers
under author contracts. To the employer, both forms of work were
significantly cheaper than regular employment contracts. Their
contributions on student jobs amounted to around 25% of gross payment,
compared to around 43% on an average wage for normal employment
contracts. Under the author contract, a contractor had to pay only 22,5%
income tax.

However, in the period 2013 to 2015
student jobs and author contracts became more expensive for employers
and much less attractive. New laws demanded that social contributions
now had to be paid on both forms of work. In exchange, students and
authors working under those arrangements would now get a certain amount
of pension. The government was attempting to rein in the proliferation
of precarious work. At the same time, it also made work through
sole-proprietorships significantly cheaper and easier to manage, with
fewer bureaucratic burdens and simpler and cheaper accounting.

Before, a sole-proprietor had to pay
social contributions and personal income tax on all earnings minus work
expenses. Personal income tax in Slovenia ranges from 16% to 50%,
depending on earnings. But in January 2013, the government introduced
another form of sole-proprietorship for those earning less than 50,000
EUR a year. They would pay an effective rate of personal income tax of
only 6%. In 2015, the government lowered this even further to 4%, far
less than the rate paid by regular employees working under a normal
contract. The rising cost of student jobs and author contracts has meant
sole-proprietorships have become one of the main vehicles for
precarious work in Slovenia, even despite the low tax rates.

Fictitious employment

It is now a widespread practice that an
employer hires a sole-proprietor for a job which because of its nature
has until now been done by an employee. The sole-proprietor works under
the same office conditions. This practice is called “fictitious
employment” and was subsidised, albeit unintentionally, by the Slovenian
government. We have found several such examples during our
investigations: individuals who received state subsidies for
self-employment and found themselves working for a single employer
without a work contract.

Checks without balances

Such fictitious employment is explicitly
illegal under current legislation and penalties can be imposed after a
workplace inspection. However, according to Andrej Zorko, a secretary at
the Association of Free Trade Unions of Slovenia, inspectors have not
been doing a good job in any area. He says they have been understaffed
and not willing to vigorously pursue those not adhering to the law.
Before an inspection takes place, inspectors usually tell the employer
they are coming and need to see all relevant documentation, giving the
employer enough time to “cook the books”.

At the end of 2017, the Slovenian
parliament adopted two major amendments to the law on work inspection.
Inspectors now have the power to order an employer to employ the
“fictitious worker” under a regular contract. If the employer doesn’t do
this he could be fined. The inspector now also has the power to close a
business if an employer is not paying salaries to his/her workers.

These changes would be positive if they
were effectively enforced. But work inspection remains understaffed and
inspectors find it increasingly difficult to prove cases of fictitious
employment because of the shifting nature of the relationship between an
employer and employee and transitory employment trends, such as
co-working and the gig or platform economy.

Moreover, the government must address
other problems before sole-proprietor subsidies can be successful. For
example, women are more often forced involuntarily into
sole-proprietorship than men. Sole-proprietors are also extremely
vulnerable because of poor legal protection, long-lasting civil trials, a
lack of transparency and a low and late paying culture in Slovenia. In
addition, specific forms of sole-proprietorship are very convenient for
high-income earners, most often in tech and consulting, who use the
status for tax optimisation, thereby contributing to income inequality.

The Slovenian experiment has shown that
government subsidies can indeed create new jobs and improve national
unemployment statistics. However, almost 40% of the participants have
given up their one-man enterprises. Many remaining entrepreneurs have
stayed to become the working poor.

Staring at the obvious

The lesson is simple. Negative impacts of
deregulation of the labour market cannot be solved by relatively minor
corrective measures such as self-employment subsidies. Such subsidies
only make sense if individuals are protected against misuse and the
precarity of their working conditions. If not, they’ll only be helping
employers get more power over their workers…with extra help from the
state.