Alexey Goncharov, Head of SIA “Civinity Solutions” in Latvia: When the anticipated “effect” becomes a “defect”


Alexey Goncharov, Head of SIA “Civinity Solutions” in Latvia: When the anticipated “effect” becomes a “defect”

It is only few months since the new rules on the payment of minimum state mandatory insurance contributions (SMIC) came into force, and now it became clear that seemingly good idea was not implemented in the best way.  Possible consequences are a reduction of the quality of services provided and a growth of the shadow economy.

Admittedly, the last two years have been challenging for cleaning service providers because of the restrictions imposed and periodically fluctuating demand, as a result of which the struggle for contracts has become much fiercer. For example, the number of applicants in public procurements has increased by two or even three times compared to pre-pandemic times, and the number of applicants sometimes reaches 15.

At first glance, it may seem that this is not bad – more competition should theoretically force companies to implement more effective solutions in order to be able to offer the same price.   But the reality is different.

First, the introduced epidemiological safety measures (the use of additional disinfectants, more frequent cleaning, etc.), raise the costs, and the price of contracts has increased by 3-10% for absolutely objective reasons.

Secondly, it should be recalled that the cleaning industry is one of those in where labor costs account for about two-thirds (60-70%) of the cost of services. The very nature of these works meant large amount of part-time employment and work beyond the full working hours – in the mornings and evenings.  This means that the new mandatory contributions procedure itself entails additional costs, since part-time employment of employees may not always be combined so that there is a full-time employment. What makes the situation with employees even more tense is the fact that more and more companies and institutions are requiring cleaners to show interoperable COVID-19 certificate. Among other things, this means that it is often necessary to search for new employees. And not because the available employees do not work well, but because it is not possible to make a suitable work schedule.

Perhaps in calmer times, increased employee costs could have been accumulated at least partially, but under the conditions of the frenzied competition less experienced or smaller service providers drastically reduce prices.

As a result, there are situations in the industry in which it is no longer possible to provide high-quality cleaning services at a specified price. It’s just not possible. Unless you put some cleaners in the “shadow”, i.e. to hire for job partly legally or even illegally. This seriously complicates normal competition, since it is clear that the cost of labor will be much higher when paying all taxes than when evading them.

So what can we do?  Of course, we cannot significantly influence the overall course of events in the business environment and society. We cannot change the fact that the demand for hotel services will be reduced for a very long time, or that many office workers will work or will be forced to work from home. But we can improve the application of labor taxes so that the planned changes really achieve the goal and protect working people.

One of the biggest challenges of the new regulation of the state mandatory insurance contributions is the heavy system of calculations. Namely, the employer is obliged to pay the difference of the minimum contribution in the amount of up to 170 euros with a delay of several months, after the State Social Insurance Agency collects all information on the person’s income and notifies the State Revenue Service about it. This means that we must create savings for several months, the amount of which, according to our calculations, should correspond to the mandatory payments of SMIC. For a stable company such a freezing of funds is not too burdensome assuming that it hires only few part-time employees.  However, if there are a lot of part-time workers, as in the cleaning business, then this practice becomes difficult. Especially if the employee is not obliged to tell the employer about other places he works.

A similar requirement for mandatory minimum contributions of the SMIC is valid in Lithuania, but it is easier for companies in a neighboring country to live, because employers know in advance how many contributions will be needed for the employee. In my opinion, a similar principle should be introduced in Latvia, namely, companies should be able to plan their payments in a timely manner.  It is possible to impose the obligation to inform the employer about other labor relations, indicating the type of employment, to introduce a total contribution of the SMIC without division between several employers, or to find another solution.

Of course, this will not reduce the problem for medium and small entrepreneurs, who believe that the need to pay more SMIC contributions for part-time workers is costly affair and therefore plan to simply eliminate part-time places. However, this will reduce the risks of unfair competition in industries where the number of partial rates for objective reasons is large.