Czech Republic: Combating Disguised Employment in the Czech Republic: Legal Insights and Potential Sanctions

Author: Klára Sleglova

With the new Act on the Uniform Monthly Employer Report and the Financial Administration’s intent to strengthen cooperation with the Labour Inspectorate, Czech employers are once again reminded of the risks associated with concealing dependent work in a commercial relationship.

 

Characteristics of Disguised Employment

Disguised employment consitutes illegal employment and occurs when employers establish a commercial relationship while demanding work that legally requires an employment contract due to qualifying as dependant work. This practice appeals to employers due to its flexibility and reduced legal responsibilities. They avoid paying social security and health insurance contributions for the employees. They can end the contract virtually anytime and without justification, unless otherwise agreed. Furthermore, they aren’t bound by other labour law obligations, such as working hour limits, providing paid vacation and time off work, or bearing the costs of ensuring safety and health protection during work.

 

Indicators of Disguised Employment

There are a number of things pointing to disguised employment. For example, if the business partner uses an email adress or a business card with the employer’s logo, if they are obliged to work only in person on the workplace, if they are guaranteed paid leave, if they are given instructions by other employees or if they have fixed working hours. However, in practice, there are often additional indicators.

 

Measures of Czech Administrative Authorities against Disguised Employment

It is mainly the Labour Inspectorate that specifically targets detecting disguised employement. Inspectors are equipped with broad authority — they have free access to all employer premises, they can verify the identity of persons, request and copy relevant documents, take photographs or videos without prior consent and privately question individuals. They can also acquire information about employers and self-employed persons from tax offices. Furthemore, the new Act on the Uniform Monthly Employer Report enables the Ministry of Labour and Social Affairs to share data with the Financial Administration in near real-time, facilitating more targeted tax audits and vice versa.

 

Sanctions for Disguised Employment

Sanctions for disguised employment can be imposed on the employer as well as on the employee. The Labour Inspectorate can charge a fine starting at CZK 50,000 and up to CZK 10,000,000 and can also prohibit the employer from conducting business activities for up to 2 years. Similarly, the business partner/employee can be charged a fine of up to CZK 100,000. Furthermore, the employer will be responsible for paying any outstanding social security and health insurance contributions required for a standard employee.

Key Action Points for Human Resources and In-House Counsel

• Disguised employment means illegally performing dependent work under a commercial contract instead of an employment one.
• Czech administrative authorities apply strict measures to uncover disguised employment, especially through inspections.
• Employers as well as employees may face significant financial sanctions among others.