Dissimulated Employment Relation

JUDr. Eva Wierzbicka Mendrok, LL.M. 03.03.2012

Illustration for Dissimulated Employment Relation

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:

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:

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:

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 .

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