In its June 2020 judgement, the Supreme Administrative Court (SAC) dealt yet again with the ‘Svarc’ system. The court held that a CZK 1 mil fine for allowing illegal work had been rightly imposed by the Labour Inspection Office. The decision should be a warning in particular to entrepreneurs cooperating with individuals/self-employed persons as contractors.
The ‘Svarc’ system means that an entrepreneur ensures some of their activities through individuals who act as independent contractors (on the basis of a business relationship), but the performance of these activities demonstrates the characteristics of dependent work. According to the Labour Code, dependent work is work performed within a relationship in which the employer is superior and the employee is subordinate, in the employer's name, according to the employer's instructions, and personally by the employee for the employer. The law prohibits the performance of dependent work outside an employment relationship.
In the present case, a company provided for its client, a manufacturer of automotive components, an activity consisting of sorting of defective and non-defective components. This activity was carried out through several self-employed persons.
These ‘service providers’ could not influence the time, place or manner of work, or the remuneration for it. Their work tools, including ordinary ones, were rented from the company, and they did not even have their own work clothes but rented a company uniform. They attended occupational safety and health training, and in their work followed the company’s and its clients’ manuals, or the instructions of the company’s employees. Most of them had first worked for the company under an agreement to carry out work, and once they learned the work, they obtained a trade licence so that they could work for the company as independent contractors – with the same content of work. Although as service providers they could refuse individual contracts, they rarely did so as the company motivated them through an evaluation system with which it could change their remuneration. They invoiced their services through a uniform system required by the company. Most of these service providers only worked for the one company and were thus financially dependent on it.
One of issues at dispute was the manner of determining the remuneration, which could not be proven conclusively in the proceedings. The company argued that the remuneration was paid based on work done (pieces checked), but the overwhelming evidence was that the remuneration was paid based on hours worked, which is a typical feature of dependent work. However, according to the court, even if the remuneration had been paid on the basis of units checked, it would not have changed the outcome of the overall assessment of the situation.
Based on the facts ascertained, the SAC concluded that the activity carried out by the self-employed persons for the company was not by its substance the provision of services, but the performance of dependent work. According to the court, the case was a textbook example of a sophisticated ‘Svarc’ system scheme.
The company’s position was made worse in particular by the fact that the self-employed could not carry out their activities independently but had to follow the company's manual and instructions, and that they did not have any equipment of their own. Their activities were simply too similar to those of ordinary employees (company uniforms, usual training).
As the Labour Inspection Office has also pointed out in its bulletin, the actual nature of the activity carried out is essential when assessing whether illegal employment is taking place. Even sophisticated contractual documentation cannot prevail over the manner in which cooperation with the service providers actually takes place.
Entrepreneurs cooperating with individual/self-employed contractors should therefore examine the potential risks. The Labour Inspection Office may fine such “employers” up to CZK 10 million for allowing illegal work. Furthermore, additional tax and social security and health insurance may be assessed and, in a worst case scenario, there is even a risk of criminal sanctions.
Ladislav Karaslkaras@kpmg.cz+420 732 529 392
Václav Bělohoubekvbelohoubek@kpmg.cz+420 222 123 257