U-I-303/18

Reference no.:
U-I-303/18
Abstract:

[The text published below is a summary prepared for the annual report.]

Running a Business as a Sole Trader while Concurrently Enjoying the Right to a Pension

 

On the basis of a request by the Labour and Social Court in Ljubljana, by Decision No. U-I-303/18, dated 18 September 2019 (Official Gazette RS, No. 59/19), the Constitutional Court reviewed the regulation of the Pension and Disability Insurance Act currently in force that does not enable sole traders to receive their full old-age pension and concurrently carry out business activities. It reviewed the regulation from the perspective of the principle of trust in the law (Article 2 of the Constitution), the principle of equality (the second paragraph of Article 14 of the Constitution), the right to free economic initiative (the first paragraph of Article 74 of the Constitution), and the right to social security (the first paragraph of Article 50 of the Constitution).

 

The Constitutional Court agreed with the applicant that the challenged regulation entails a deterioration of the position of sole traders when compared to the regulation previously in force. Therefore, the Constitutional Court first reviewed the challenged regulation from the perspective of its consistency with the principle of protection of trust in the law determined by Article 2 of the Constitution. It found that the challenged regulation pursues the objectives of ensuring intergenerational equity, equality, and financial sustainability, which are in the public interest and prevail over the interests of sole traders. In this regard, the Constitutional Court took into account that sole traders were not deprived of their pensions in their entirety and that the three-year transitional period provided sufficient time for their adaptation.

 

From the perspective of the principle of equality determined by the second paragraph of Article 14 of the Constitution, the Constitutional Court compared the position of sole traders with the positions of (1) farmers, (2) recipients of pensions who receive payments on the basis of civil-law contracts, (3) retired persons who carry out temporary and occasional work on the basis of a special regulation, (4) sole traders who obtained a pension in accordance with the regulation previously in force, (5) recipients of pensions who act as holders of procuration for a capital company, i.e. representatives with an extensive, statutorily determined, power of attorney, and also carry out other work in the company, and (6) workers and self-employed persons in the cultural field. With regard to all of these comparisons, the Constitutional Court held that the challenged regulation is not inconsistent with the principle of equality.

 

The Constitutional Court further reviewed the challenged regulation from the perspective of its consistency with the right to free economic initiative guaranteed by the first paragraph of Article 74 of the Constitution. One of the essential consequences of the challenged regulation for sole traders is namely that they have to terminate their business in its entirety if they wish to receive a full pension.

 

Article 74 of the Constitution determines the fundamental constitutional definition of the economic system of the state, which is based on free economic initiative, i.e. on free enterprise, with due consideration that free and fair competition is a fundamental principle of the economic order of the state. However, the Constitution also sets limits on free economic initiative. The second sentence of the second paragraph of Article 74 of the Constitution thus determines that commercial activities may not be pursued in a manner contrary to the public interest. The public interest is the explicitly determined constitutional framework within which free economic initiative is guaranteed. The Constitution hence explicitly determines the limits of free economic initiative and vests the legislature with the authority and the duty to formulate, within the scope of regulating free economic initiative, economic policies in different areas of social life that it deems to be the most appropriate for ensuring the general social welfare. In so doing, the legislature enjoys a wide margin of appreciation.

 

By means of the challenged regulation the legislature determined the conditions for exercising the right to a pension. It thus aimed at achieving the objectives of intergenerational equity, eliminating inequality before the law, and ensuring the financial sustainability of the pension fund. The challenged regulation does not force sole traders into retirement or to terminate their business. The circumstance that a sole trader fulfils the conditions for retirement enables him or her to choose either to keep the status of sole trader and consequently receive a reduced pension or to cease his or her activities and receive a full pension. Retirement upon fulfilment of the conditions is not mandatory. A person who fulfils the conditions for retirement thus merely has the possibility to retire.

 

However, although the challenged regulation determines the conditions for obtaining the right to a pension and does not have a direct and mandatory effect on the exercise of free economic initiative, it is not neutral with regard to free economic initiative. It has to be presupposed that a regulation that would enable everyone to receive a full pension – including sole traders regardless of whether the pension substitutes for their income or whether their pension and income are cumulated – would create conditions that would encourage sole traders to continue to run their business. A regulation that restricts the reception of a pension to instances where an individual ceases to be a sole trader does not contribute to such. Continuing to run a business after having fulfilled the conditions for retirement thus proves to be less attractive than it could be precisely as in such instances the reception of a full pension is excluded. However, it must be taken into account that the choice which an individual faces with regard to the possible continuation of his or her business after having fulfilled the conditions for obtaining the right to a pension and obtaining the option to retire, as a general rule, also depends on a number of other circumstances in which the individual finds him- or herself and which are of a personal, non-monetary, or monetary nature. The challenged regulation hence entails only one of the reasons for an individual’s decision whether to continue a business after having fulfilled the conditions for retirement, and it is by no means the aim of the challenged regulation to influence the individual’s choice to give up his or her business. Therefore, the Constitutional Court decided that the indirect actual influence of the challenged regulation on the exercise of the right to free economic initiative does not have the characteristics of an interference with this right. It held that the challenged regulation is not inconsistent with the right determined by the first paragraph of Article 74 of the Constitution. 

 

When conducting the review from the perspective of the right to social security enshrined in Article 50 of the Constitution, the Constitutional Court proceeded from the fact that citizens have the right to social security, including the right to a pension, under the conditions provided by law. According to established constitutional case law, the core of the right to a pension includes ensuring the income security of insured persons in instances when they are no longer required to work and provide for their income in such manner. A pension is intended to substitute, to a certain (proportional) extent, for the income received during one’s active years. The social aspect of the constitutional core of the right to a pension does not guarantee the payment of an old-age pension in instances where the insured person does not cease to work. In addition, the legislature’s possibility to temporarily suspend the payment of old-age benefits (which are based on contributions paid) if the beneficiary concurrently engages in certain gainful activities is also determined by the third paragraph of Article 26 of Convention No. 102 of the International Labour Organization concerning minimum social security standards and by the third paragraph of Article 26 of the European Code of Social Security.

 

It follows from constitutional case law that the essence or the core of the monetary aspect of the right to a pension entails (inter alia) the right of an individual to obtain and enjoy, on the basis of contributions paid for pension insurance and subject to the fulfilment of other reasonable conditions (e.g. the pensionable period, age), a pension that guarantees his or her social security. However, when considering the monetary aspect of the right to a pension, it must also be noted that the first paragraph of Article 50 of the Constitution accords the legislature a wide margin of appreciation regarding the choice of measures for regulating the right to a pension. Within this framework, the Constitutional Court may only review whether the challenged condition is reasonable. When what is at issue is the manner of the exercise of a human right, the review of the Constitutional Court is restricted to the question of whether the legislature had reasonable grounds for choosing the measures that define the manner of exercise of the right at issue.

 

By means of the challenged regulation the legislature aimed to ensure intergenerational equity, as it prevents the additional burdening of insured persons who have not yet fulfilled the retirement conditions and who carry the predominant share of the burden of financing the system of mandatory pension insurance through their contributions. In addition, it was intended to ensure the financial sustainability of the pension system. The state must aim to regulate pension insurance in such a manner so as to render the pension system sustainable on its own. The state’s financial capacity to co-finance the pension system also requires that a balance between the competing interests of policies in the social, economic, and fiscal fields is achieved, which inevitably entails that the capacity to additionally finance the pension fund from the state budget has to adapt to this balance and to the existing capacities. The challenged regulation further proceeded from the position that within the system of mandatory pension insurance an insured person is insured for obtaining a pension that will substitute for the loss of income from work. The reduction of the pensions of sole traders who continue to run their business will be substituted for by their expected income from such business. Therefore, they do not have to be ensured a pension in such part. This is also a measure that contributes to the financial sustainability of the pension system. In light of the above, the Constitutional Court held that the challenged regulation is consistent with the right to social security determined by the first paragraph of Article 50 of the Constitution. However, such decision of the Constitutional Court does not entail that the Constitution does not allow for a different regulation that would allow sole traders to run their business and concurrently enjoy the right to a full old-age pension.

Document in PDF:
Type of procedure:
review of constitutionality and legality of regulations and other general acts
Type of act:
statute
Applicant:
The Labour and Social Court in Ljubljana
Date of application:
26.04.2018
Date of decision:
18.09.2019
Type of decision adopted:
decision
Outcome of proceedings:
establishment – it is not inconsistent with the Constitution/statute rejection
Document:
AN03993