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14 December 2011

Havel, Holásek & Partners: Svarz System Declared Illegal

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On 6 November, 2011, the Czech Parliament outvoted the Senate’s veto on the governmental bill of the Employment Act. The amended law will broaden the definition of illegal work by dependent activities carried on outside of employment, the so called Svarc system (in Czech švarcsystém). The amended law will become effective on 1 December, 2012.

The Svarc system uses the work of individuals who are officially self-employed persons, but where the actual relationship between these persons and the company that hired them possesses features that are characteristic for a dependant activity (i.e. employment).

Characteristic features of a dependent activity

A closer definition of the features characteristic for a dependent activity is provided by the Labour Code. The amended Labour Code that will go in effect on 1 January, 2012 will include more precise and separate definitions for the characteristic features of dependent work and the conditions under which dependent work must be carried out. Dependent work will be defined as “work that is carried out personally by a subordinate employee for a superior employer on behalf of, and in accordance with, the instructions of the employer”. As far as the conditions for the performance of dependant work are concerned, it will apply that “dependant work must be carried out for a wage, salary or remuneration for work, at the expenses and liability of the employer, during the working hours and at the employer’s workplace or a different agreed upon place “.

Although simple at first sight, the definition may cause problems in practice. The approach that has been applied so far is that the inspection bodies assess not only the content of the concluded agreements, but also the actual implementation of the contractual relationship between the parties in order to exclude or confirm the existence of a concealed employment. It is not clear from the amended law whether the inspection bodies will follow the language interpretation of the relevant provision and whether it will be sufficient for companies that the contractual documentation does not indicate the existence of a concealed employment or whether there is space for the inspectors to consider and assess the circumstances of an every individual case.

Why is the Svarc system so popular?

The main reason why the Svarc system is used rather frequently lies in the cost savings it offers. Companies and workers can save substantial amounts of levies that they would otherwise have to pay to the state from their salaries. On the other hand, the Svarc system has some disadvantages for the workers, too, as, under their contracts, their position is that of an entrepreneur, and thus they do not enjoy the protection provided to employees under labour law.

For a long time the Czech society has remained divided over this topic. The opponents of the Svarc system point at the losses sustained by the state and the low level of protection available to the workers. In contrast, its supporters (from among companies and workers) argue that this type of relationship provides them with a higher degree of flexibility and motivation for their work which sufficiently compensates for the lower level of social certainties. Another advantage seen by the supporters of this system is the economic activity of people who would otherwise be unemployed and consume social benefits paid by the state.

Sanctions for breach of the law

The labour market will step out from the current grey zone where the Svarc system has neither been expressly banned nor permitted, but rather induced from the definition of dependent work, typically with consequences only in the tax area. From January 2012, the Svarc system will be regarded as illegal tout court. Together with this definition, the lawmaker toughens the sanctions for the breach of the ban on the Svarc system. Companies allowing illegal work may be fined up to CZK 10,000,000. Another interesting novelty is the introduction of the lowest possible fine to be in the amount of CZK 250,000. Employment offices will be authorised to fine workers up to CZK 100,000.

In this connection, the Ministry of Labour and Social Affairs has already announced that they will substantially reinforce the struggle against illegal employment from January 2012. The Ministry is planning to increase the number of inspectors of the State Labour Inspectorate to 400 and to secure the operation of 180 mobile offices. The number of inspections to be conducted next year should grow to approximately 200,000.

Soňa Audesová, Senior Associate
Veronika Plešková, Associate

Source: Havel, Holásek & Partners s.r.o.; Legal News, December 2011

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