New regulations aim to fight bogus self-employment

An amendment to the Czech Republic’s Labour Code, which came into force on 1 January 2012, aims to fight bogus self-employment. This form of employment had previously been just within the law, but the new regulations define dependent work more precisely and will make bogus self-employment unambiguously illegal. Financial penalties for bogus self-employment have been increased for both employers and workers, and labour inspectorates plan to introduce more controls in 2012.

Self-employment in the Czech Republic

The Czech Republic has a high number of self-employed workers. According to statistics from the Ministry of Industry and Trade (MPO), the numbers have been growing rapidly in recent years, increasing by more than 80,000 between December 2008 and December 2011. Similarly, the Czech Statistical Office (CZSO) has reported a growing number of self-employed people who do not have employees, up from 11.8% of the workforce in 2007 to 13.9% of the workforce in the third quarter of 2011.

A 2008 survey (CZ0808019I) carried out by the Research Institute for Labour and Social Affairs (RILSA) into bogus self-employment in the Czech Republic defined it as referring to:

business activities that do not include any managerial or proprietary tasks and which possess the attributes of an employment relationship but without entitlement to the corresponding labour law protections.

RILSA’s researchers estimated that in 2007 between 13–26% of those describing themselves as self-employed should have been classed as employees. It can be assumed that during the economic crisis these numbers have increased. This form of employment is favoured by employers because they don’t have to pay social and health insurance contributions and it is easier to hire and dismiss self-employed workers as demand fluctuates. Meanwhile the bogus self-employed enjoy higher net earnings but have no labour law protection.

Fight against bogus self-employment

Czech governments, regardless of their political orientation, have been fighting bogus self-employment since its emergence at the beginning of the 1990s, without any major success. Legislation was passed which was intended to force employers to give workers employee contracts if they were dependent on one company for their income. Although intended to ban bogus self-employment, even this legislation left the issue open to interpretation. As a result, for instance, in 2005 the construction company ZX Trading was acquitted of bogus self-employment allegations after the Supreme Administrative Court heard evidence from craftsmen who had rejected an employment relationship with the company even when they worked for it on the basis of a business licence.

Proving bogus self-employment has been difficult because it is, in the short term at least, mutually beneficial to employers and workers. Since both are guilty parties, the filing of complaints is very rare.

Government adopts a punitive approach

In 2009 the government proposed the legalisation of bogus self-employment as one of the anti-crisis measures which could help to maintain employment. This was strongly rejected by trade unions that have opposed bogus self-employment for years. The Czech-Moravian Confederation of Trade Unions (ČMKOS), the country’s largest trade union confederation, warned that this would cause a shortfall in social and health insurance payments that could bring about the collapse of social security systems. Some employer organisations were also unhappy about the proposal and the largest, the Confederation of Industry (SPČR), argued that it would lead to unfair competition for companies willing to employ workers.

In 2011 a punitive approach was eventually pushed through, supported by both ČMKOS and SPČR, primarily as a response to heavy losses in tax and social insurance that could harm the State Treasury in the long term.

The amendment of the Labour Code, which came into force in January 2012, has brought numerous changes (CZ1201019I), including a change in the definition of dependent work. Conceptual characteristics that define dependent work are now separate from conditions under which the dependent work must always be performed. Such employment relations become indisputably illegal where, for example, workers are in a subordinate role to an employer and perform their tasks in accordance with the employer’s instructions, yet the employer claims not to be responsible for what they do.

Strict sanctions and more inspections

The amendment of the Employment Act sets out penalties for illegal work and increases sanctions intended to prevent bogus self-employment. Employers’ fines have been doubled to a possible maximum of CZK 10 million (€400,000), and a new minimum fine has been introduced of CZK 250,000 (€10,000). An individual found to have made a bogus declaration of self-employment can be fined up to CZK 100,000 (€4,000), ten times higher than the previous maximum of CZK 10,000 (€400).

The successful implementation of the new regulation largely lies with the inspection authorities. The Ministry of Labour and Social Affairs (MPSV) has promised to strengthen labour inspections in order to quadruple the number of controls. The Czech Social Security Administration (ČSSZ) can, as part of the control system, demand social insurance contributions for workers it believes to be employed rather than self-employed, while individual health insurance companies can also carry out checks. Financial institutions will also continue with their current inspection regime.

Hana Geissler, Research Institute for Labour and Social Affairs (RILSA)

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