At beginning of the year, the Czech media were flooded with, for many rather a welcome, news that according to the Court of Justice of the European Union (CJEU) self-employed persons who cooperate with a sole customer on a long-term/permanent basis for a contracted lump-sum wages are entitled to annual leave.1
The results of the ruling were, nevertheless, misinterpreted by the media. In fact, one needs to bear in the mind the ruling is not as ground-braking as it may seem since it only expands on the adopted attitude towards the so-called covert performance of dependent activity. In layman’s terms, both Czech and European law tends to regard somebody who “in actual fact performs their duties as an employee would do” although they “for the sake of appearance behaves like a self-employed person” as an employee with all the consequences.
Similarly, the quoted ruling of the CJEU in the King case had to deal with a matter of application of a EU guideline amending the working hours; in accordance with the guideline only a person who could be labelled as a “worker”2 may be entitled to annual leave. The term “worker” is defined by the CJEU in accordance with objective criteria which define a labor-law relation with respect to the rights and duties of the persons in question.3 Mr. King performed his duties for Sash WW on a basis of a “contract of a self-employed person working for a commission”. Despite the fact that the contract was formally signed between businesspersons, the CJEU (and so did British courts) admitted that EU directive protection provisions concerning the minimum paid leave apply, which results in “surprised” Sash WW having to pay Mr. King unexpended leave due since 1996 (!).
In the Czech environment, the so-called svarc system is often talked about. Although the Czech law does not use the term “worker” but rather “dependent work/activity”, both Czech and European attitudes converge in principle – if the contracting parties agree that a dependent activity is to be performed, i.e. the “self-employed” person will:
- perform their duties personally,
- in accordance with specific instructions of the other party,
- on the other party’s behalf,
- for a (usually fixed) wages,
- on the other party’s costs and responsibility, and/or
- during working hours and on the other party’s premises,
then regardless of the formal labelling of the parties as businesses and the title of the contract, the relation is to be deemed as one of “a dependent activity”. It means that the relation needs to be assessed in actual fact rather that “as stated” in the contract through the lenses of the above criteria. Sometimes, some contracts even support the idea of re-qualification to the dependent activity.
Should it be proved that the aim of both contracting parties was to perform a dependent activity, then all labor-law, tax and other consequences apply. And it is the sign of “dependence” which is the crucial one, especially with professions which might either be practiced as dependent (i.e. as an employee) or independently (i.e. a self-employed person).4 The line, however, between an acceptable right establishment and the illegal svarc system is very thin.
Labor law consequences
Should the contracting parties aim to pass a contract of employment as a business agreement, in other words they attempt to veil a dependent activity, the contract in question would be considered according to its true nature; It means that a supplier-customer relationship might be re-qualified as a standard employment. Therefore, the self-employed (who is in actual fact an employee) may under certain circumstances claim their rights in the following areas:
- right to a paid leave (the often-quoted ruling CJEU in the King case);
- termination of the work activity – e.g. if the cooperation is terminated on the basis of termination of a commercial contract, the self-employed person (in fact an employee) might surprise the “employer” by bringing a legal action regarding invalid termination of employment;
- obstacles to work – in the case of obstacles to work on behalf of the employer, the employee has a right to be paid wage’s compensation; this claim may be made by the self-employed person (in fact an employee);
- additional allowance - the self-employed person (in fact an employee) might also claim additional allowance or compensatory leave for overtime work, for work at night and/or weekends, holidays etc.;
- damage liability - the self-employed person (in fact an employee) might, furthermore, demand a decrease in a degree of their damage liability in accordance with the Labor Code, or even claim compensatory allowance for an accident at work or an occupational disease.
Tax and compulsory insurance consequences
It is apparent that the tax and compulsory savings are the most common reason for contracting parties to “resort to” svarc system as the tax burden of the businesses is considerably lower than in it is in the case of employment. Nevertheless, the tax administration has been extremely productive and the rulings in the matter of svarc system are numerous and cases of the tax offices re-qualifying the contracts and, subsequently, additionally assessing the tax are fairly common.
Administrative law consequences
The Employment Act defines illegal work as, among others, a “dependent activity performed by an individual outside of a labor-law relation” and it is checked by local labor inspectorates and fines for its performance may be imposed upon both the employer (from minimum CZK 50,000 up to CZK 10,000,000) and the self-employed person (up to CZK 100,000).
What is more, should the employer be fined for illegal work, they are also deemed to be an “unreliable employer”. If a foreigner from a third country (i.e. outside of the EU) applies for a job with such an employer, it will not be possible to employ them; in other words, the applicants will not be issued with the employment card (you can find more information here).
Criminal law consequences
Finally, it is also important to emphasize that should a circumvention of lay by svarc-system be detected, the employer might also face charges in terms of tax, social security and health insurance premiums evasion, as well as other similar payments.
1 The stated conclusion is based, with a certain degree of simplification, the ruling of the Court of Justice of the European Union of 29 Nov 2017, C-214/6, in the case King vs The Sash Window Workshop Ltd.
2 The EU Labor law directives use the term “worker”, which is explained autonomously by the CJEU, instead of an “employee”, which may be defined differently in different states
3 The main characteristics of a labor-law relation is the fact that a worker performs activities for a different person on the basis of the other person’s orders and receives wages for such activities – see ruling of the CJEU in Deborah Lawrie-Blum vs Baden- Württemberg, C-66/85, 24 Jan 1985
4 The fact that some activities (even a large number of them) may be performed either independently or within an employment relation is admitted by the Czech Supreme Administrative Court – cf. ruling 6 Afs 85/2014 of 30 Sep 2014: “it is, therefore, possible to distinguish three types of activities. First, activities performable exclusively independently due to the fact it is stipulated by law (a bailiff, notary etc.) or per definitionem (regarding the scope and type of the activity, e.g. complex production activities, certain types of business activities, a large real estate agency etc.). The second type is a type of activities that are of an “either” nature (vast majority of sole-traders – masons, plumbers, independent professions, assistance activities, services like accountants, hairdressers etc.), the third case, then, are activities solely dependent (such as cashiers in a supermarket). The case law arrived at a conclusion that the second type, the “either”-natured, activities do not fall into the category of the illegal svarc system.”