How to avoid false self-employment or undeclared employment (in the Czech Republic it’s called the “švarc-system”)?

These days, unlike in the past, employees are often presenting companies with a fait accompli: “I don’t want an employment contract. I want to invoice for my work!” So how do you make a “job” on the basis of a trade licence legal?

Wikipedia: “False self-employment is a situation in which somebody registered as self-employed, a freelancer, or a temp is de facto an employee carrying out a professional activity under the authority and subordination of another company. Such false self-employment is often a way to circumvent social welfare and employment legislation, for example by avoiding employers social security and income tax contributions.”

We recommend going through the following points one by one and defining the contractual relationship and the actual operation as much as possible so that the features of false self-employment don’t apply.

1.Regular and equal rewards 

A self-employed person raises suspicion of a false self-employment if they have only one customer partner (company) and invoice this firm the same amount at regular intervals. It’s a good idea to avoid agreed remuneration based on an hourly rate in which the employer’s records play a crucial role. Pay attention to the remuneration amount; if it‘s the same as company employees in a similar position receive, officials consider it a sign of false self-employment.

 

2. Acting on behalf of the employer 

A self-employed person may not act on behalf of their business partner (company), they can only act on their own. This applies particularly to e-mail addresses, business cards, signatures in e-mails, dealing with third parties on behalf of the company.

 

3.Who owns the work equipment? 

If the self-employed person carries out their work using the equipment of a business partner (company) and there is no lease agreement between them (for example, offices, computers, printers, etc.), in an inspection this could indicate false self-employment. If the work must be carried out on the company’s premises, the hire of equipment and workspaces must be subject to a contract. “Illegal” use of equipment is a feature of false self-employment.

 

4.Prohibition of work for another business partner (company) 

Long-term activity for one business partner (company) doesn’t in itself indicate false self-employment, but in combination with a prohibition of activity for another business entity, it could be a sign of “dependent activity “, i.e. employment. Therefore, a self-employed person should not enter into a contract with the company for an indefinite period (or a long period in which exclusivity is established.

 

5.Unequal relationship between self-employed and business partner (company). 

If a self-employed person cooperates legally with a company, it’s regarded as an equal partnership in terms of commercial relationships. If the relationship between a self-employed person and a business partner is characterized by seniority and subordination (self-employed persons are carrying out  the company’s orders without reservation), suspicion of false self-employment arises.  Another indication is the inclusion of the self-employed person in the company’s organizational structure.

 

6.Liability for damage. 

In an employment relationship, the employee is liable for the damage only up to the statutory limit (4.5 times the monthly salary), in addition to this amount, it’s the employer who bears liability. On the other hand, the self-employed person is liable for any damage caused, with all their assets. Therefore, if under a contract, a self-employed person is liable to the partner (company) for the damage caused, but only up to a certain amount, or not at all, this is an indication of false self-employment.

 

7. Scheduled working hours 

A classic feature of dependent activity is fixed working hours. Therefore, a business partner (company) may not monitor and record the attendance of a self-employed person (for example in the form of an attendance record or a swipe card). For inspectors, the record of working hours is pretty good evidence of hidden employment.

 

8. Too wide a range of activities, little specialization 

The risk of false self-employment is greater if the scope of activity that a self-employed person carries out for the business partner is less. Contracts between the self-employed person and the company should also not include wording typical of employment contracts, such as the right to paid leave, fixed working hours, or regular attendance at the workplace, let alone employee benefits such as meal vouchers, fitness allowance, etc.

 

 

 

At EIBD, we’ll be happy to help you prepare contracts.