Bogus self-employment found to be on the rise

A recent survey estimates that the economic activity of 100,000 self-employed workers in the Czech Republic bears the marks of bogus self-employment. Although these workers are legally self-employed, such jobs include no managerial or proprietary tasks. The rise of this phenomenon is mainly attributed to more favourable tax benefits for employers, a desire to transfer internal activities and business risks onto subcontractors, and entrepreneurial concepts based on cheap labour.

About the survey

The issue of bogus self-employment was addressed by the Research Institute for Labour and Social Affairs (Výzkumný Ústav Práce a Sociálních Vĕcí, RILSA) in a project entitled the ‘Social and economic position of self-employed workers in society’ (2006–2007) (Sociálně ekonomické postavení osob samostatně výdělečně činných ve společnosti II (in Czech, 1.45 Mb PDF)). The survey was funded by the Ministry of Labour and Social Affairs (Ministerstvo Práce a Sociálních Vĕcí, MPSV) as part of a programme entitled Modern society and its transformations (in Czech). The RILSA project attempted to reveal the economic and legal issues faced by small and medium-sized entrepreneurs, as well as focusing on their working conditions. Research on the form and extent of bogus self-employment was conducted through surveys on job websites and informal, in-depth interviews with employees and business representatives in the construction industry – where this phenomenon typically occurs.

Development of bogus self-employment

The issue of bogus self-employment first appeared in the Czech Republic in the early 1990s, when the entrepreneur Miroslav Švarc replaced the employees of his construction company with tradespersons, that is, individuals with trade licences. In other words, rather than concluding a regular employment contract with employees, the employer used self-employed workers so that he could circumvent taxes and social insurance contributions. Since then, this practice has been labelled the ‘švarcsystém’ in the Czech Republic.

Bogus self-employment refers 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. According to estimates of the survey’s authors, this type of business activity is practised by 100,000 workers. Experts from the Czech Chamber of Commerce (Hospodářská komora ČR, HK ČR) calculate that this figure could be significantly higher, at 200,000 workers. These figures represented between 13% and 26% of the 750,000 self-employed individuals in the Czech Republic in 2007.

Employers resort to such practices in order to reduce or avoid tax and social and health insurance contributions for employees. In addition to the lower cost of labour, this strategy of hiring self-employed workers transfers the business risk onto the subcontractor.

Main survey findings

As part of the survey, the four largest internet job websites in the Czech Republic were investigated and job advertisements were analysed. The aim was to capture the extent and nature of demand for self-employed workers. The survey showed that work under a trade licence is considered a type of employment relationship. In two thirds of offers for jobs under a trade licence, the applicant was also offered full-time work, which is a testimony to the blurred boundaries between job offers for potential employees and self-employed workers.

One of the first organisations to be contacted as part of the survey was the Association of Building Entrepreneurs of the Czech Republic (Svaz podnikatelů ve stavebnictví v ČR, SPS ČR), whose members are mainly large and medium-sized construction companies, along with design and engineering organisations and the manufacturers of building materials and construction products. The researchers sought to measure the occurrence of bogus self-employment in the country’s construction industry. The interviews showed that bogus self-employment is not a topical issue for the larger companies, which have an established team of employees and are not interested in ‘alleged’ employees.

In a second stage of the survey, eight representatives from associations of smaller companies were interviewed. The interviews revealed that the practice of ‘employing’ entrepreneurs is more common among smaller companies. Bogus self-employment was understood by the respondents as work carried out under a trade licence in normal operations – for example, in work performed by a supermarket cashier or factory worker. On the other hand, the use of entrepreneurs for fixed-term contracts, which can also take on the attributes of bogus self-employment, was seen as a freer form of employment or a type of subcontracting. The respondents pointed to many advantages of subcontracting relationships for small companies, such as increased labour market flexibility and lower labour costs. In addition, the respondents cited a number of advantages of ‘employing’ entrepreneurs: for example, such workers are generally cheaper, faster and more productive than employees, they are more specialised, they provide a higher quality of work than employees, and they are available when needed. In terms of the disadvantages of hiring entrepreneurs, the respondents focused mainly on current operational problems, citing difficulties in coordinating numerous subcontractors or problems imposing sanctions for the failure to fulfil contracts.

Risks of bogus self-employment

The rise of bogus self-employment represents a significant benefit for employers. However, according to the survey’s respondents, over the long term it carries many potential risks – including a possible decline in the competitiveness of companies that do not invest in the human capital of alleged employees and the lack of loyalty among such employees.

The survey’s authors also highlight how an increase in bogus self-employment translates into losses for the state in terms of tax payments as well as health and social insurance contributions. At the same time, there is a risk that these individuals may lack adequate social security arrangements, as the law only allows them to take part in the social insurance system to a limited degree.

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

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