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Reports and Studies

Putting an end to cross-border social security fraud and abuse


Cross-border social security fraud and abuse are certainly not new phenomena. What is clear, however, is that these problems have been dealt with in a politically negligent manner for many years. This is probably because everyone agreed that the problem was too complex to solve and that it touches on two core principles of the European Union about which criticism is effectively not allowed.
Cross-border coordination of social security is based on the fundamental principle of ‘mutual trust’ between the Member States, which means that we assume that Member States do not cheat each other and do not bend the rules to give themselves an unfair advantage. This fundamental principle of mutual trust between Member States has also been repeatedly confirmed by the European Court of Justice.
In addition, the rules of cross-border coordination are based on the principle of the ‘state of residence’, also called the state of origin. For example, the state of residence determines the employment relationship between employer and employee (or the latter’s self-employed status), who pays the social security contributions (employer or employee), the percentage of the social security contribution, and the method of calculation, and unilaterally issues official documents (the by now well-known A1 certificate). As a host Member State, you cannot change much about this. In fact, as a host state you are not allowed to question the rules and practices of a state of residence since there is mutual trust between Member States.
If we look at the temporary cross-border posting from a company perspective, we can divide the total gross labour cost into three categories:
1. Firstly, there are direct gross salary costs, including basic salary, overtime, salary supplements, etc. Partly due to the new directive 2018/957 on the posting of workers, which is based on the principle of equal pay for equal work, the direct gross salary costs for local workers and temporarily posted foreign workers are now roughly the same (although there is still considerable disagreement about this).
2. The second category consists of the costs associated with sending the worker abroad. Because there is no obligation to provide cross-border employment, the company itself chooses whether or not to pay these additional costs. They include such items as workers’ travel costs and accommodation costs. In principle, these are objectively measurable additional costs.
3. In the final category are the gross social security costs that every company has to pay. This third category of labour costs is, according to the current European rules, exclusively determined by the state of residence.

Strikingly, during the political discussion about the new posting of workers directive, various politicians from different Central and Eastern European states have repeatedly insisted on maintaining the ‘competitive advantage’ of ‘their companies’ when temporarily posting workers abroad. By ‘competitive advantage’ they refer not to their companies’ productivity, innovation and so on, but clearly to their companies’ financial advantage – in other words, low labour costs.
From a company viewpoint, therefore, a competitive advantage can only be derived from lower social security contributions, which are exclusively determined by the state of residence.

In this study we have discovered various de facto and legal situations by means of which states offer companies a substantial financial advantage when they temporarily post their workers abroad. Unfortunately, the current European regulations are organised in such a way that these financial benefits cannot be challenged. This ‘problem’ has not escaped the notice of the European Court of Justice. In the Altun Judgment of 19 June 2018, the European Court opened Pandora’s box and broke a European taboo. The Court acknowledged that fraudulent A1 certificates may be disregarded unilaterally by the courts of the host state. Is this the end of the fundamental principle of mutual trust between Member States? Probably not. But the principle is no longer untouchable. On the basis of the de facto and legal arguments in this study, the EFBWW has reached the conclusion that there is not only competition between companies within the EU, but between Member States too. The current European system of social coordination allows Member States to systematically abuse their national social security so as to give their companies a competitive advantage when they employ their temporary workers abroad. This new form of cross-border social security fraud and abuse is a multi-headed hydra that will definitely be hard to defeat. If we really want to build a fair European internal market, cross-border competition between companies must be based on innovation, productivity, creativity, cooperation, skills and so on, and not on a policy of low costs. Low cost competition is a dead-end street, with only losers. As a European trade union federation, we will do battle with the new multi-headed monster and defeat it! I would like to express my appreciation to the four experts who have written this report. My thanks also go to all those who participated in the many formal and informal contacts, who gave us a better understanding of the complexity of the problem of cross-border fraud and abuse in social security.