Extending social security to workers in micro- and small enterprises
The large majority of employees worldwide work in micro and small enterprises (MSEs). Seven in 10 workers are self-employed or in small businesses. Many MSEs are informal, they often operate on low productivity and face difficulties to comply with minimum wage regulations and social security legislations due to their limited administrative and financial capacities. In many cases, neither the employers nor the workers in MSEs are covered by social protection systems. But even where MSEs are formally registered, their workers are not necessarily ensured labour and social protection.
This module stresses specific challenges for the extension of social security to workers in micro, small and medium enterprises (MSEs) and explores some policy options, based on international experience and guided by ILO social security standards
Workers in micro and small enterprises
- What are the specific challenges with regard to including workers in MSEs under social security legislation?
- How can workers in MSEs be included under social security legislation?
- What else needs to be considered when aiming at including workers in MSEs under social security legislation?
- Legal exclusion: Legal frameworks may not be applicable for enterprises below a certain minimum size, which leaves workers in MSEs unprotected by statutory social insurance. In addition, many workers in MSEs find themselves in employment relationships that are not clearly identifiable, ambiguous or hidden, and for which it is more difficult to identify whether or not workers are eligible employees for social insurance schemes
- Administrative barriers: Many MSEs struggle to comply with administrative requirements. Complex and burdensome administrative procedures and services can hamper enterprise formalization and discourage employers to enrol their employees in the social security system, particularly MSEs in rural and remote areas that face geographical barriers to access social security offices.
- Limited contributory capacities: Many MSEs are characterized by low productivity, and in many cases both wages and business revenues are lower, and often more volatile, than in larger enterprises. This limits employers’ and workers’ financial capacity to contribute to social insurance.
- Lack of enforcement and control: Inspections in MSEs are often neglected by governments, as they can be more demanding and more costly than for larger enterprises, where a larger number of workers can be covered per enterprise visit.
- Lack of information and organization: MSEs are less likely to organize as compared to larger enterprises; and in some countries, unionisation and collective bargaining are only possible for enterprise above a certain size. Furthermore, MSEs may not have the necessary information and knowledge to register their workers with social security, or may be reluctant to do so.
- Lack of integration and coordination: Many of the challenges related to informality often go beyond the scope of what can be addressed by social protection policies or institutions. A lack of coordination between the social protection system and other relevant policy areas, such as enterprise formalization policies, labour market and employment policies, enterprise development policies, macro-economic policies can constitute a major barrier to the extension of coverage.
Extending legal coverage
- Extend legal coverage to workers in MSEs through different means, such as lowering or removing minimum thresholds with regard to the enterprise size in the social security or labour legislation or including additional categories of workers in the legislation to take account of the diversity of employment situations
- Clarify and simplify the law, broaden the scope of workers covered by law, for example by including those without a formal contract
- ILO working paper: Applying labour law to micro, small and medium-sized enterprises: A comparative study of 16 countries
- How labour law applies to small enterprises (video)
- ILO resource tool: Labour and Labour-Related Laws in Micro and Small Enterprises
- ISSA Good practices: Jordan’s strategy to expand social security for workers in small enterprises
Facilitating access to social protection by removing administrative barriers
- Simplify and streamline registration and other administrative procedures, for example through mobile or online registration
- Develop integrated service delivery mechanisms, such as one-stop-shops, to improve the access to social protection for MSEs, particularly in rural areas
Facilitating contribution collection and financing mechanisms
- Simplify the declaration and payment of social insurance contributions for micro and small enterprises
- Facilitate the payment of social security contributions by allowing greater flexibility regarding the scheduling of contribution payments or allowing for contributing to priority social security branches, introducing differentiated contributory provisions or unified social insurance contributions
- Facilitate the payment of social security contributions and taxes, for example through monotributo mechanisms
Enhancing compliance and facilitating inspections
- Facilitate the inspections of MSEs and enhance compliance, for example by removing barriers to the inspection of small enterprises based on their number of employees or turnover
- Raise awareness and promote compliance through prevention measures and combine sanctions with information and awareness raising, especially for MSEs
Strengthening incentives for formalization through linkages with other policy areas
- Simplify business registration procedures and reduce transaction costs for MSEs, facilitate market access for MSEs and measures to enhance their financial inclusion to promote the transition of MSEs to the formal economy
- Enterprise policies to promote sustainable enterprises and, in particular, create conditions for a conducive environment for MSEs
- Promote freedom of association for MSEs
- The extension of legal coverage needs to be accompanied by mechanisms to ensure the application of the laws in practice. Additional measures are needed with regard to ensuring that compliance with legal obligations and administrative processes do not pose an overly high burden on small enterprises.
- Social security and labour inspection mechanisms need to be effective and adequate to encourage compliance. Both workers and employers should be informed of the regulations in place and be aware of the importance of social security coverage
- Considering that low productivity and weak financial capacities are among the key constraints faced by MSEs, it is important to complement these measures by a coherent and comprehensive strategy to enhance productivity growth of MSEs and ensure a conducive business environment so that their transition to the formal economy is facilitated
- Key resources on enterprise formalization (ILO website)
- ILO brief: Enterprise Formalization: Tailored registration, tax and social security requirements for MSEs
- Progress review of the Enabling Environment for Sustainable Enterprises (EESE) Programme in Zambia
- Report submitted to the 104th ILC: Small and medium enterprises and decent and productive employment creation
- ILO report: Global evidence on the contribution to employment by the self-employed, micro-enterprises and SME's
- ILO/GIZ Study on what works to formalize enterprises
- ISSA Guidelines: Administrative Solutions for Coverage Extension
- ILO policy resource guide: MSEs, informality and labour law
- Case Study: Better enterprise performance and higher social protection coverage in Indonesia