2019-10-03

Social Security for Seafarers, CJEU Judgement and the “Restore Polish Flag” Project

High labour costs due to social insurance were one of the main reasons for rapid expansion in the world maritime shipping of a phenomenon known as a flag of convenience. Crew costs can reach 60-70% of shipowner’s overall costs. Work at sea is hard and requires sacrifices, so in order to find anyone willing for the job the wage must be correspondingly attractive, meaning high. Otherwise no one will choose to work at sea. High salaries are one thing, but social insurance is another. In Europe, social insurance counts among blessings of civilisation. Pursuant to the law of European countries,
a person cannot be employed (which applies to seafarers as well) without being provided with social insurance. Therefore, to a relatively high wage one must add also a high (resulting from the high wage) social insurance contribution. And these additional non-wage labour costs proved too much for shipowners. They were not able to bear them. Or rather they were not able to conduct a profitable shipping activity bearing these costs. So they started to look for a solution.

Life abhors a vacuum, which applies to business as well. If there is demand, there will also be supply to meet it. In the case of high labour costs on board the solution was provided by flags of convenience. Third world countries have not yet obtained the blessing of civilisation consisting in social insurance. Pursuant to the law in force there, one can employ a seafarer to work on board for a bare wage, no social insurance required. And so the exodus of European (including Polish) shipowners to sail under flags of convenience began. It had taken some time before the effects of this exodus became visible. Because we cannot say that a flag flown by ships operated by shipowners from a given country does not affect the economy of this country. Tonnage tax, registration fees and, to a large extent, inspection fees or charges for formal and legal services provided to companies support budgets of flag of convenience countries instead of the countries where shipowners are established. Professor
W. Modzelewski estimates that as regards Poland, the loss of profit of state public finance due to the lack of Polish fleet under the Polish flag amounts to PLN 7-9 billion annually. As almost 30 years have passed already since the Polish fleet under the Polish flag disappeared, according to this estimate the flag gap is more than PLN 200 billion. In Poland, the awareness of such negative effects is only just raising. Whereas European Union realized the fact a long time ago. It is evidenced by the Community Guidelines of 2004 defining the rules for aid to maritime transport. Solutions compliant with the Guidelines were implemented by Finland, Belgium, the Netherlands, Germany, Ireland, France, Spain, Greece, Italy and Norway, so practically by all EU/EEA sea countries. As a telltale case proving the effectiveness of such actions we can name Norway (not EU, admittedly, but EEA with the same rules in force). Norway, a country with the population of less than 6 million, has a fleet of over 1,900 vessels flying the Norwegian flag. Such a huge fleet exists due to implementing there shipping friendly legislation recommended by the Community Guidelines of 2004. The annual shipping income in Norway in 2016 amounted to over NOK 116 billion (ca. EUR 16.5 billion)

After years of neglect due to the neoliberal business “ideology” professed by political options formerly ruling in Poland, maritime economy and shipping are regaining their proper position and importance. An act has been adopted recently to amend seafarers’ income tax, which restores the law, being a dead letter since 2015, related to the 183-day rule for seafarers. Under the auspices of the National Development Council (NRR) of the President of the Republic of Poland a project is being developed temporarily named “Restore Polish Flag”. As part of this project, a reform of social insurance for seafarers has been prepared.

Implementation of this amendment is particularly important in the context of CJEU Judgement of
8 May this year, regarding the very social security for seafarers. The essence of this judgement is as follows: a seafarer from an EU country employed by a shipowner from another EU country and working on board a sea-going vessel flying the flag of a third state (including the flag of a state considered a flag of convenience state) and outside of the EU territory, as regards social security falls within the scope of the regulations of his/her country of residence. This means that EU shipowners will not be able to employ, on board their vessels flying flags of convenience, seafarers from EU countries (including from Poland) without providing them with social insurance.

The consequences of this state of affairs - in the context of the “Restore Polish Flag” project - are shown by the short analysis below:

Legal situation (of countries and shipowners) before the CJEU judgement:

- third country regulations (including flag of convenience countries) - the law of these countries permits of employing seafarers without social insurance,
- Polish legislation - Polish seafarers employed on board third country vessels (including ships flying flags of convenience) do not perform their work in the territory of the Republic of Poland and therefore are exempted from social insurance obligation in Poland (Article 6(1) of the Act of 1998 on the Social Insurance System stipulates that natural persons being employees in the territory of the Republic of Poland are subject to mandatory pension and disability pension insurance),
- EU shipowners - can employ to work on board their vessels flying a flag of convenience seafarers from both non-EU countries and Poland under the same terms (without social insurance).

Legal situation (of countries and shipowners) after the CJEU judgement

- third country regulations (including flag of convenience countries) - nothing has changed, these countries are not bound by EU regulations
- Polish legislation - exemption of seafarers working on board foreign vessels (including ships flying a flag of convenience) from the social insurance obligation has become incompatible with EU law (the conflict of law rules provided for in Regulation 883/2004 are of the mandatory nature)
- EU shipowners - will still be able to employ seafarers from non-EU countries without paying social security contributions, however in the case of seafarers from Poland shipowners will have to pay social security contributions pursuant to Polish law (once Polish law is adjusted accordingly, which will have to happen in order to obtain compliance with EU law).

Consequences for EU shipowners, including Polish ones (should there be no social insurance reform pertaining to Polish seafarers):

- drastic increase in labour costs (under Polish regulations on social security for seafarers currently in force) for EU shipowners employing seafarers from Poland on board sea-going vessels due to the necessity of adding social security contributions to their wages.

Potential consequences for Polish seafarers and the state finance (and maritime education in Poland as well) should no amendments be introduced:

- EU shipowners (to avoid labour cost increase) will get rid of Polish seafarers little by little,

- the Drewry agency estimates that there are about 40k Poles employed with marine fleet worldwide; according to trade unions, the number of Polish seafarers at risk of losing their job is about 10-15,000,

- when seafarers lose their jobs, the state finance will lose inflows due to seafarers’ salaries transferred to Polish banks; at present these inflows amount to ca. PLN 2 billion annually,

- with no possibility to work on board sea-going vessels within world shipping, there will also be no one willing to study at maritime universities and colleges, which will throw into question the current grounds for existence and development of maritime education in Poland.

The essence of the social security reform prepared under the auspices of NRR of the President of the Republic of Poland:

- social insurance for seafarers becomes linked to the national minimum wage

- shipowners (owning ships flying the Polish (!) flag) will be exempted from the part of the contribution financed by an employer.

An offer for shipowners resulting from implementation of the prepared reform:

- shipowners who will register their ships under the Polish flag will be exempted from the part of the contribution to be financed by them as employers,
- shipowners remaining under third country flags will pay contributions (once the Polish social security system is adjusted accordingly) calculated based on the national minimum wage instead of gross wage (contributions will be significantly lower than the ones currently required pursuant to applicable law, therefore they will not result in any drastic labour cost increase),
- Polish seafarers (both under the Polish flag and under a flag of convenience) will have their social security status regulated, in compliance with EU legal requirements.

Effects of the proposed changes:

- ncreating (economic) conditions for rebuilding Polish fleet under the Polish flag,
- maintaining the competitiveness of Polish seafarers in the world shipping labour market,
- maintaining jobs for Polish maritime school graduates which will give grounds for further functioning of Polish maritime education.

Of course, the reform of social security for seafarers is just the beginning of the road. The beginning of the road to restore commercially viable conditions of ship operation under the Polish flag. As next, it is necessary to amend regulations pertaining to ship mortgage, maritime chamber, sea-going vessel register (including implementation of an electronic register), to simplify regulations concerning registration fees and to regulate powers of government offices so as to prevent doubling inspections carried out on board. It will be the second stage of the reform of the Polish flag state regulations. The reform that will result in shipping friendly law. The law that will ensure shipowners and shipping companies a stable, commercially viable ship operation under the Polish flag. All this to make shipping under the Polish flag advantageous for the state, shipowners, seafarers and all of us in general.

The sea and work at sea contributed to the prosperity of developed European countries. These countries benefit from them still. It is high time for us to do the same.

cpt. Tadeusz Hatalski, Member of the National Development Council

Phot. T. Urbaniak / Port of Gdynia Authority