Dissimulated Employment Relation
JUDr. Eva Wierzbicka Mendrok, LL.M. 03.03.2012
How to distinguish a supplier relationship from an employment relationship?
Distinguishing both of these relationships is based on defining what is dependent labor. The material point of view is applied, i.e. the formal designation of the contract or the parties to the contract is not decisive, nor are certain formal expressions in the contract decisive, but what is decisive is only what the actual content of rights and obligations is and how the activity is actually carried out. Originally, the given issue was regulated by the provisions of § 13 of the Employment Act, according to which the fulfillment of the employer's ordinary tasks resulting from the subject of his activity had to be ensured through employees in an employment relationship. Routine tasks were defined in such a way that they were directly related to the main subject of performance provided to customers by the respective employer. In the case of activities beyond the scope of normal tasks, it was possible to hire an external contractor on the basis of a business contract (cleaning of the employer's offices, maintenance of the computer network, advertising and promotional services or accounting), which is still completely legal and widely used outsourcing of secondary activities. The Labor Code with effect from 1 January 2007 then canceled the amendment of § 13 of the Employment Act and introduced the concept of dependent labor (§ 3 ZPr), which was not specified in any way. The Code only stipulated that dependent work can be performed exclusively in an employment relationship (employment relationship and agreements on work performed outside the employment relationship). On the basis of an amendment to the Labor Code, with effect from 1 January 2012, the definition of dependent work according to § 3 of the Labor Code has now been enshrined in legislation, which is defined as work that is performed in a relationship between the superior of the employer and the subordinate of the employee, on behalf of the employer, according to the instructions of the employer and the employee it is performed personally for the employer, it is performed for a wage, salary or other remuneration for work, at the expense and responsibility of the employer, during working hours at the employer's workplace, or at another agreed place. At the same time, it continues to apply that dependent work can be performed exclusively in an employment relationship. The purpose of this legal regulation is to ensure that, by its very nature, dependent work is carried out in the protected regime of the Labor Code, and last but not least, to ensure the income of the state budget, which is adjusted disproportionately by legal regulations in such a way that the levies of entrepreneurs are significantly lower, than levies for employees working under the Labor Code regime. At this point, it is important to emphasize that all legal acts and contractual relationships are always assessed according to their true nature and the will of the participants in such an act or legal relationship (material point of view), and not according to the formal designation. If the contractual relationship between the participants declared by the contract as a supplier-customer according to the Commercial Code, its content corresponds to the concept of dependent labor according to the provisions of § 2 of the Labor Code, then it is a disguised labor law relationship. In accordance with the provisions of § 41a, paragraph 2 of the Civil Code, then a simulated legal act (business relationship) is invalid, and on the contrary, a disguised legal act (employment relationship) is valid, if this disguised legal act corresponds to the will of the participants and if all conditions are fulfilled its requirements (requirements for concluding an employment contract or an agreement on work outside the employment relationship). Such a situation will be the rule in the case of the performance of dependent work in the simulated regime of the Commercial Code, and the relevant legal relationship will be assessed as a disguised employment relationship.
Consequences of finding a disguised employment relationship
In the event that a doubt arises as to whether it is really a business relationship or an employment relationship, and this doubt is finally resolved by the fact that it is a disguised employment relationship, the following consequences may be associated with it, among others:
- Application of provisions of the Labor Code. Even if the relationship is formally designated as business, the provisions of labor law regulations will be applied to the position of the contracting parties (restrictions for termination of employment, application of severance pay, limitation of employee liability for damage, employer liability for work-related accidents and occupational diseases, compensation of wages for the first 21 days of incapacity for work, etc.).
- Administrative offense resulting from a disguised employment relationship. If the labor office discovers that the employer allows the employee to perform dependent work outside the employment relationship, this will be considered an administrative offence, while from 1.1.2012 higher maximum limits for fines will be applied, both for the employer (up to CZK 10,000,000 , but at least CZK 250,000), as well as for employees (up to CZK 100,000 without a minimum fine).
- Tax and social and health insurance consequences. In the event that a commercial legal relationship is concluded between two entities, it is a relationship between two independent entities, where the customer pays the supplier for the work performed and no other costs are associated with it. In the case of a subsequent qualification as a disguised employment relationship, the employer (customer) will be additionally charged with taxes and payments of social insurance, health insurance and a contribution to the state employment policy, to the extent that it was an employee.
Typical contractual provisions indicating the performance of a dependent activity
Whether it is the performance of dependent work is often evidenced by the very provisions contained in the contract concluded between the supplier and the customer, or the documents related to it. Typical arrangements indicating the performance of a dependent activity can be summarized as follows:
- Personal work performance. One of the elements typically characterizing the employment relationship is the worker's commitment to personal performance of work, or the provision prohibiting the use of another subcontractor for the agreed work.
- Place of fulfillment or performance of work activity identical to the customer's registered office. If the contract between the customer and the supplier specifies the customer's registered office or place of business as the place of performance, it is possible to infer from this the agreement of the place of performance of the work, or the regular workplace of the employee.
- Determination of a specific time/number of hours for the performance of work or for the provision of services. A specifically determined scope of activity usually characterizes dependent work. This corresponds to, for example, a fixedly agreed period „from to“ on specified (usually working) days or also, for example, a fixedly agreed number of hours per month. Also, a minimum average number of hours set for a certain period (e.g. per calendar month) would be problematic.
- Agreement on fixed monthly remuneration or remuneration depending on the number of hours worked. In the event that the remuneration for work or services provided by the supplier is determined according to the number of hours worked and at the same time a minimum number of hours is set for a certain period (e.g. a calendar month) or if the remuneration is set at a fixed amount per calendar month, etc., performance can be imported dependent activities. This is also related to the possible agreement on the right to remuneration, regardless of possible obstacles in the provision of services, such as incapacity for work or taking leave. If the supplier keeps invoicing the same monthly remuneration even in the month when he was on vacation or when he was partially unable to work, then this indicates a dependent activity without risk on the part of the supplier, which is otherwise typical for business relationships
- Providing work aids or equipment. An agreement regarding the fact that the supplier will receive work equipment (laptop, mobile phone, car, etc.) from the customer for the purpose of providing the agreed performance or that it will use the customer's facilities (office, equipment of the customer's office, etc.) means that such a supplier does not bear the risk arising from business activities and that the provision of services by the client is not at the cost and responsibility of the client, as would be appropriate in a business relationship.
- Non-Competition Clause. If it follows from the contract that the supplier is not authorized to provide services or perform work for any third party during the validity period, or if in fact this is the contractual relationship (the supplier invoices only one partner every month and does not show any business activity for others), then this may indicate about dependent activity.
It should be emphasized that the occurrence of any of the above-mentioned provisions in the contract does not necessarily automatically mean that it is a disguised employment relationship. Each legal relationship must be assessed separately and all its features must be evaluated comprehensively, while the conclusion of a disguised employment relationship can usually be reached in the case where several of the above-mentioned arrangements are included and their overall effect is such that the performance of work shows a dependent character.
Arrangements that are usually not a sign of dependent activity
The questions listed below usually indicate the independent performance of an activity that may be the subject of a commercial obligation relationship:
- Independence. If the supplier has some freedom in where, how and in what manner he will carry out the performance and is not limited in this direction by the orders of the customer, it is an independently performed activity (this is not meant in the sense of personal performance of work without the contribution of other persons, but in the sense of the performance of an activity according to independent consideration and planning of time, resources and personnel and subcontractors used).
- Business risk. One of the characteristic features of business according to the definition of the Commercial Code is that the performance is provided by the entrepreneur on his own responsibility, which means that the entrepreneur is also responsible for certain things that he cannot influence (e.g. non-delivery of work/documentation due to theft, accidental destruction belongings of the customer that he has with him, even though he was not at fault, etc.). In contrast, the employee's liability is limited and the employee does not bear the business risk.
- Place of performance mainly outside the client's registered office. If the place of performance is defined in such a way that the supplier provides services at the place of his business or at a place according to his own responsibility, with the fact that he is at the customer's place of residence only from time to time due to the handover of a completed part of the performance or due to some coordination meeting , then it is an independent business activity.
- Variable remuneration depending on the quality and scope of services provided. If, according to the contract, a variable remuneration is applied, which is derived from the supplier's performance, it is usually an activity carried out independently with business risk in terms of the amount of income achieved.
Methodology for determining the amount of income from dependent activity (Instruction of the Ministry of Finance of the Czech Republic No. D-285)
The purpose of the instruction of the Ministry of Finance of the Czech Republic No. D-285 is to define the boundaries for the taxation of the income of natural persons from dependent activities, so that there is a uniform application of the provisions of § 6, paragraphs 1 and 2 of Act No. 586/1992 Coll., on income taxes, as amended. For determining the method of taxation of natural persons, the legal fact on which the relationship between the income payer and the income tax payer was established is not decisive. The determining aspect is whether or not it is „dependent work“. Dependent work is defined on the basis of this instruction by the fact that the payer of the income directly or indirectly imposes tasks, directs and controls a natural person and bears responsibility related to his activity, their relationship is long-term or continuous, while the work is performed personally or through a cooperating person in the sense § 13 of the Income Tax Act, with the help of material, machinery and equipment or other work aids provided to the person by the payer of the income. Remuneration for work is calculated on the basis of the length of working hours or in a similar way for remunerating a person in an employment relationship. It therefore follows from the above that even if the parties to the commercial contract try to conceal the employment relationship, the self-employed person's income will be taxed in the same way as it is for an employee working on the basis of an employment relationship, while the above-mentioned instruction of the Ministry of Finance and the methodology of the financial authorities in ascertaining the amount of income from dependent activity is of course a certain guide and inspiration for how to assess the contractual relationships in question, although the term „dependent work“ defined by the mentioned Income Tax Act is not completely identical in content or in terms of interpretation to the term „dependent work“ defined by the Labor Code .