Unregistered Employment, Lost Taxes, Compromised Rights

Although there are legislative regulations and requirements in place, the procedures for hiring and registering workers in Armenia remain problematic, causing loss of millions of drams to the state and depriving employees of their rights.

Labor relations in Armenia are governed by the Labor Code. Article 14 of the Code states that labor relations between an employee and an employer must be established through a written labor contract that complies with the country’s labor legislation or through an individual legal act that hires an individual for employment. Article 102 stipulates that any work performed without following these procedures is considered illegal.

As per Article 412 of Armenia’s Tax Code, an employer is fined 250,000 AMD for every unregistered employee.

The Violators

Karen Tamazyan, Head of the Tax Administration Planning, Monitoring and Control Department at Armenia’s State Revenue Committee (SRC), reports that tax authorities frequently receive complaints about various tax violations, including complaints about not registering employees in compliance with the law. The legislation in Armenia requires that employees have an employment contract that fulfills employment requirements, and administrative penalties are imposed for noncompliance. The Health and Labor Inspection Body sets the administrative fines for this type of violation.

Erik Astvatatryan, Head of the Awareness, Consultation, and Public Relations Department of Armenia’s Health and Labor Inspection Body — an institution created in 2017 by the government in order to ensure the protection of labor rights — notes that they carry out inspections in accordance with Armenia’s Law “On Inspections,” based on a risk-based inspections annual program, checklists approved by the Armenian government, as well as on applications by citizens and administrative proceedings initiated by the Inspection Body.

In 2020, the Inspection Body initiated 98 administrative proceedings for labor rights violations. Six of these proceedings were related to failure to sign labor contracts. In 2021, 533 administrative proceedings were initiated, with 256 initiated by the Inspection Body and 277 based on individual applications for violations. Of these administrative proceedings, 241 were related to failure to sign employment contracts, including 157 initiated by the SRC. The SRC imposed 88 penalties on economic entities and their employees.

In 2022, a total of 1,245 administrative proceedings were initiated, of which 876 were initiated by the Inspection Body and 369 were based on individual applications for violation. Among these proceedings, 861 were related to failure to sign employment contracts. Out of all the proceedings, 729 were initiated by the SRC, which imposed 618 penalty decisions on economic entities and their employees.

According to the State Revenue Committee, tax authorities recorded the following statistics across various fields through inspections: in 2020, 825 taxpayers had 842 cases involving 1,756 unregistered workers; in 2021, 1,163 taxpayers had 1,188 cases involving 2,200 unregistered workers; in 2022, 1,410 taxpayers had 1,441 cases involving 2,326 unregistered workers.

From 2020 to 2022, the following companies had the most violations regarding unregistered employees not being registered in accordance with the law:

• In 2020: Idj Grand Teksilopt, Maral-K, Tashir Pizza, Czech-Arm-Invest.
• In 2021: Saint Teresa Medical University, Klubnichnaya Polyana, Arshak Vardanyan, Soft Trade.
• In 2022: Iteks, Ar-Art Teks, Hasmik Geghamyan, Varsham.

According to the State Revenue Committee (SRC), there are cases of informal employees among large taxpayers as well. In 2022, the top ten companies with the most unregistered employees are as follows: Dustr Marianna (ranked 103rd on the list of large taxpayers, located in Yerevan), ADA Tech (ranked 123rd, located in Yerevan), Steel Concern (ranked 172nd, located in Kotayk), Voske Aga (ranked 256th, located in Yerevan), Tigran Mets publishing house (ranked 469th, located in Yerevan), Esting (ranked 394th, located in Yerevan), Spart (ranked 475th, located in Syunik), Sahakyanshin (ranked 445th, located in Yerevan), Vardges Grigoryan Bayenduri (ranked 688th, located in Ararat), and Dustr Angelina (ranked 664th, located in Kotayk).

According to Tamazyan, there were recorded cases of hiring employees without following proper legal procedures in 2020, 2021, and 2022. As a result, taxpayers were fined 442,470,000 AMD in 2020, 549,810,000 AMD in 2021, and 581,500,000 AMD in 2022.

Between 2020 and 2022, the following companies paid the largest fines for not complying with employment laws: Idj Grand Tekstilopt was fined 27 million AMD in 2020; Saint Teresa Medical University was fined 14 million AMD in 2021; and Itex was fined 13,750,000 AMD in 2022.

Tamazyan notes that in 2022, cases of unregistered employment in accordance with the law were primarily found in the fields of retail and wholesale trade, public catering, food production, and construction.

According to monthly calculations of income tax and social pension fees submitted by taxpayers to tax authorities, the average monthly number of persons with a tax base (those who receive an income) was 609,469 in 2020; 635,748 in 2021, and 672,187 in 2022.

Possible Solutions

According to lawyer Sose Chandoyan, it is a common practice for employers to neglect signing an employment contract with their employees in order to evade paying the full amount of taxes mandated by law.

“According to Armenia’s Tax Code and Law ‘On Funded Pensions,’ the employer is required to calculate, withhold, and transfer 20% income tax and 5% social pension from the salary of each registered employee and other associated payments to the state budget,” explains Chadoyan. In addition to this, a stamp duty is also added, which is calculated based on the salary amount. Chadoyan also notes that if an employer does not sign an employment contract with an employee, they exempt themselves from paying the aforementioned taxes. According to Chadoyan, this sometimes occurs with the consent of the employee and with a promise to return a certain portion of the unpaid taxes to them.

It is evident that in Armenia, many people prefer to remain silent and be employed, even if they remain unregistered and without associated rights. This is due to the country’s high unemployment rate of around 11.6%, as well as a poverty rate of over 26.5%.

Amalya, 30, said that after trying many times to find a job, she was eventually hired to work at a tutoring center without a written contract; it was only a verbal agreement. Although she knew her rights were being violated, she chose to stay quiet.

“There was no other way, I had no choice,” says Amalya. “I had barely found a job, so I couldn’t demand to be registered because I could have become unemployed again.” She adds that she never considered seeking help from the state to restore her violated rights. She didn’t want to go through the bureaucratic nightmare of the court system. “The relevant state bodies must protect workers’ rights and carry out inspections because workers are often defenseless in these situations,” she explains.

Kristina, a 29-year-old working in the private sector, had never insisted on signing a labor contract. She believes that state bodies play an important role in overseeing the labor market. She also mentions a common practice— when an employer registers the employee, but does not specify the salary amount in the contract.

“I can say from experience that most working people would not tolerate their rights being violated if our labor market was not in its current state,” Kristina says. “Finding a job is difficult, and people are afraid of becoming unemployed. So, they prefer to work and earn an income, even if they are working informally; they conform and keep quiet.”

According to Chandoyan, one reason people don’t apply to the court to demand the restoration of their violated rights is fear of losing a job they’ve just obtained. Another reason is that the courts are overwhelmed. She says that the number of lawsuits related to labor disputes has significantly increased compared to the past decade.

Zaruhy Manucharyan, Press Secretary of the Labor and Social Affairs Ministry, notes that if a court order has established that there were actual labor relations between an employee and an employer, then the labor relations are considered to have begun on the day the employee started working.

“The employee has the right to appeal to the court to confirm the existence of labor relations during the period when such relations existed, as well as within a year after the termination of labor relations,” explains Manucharyan. 

The issues of those without registered jobs became more pronounced during the coronavirus pandemic. After restrictions were applied, the state implemented a number of urgent measures to mitigate the negative socio-economic impact of the pandemic. However, these measures did not apply to those with unregistered jobs.

According to an Open Societies Foundation study, 61% of workers worldwide and 70% of workers in low- and middle-income countries work informally, without an employment contract. As a result, they are deprived of labor and social protection rights.

That study does not include data on the number of unregistered workers in Armenia or which sectors they work in. The Statistical Committee of Armenia conducted its own study on informal employment in 2008, which is the only such study so far. The study found that informal employment was at 51.8%, of which 29.1% was in the non-agricultural sector. 

That study states that informal employees might not pay taxes, but they do spend their earned salary in the country, so their unregistered income is returned to the economy in other forms, such as through VAT when purchasing goods. These individuals are still participating in the country’s economic life, so ignoring and not considering them as part of that life because they don’t pay taxes and are not registered is problematic. 

According to Chandoyan, to address informal employment, certain changes are needed to the Tax Code, like absolving the taxpayer’s tax burden.

“Not wanting to take on the role of a lawyer for employers who evade and violate the law, however, I must state that only by developing a competent tax policy and using new measures will it be possible to curtail this shadow economy,” says Chandoyan. “Otherwise, the issue of legalizing unregistered workers by employers will always be on the agenda.” She notes that the norms that regulate employer-employee legal relations are clearly defined in the Labor Code, and adds that workers themselves must start standing up for their rights.

Law & Society