Frequently Asked Questions About Formalization
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The informal economy is made up of all the economic activities, enterprises, jobs and workers that are not covered in law or in practice by formal arrangements. These include legal frameworks for enterprise operations and social and legal protections for workers.
Source: ILO (2015), Recommendation No. 204 Concerning the Transition from the Informal to the Formal Economy
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Formalization is an incremental process that aims to: 1) extend legal rights and social protections to workers; and/or 2) bring the activities and operations of informal economic units and enterprises into compliance with laws and regulations.
Measures to promote formalization will vary depending on the context, sector and whether the aim is to formalize workers, enterprises and/or economic units. Efforts to formalize informal employment should focus on extending rights and protections to workers, not just obligations.
Source: ILO (2021), Transition from the Informal to the Formal Economy – Theory of Change
The following video explains a rights-based approach to formalization, including practical solutions for specific sectors and forms of employment.
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Governments can promote formalization through a variety of supportive policies.
The International Labour Organization (ILO) outlines three complementary pathways to formalization: 1) creating decent jobs and sustainable enterprises in the formal economy; 2) transitioning workers and enterprises from the informal to the formal economy; and 3) preventing the informalization of jobs.
For workers, processes should focus on reducing risks by: improving access to social protection, recognizing their labour and collective bargaining rights, improving access to professional training and skills development and sector-specific measures aimed at improving working conditions and access to support.
To facilitate the transition for informal economic units, governments can put in place macroeconomic, employment, social and other policies to create favourable conditions and reduce risks and barriers.
Workers’ participation is a central component in the design and implementation of any formalization process as it ensures policies reflect their needs and realities.
Source: ILO (2021), Transition from the Informal to the Formal Economy – Theory of Change
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There is no “one size fits all” formalization approach. Having reliable data and statistics on the informal economy is essential in designing social and economic policies that respond to the realities of the labour market and that address sources of risk and decent-work deficits for workers.
Source: ILO (2015), Recommendation No. 204 Concerning the Transition from the Informal to the Formal Economy
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Enterprises are considered informal based on their level of compliance with legal registration and record-keeping requirements. In some cases, this can be in regards to labour and social security laws, tax obligations or health and environmental regulations. In other cases, informal enterprises are not covered by those laws and regulations, which limits not only their duties but also their protection.
Source: ILO (2021), Enterprise Formalization: An Introduction
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Formalization means an informal enterprise or economic unit is transitioning to the formal economy.
This means they operate under the regulatory framework and can enjoy the benefits that this involves – like having legal protections and the financial and business support that comes with registration.
It also means they abide by obligations – like having proper accounting records, paying taxes and formalizing their employment relationships with workers.
Formalizing an enterprise does not necessarily mean that the employment in it is “formalized”.
Source: ILO (2021), Transition from the Informal to the Formal Economy – Theory of Change
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Insufficient legal protection is part of the definition of informality. Labour law distinguishes between workers who are in a standard employment relationship and those who are not. Standard employment relationships are jobs that are continuous, full-time and have a direct relationship between employer and employee. Most labour laws only extend protections and entitlements to workers in standard employment relationships, or they only extend a limited number of them to some non-standard workers. This can incentivize the misclassification of workers to evade labour law.
Source: von Broembsen, M. (2016), Eliminating Legal Barriers from the Perspective of the Informal Economy
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Workers in informal employment want a rights-based formalization process that they are directly involved in shaping; ideally through collective bargaining.
Efforts should align with the principles outlined in ILO Recommendation 204 – an international labour standard. They should be aimed at reducing the risks and structural barriers workers face, and be conducive to decent work, community well-being and social justice. This requires inclusive and appropriate public policies that help extend social protection and legal recognition.
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The ILO develops labour standards that can act as legally binding international treaties or non-binding guidance for member states.
ILO Recommendation 204, focused on formalization, emphasizes that formalization processes should respect workers’ fundamental rights at work, preserve existing livelihoods and promote decent work.
Other labour standards exist for specific sectors with high rates of informality, like domestic work, and some focus on issues like violence and harassment and just transition.
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Several international and regional institutions provide guidance on formalization through international human rights law and other instruments.
The OECD has developed sector-specific guidance while the United Nations, G20 and APEC have integrated formalization initiatives into economic growth policies. Increasingly, international and regional organizations recognize the need to cooperate and help governments to promote formalization.
Under the Universal Declaration of Human Rights, states must respect, protect and fulfil the right to just working conditions for all.
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Governments can adopt a set of integrated policies to encourage formalization – what is appropriate depends on the policy context and goals.
Key policy areas are labour rights, social protection, improved working conditions, and incentives to register businesses and pay tax.
Workers’ participation is a central component in the design and implementation of any formalization process, as it ensures policies reflect their needs and realities.
Source: ILO (2015), Recommendation No. 204 Concerning the Transition from the Informal to the Formal Economy
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Social protection is a key component of formalization processes.
One consistent demand from workers in informal employment is to be able to access social security schemes – like health care, maternity benefits and pensions – in the same way that formal workers do.
When social security schemes provide comprehensive protection to workers – and are financed equitably by workers, employers and governments – they can contribute to formalization.
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Good practices to extend social protection to workers in informal employment exist around the world.
Argentina, Brazil and Uruguay have implemented simplified and subsidized tax and contribution regimes, enabling self-employed workers to access a range of benefits.
Cabo Verde, Jordan, Kenya, Mexico and the Philippines have included self-employed workers in their general social protection schemes. And Namibia, Ghana, Vietnam, Peru and Thailand enable self-employed workers to join social insurance on a voluntary basis.
Source: OECD (2024), Breaking the Vicious Circles of Informal Employment and Low-Paying Work
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To ensure formalization becomes a reality, workers in informal employment may need different mechanisms based on their status in employment.
Wage workers need written contracts, employment-based benefits and protections, as well as mechanisms that ensure employers comply with labour regulations.
Own-account self-employed workers require policy measures that promote their economic inclusion, including access to finance, public procurement and trade networks, as well as social protection and recognition and protection under labour laws.
What all workers need are access to social protection, decent work and respect for their rights as workers, including the right to freedom of association and collective bargaining.
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Yes, workers in informal employment already pay taxes at national and local levels. In fact, many countries have specific taxes (called presumptive or simplified taxes) for workers in informal employment.
In many cases, the proportion of taxes that workers pay in relation to their revenues is too high. Paying taxes and tariffs does not necessarily mean that workers in informal employment are considered formal or that they can benefit from access to services and infrastructure.
Source: Rogan, M. (2019), Tax Justice and the Informal Economy: A Review of the Debates
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When workers organize into cooperatives, associations and other social and solidarity economy collectives, they create mechanisms of mutual support. Workers may self-organize in SSE entities to access savings, credit and healthcare services – especially in the absence or weakness of public policies or state-provided social protection systems.
Registering as SSE entities allows cooperatives to operate under specific legal frameworks and demand recognition from state institutions, which is particularly important in contexts where workers in informal employment are not allowed to register as unions or participate in collective bargaining.
Source: Parra, F. (2025), How Do Cooperatives Support Worker Recognition and Political Representation?
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Social dialogue and collective bargaining help to meaningfully include organizations of workers in informal employment in formalization processes.
To meaningfully address the realities of informal employment, collective bargaining laws must recognize the rights of all workers to organize and negotiate collectively, regardless of their status in employment and the location of their work – including private homes and public spaces.
Local, regional and national collective bargaining spaces must be designed to be inclusive of workers in informal employment and their organizations.
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Local governments are the part of the state in most direct contact with workers in informal employment – so they are in a unique position to facilitate formalization processes.
For national policies to be coherent and effective, they must be complemented by local measures that meet workers where they are. This will help local governments to improve working conditions from a grounded understanding of workers’ needs and contributions, and build supportive public services.
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An effective formalization policy framework requires flexibility to be able to respond to the specific conditions of different sector groups.
Rigid formalization policies and punitive enforcement create additional barriers for workers who lack the resources to comply with formalization requirements. This is particularly true for own-account workers who are earning a daily income to survive. It can also create conditions for corruption and abuse between enforcement officials and the enterprises they are called to formalize.
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Some evidence shows that increasing the productivity of informal economic units through formalization can boost economic growth – and that economic growth leads to the creation of more formal jobs.
However, not all informal enterprises have growth potential and many informal sector units are not in a position to take on entrepreneurial risks. This is because workers in informal employment operate without basic protections, often in contexts where evictions, confiscations and other exclusionary measures are common. Formalization interventions must go beyond simply enhancing productivity – they must extend protections and rights to workers to help them redress the barriers they face.
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When economic crises cause job losses in the formal economy, more people become employed in the informal economy to survive. But importantly, workers already working in the informal economy are more vulnerable to crises than formal workers due to the absence of legal and social protections.
During COVID-19, workers in informal employment lost their jobs and livelihoods at a greater rate than formal workers. And, during the global financial crisis in 2008, informality increased in some countries but decreased in others.
The negative impacts of the crises and the measures to tackle them tend to be long-lasting and exacerbate exclusion and inequality in the informal economy.
Source: ILO (2020), COVID-19 Crisis and the Informal Economy: Immediate Responses and Policy Challenges
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The short answer is no. Formalization is not feasible for all informal economic units or workers in informal employment because their levels of operation are too small and do not have the capacity to grow. Additionally, the lack of economic growth and creation of formal jobs means that every year, new people join the informal economy.
However, promoting a worker-centred formalization process that enhances access to legal recognition and social protection is conducive to transitioning to the formal economy.
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No. The internationally agreed concept of informal economy excludes illegal and illicit activities.
Source: ILO (2023), Resolution Concerning Statistics on the Informal Economy
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Having access to credit is a key stepping stone for any economic activity to grow.
For workers and economic units in the informal economy, financial inclusion means more than the possibility of enhancing their earning capacity, it also means recognition of their activities as work that contributes to the economy. Facilitating financial inclusion, in combination with other measures, can help incentivize engagement in formalization processes.
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Legal recognition is an essential part of domestic workers being included in formalization policies.
The ratification and implementation of ILO C189 and R201, as well as the enactment and implementation of national legislation on domestic work are critical to addressing decent-work deficits in the sector.
Extending the scope of labour law and social security to provide written contracts, minimum wages, paid leave, healthcare and other basic worker protections are critical to formalization efforts. And institutionalizing and strengthening social dialogue mechanisms (with representation from domestic workers’ unions, governments and domestic workers’ employers) can ensure effective policy design and the definition of a road map towards formalization.
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Abiding by the principles laid out in ILO Recommendation 204 is critical to support street vendors’ efforts to transition to formality. As a foundation, legal frameworks and labour laws should recognize street vendors and market traders as workers with rights. Formalization efforts should also ensure vendors’ right to register as unions of self-employed workers, and their organizations’ right to participate in collective bargaining at the local and national level.
Formalization for street vendors should include things like inclusive urban planning, access to vending spaces with basic services, simplified tax systems, and access to credit and social protection.
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A foundational step in formalizing waste pickers is recognizing them as workers with rights under the law. Waste pickers are particularly impacted by waste, recycling and green transition policies and should be involved in policy development. These policies should promote decent work and ensure that waste pickers have a protected role in waste management and the circular economy, upholding their right to a just transition.
Other formalization measures could include guaranteeing the right to access recyclables without restrictions, payment for services, inclusion in waste management systems, the right to bid for solid waste management contracts through public procurement, and access to equipment and infrastructure.
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Dependent contractors like home-based workers need appropriate legal and regulatory frameworks that recognize their employment relationships with suppliers, and provide them with legal and social protections.
Other measures to support home-based workers include adequate zoning regulations, the recognition of home as a work space, and access to social protection and public services, like childcare. Workers in the sector also require transparent contracts and protection from arbitrary cancellation of work orders and delayed payments.
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Platform workers work in many different ways and on a variety of tasks – they work across several sectors, with some in a specific location and others remotely.
One challenge is the disguised employment relationship between platform workers and platform owners. Companies often argue that the platform is simply linking self-employed entrepreneurs with customers and maintain there are no grounds to impose labour laws. But such arguments mask the level of control platforms have over workers through the use of algorithms that can control workers’ access to customers and their pay rates.
The absence of appropriate regulations hinders the recognition and protection of platform workers’ labour rights.
Our Work on Formalization
This page brings together key concepts, research, policy analysis and WIEGO resources that explore how formalization can be designed to be inclusive and worker-centred.
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