Illegal Employment: What Does the Labour Inspectorate Ask?

Since January, the rules of the game have changed. What are the pitfalls of illegal employment and what to watch out for when working with self-employed workers? Illegal employment is dependent work performed by a natural person outside the labour relationship, i.e. without a concluded employment contract, an agreement to complete a job or an agreement to perform work. The natural person cooperates most often on the basis of a cooperation agreement ↗ (whether framework or one-off).

What is the essence of illegal employment? In simple terms, it is when a company treats a self-employed worker as its employee (the self-employed worker is effectively subordinate to the company in the performance of its activities). However, on the surface, the parties pretend that they have only a business relationship (e.g. a framework contract or a supply of services contract) and that the self-employed worker is an independent and autonomous entrepreneur (external worker) in relation to the company.

The parties are usually motivated by the desire to save on contributions and to avoid rules that the employer is required by law to comply with in relation to their employees (e.g. in the area of occupational health and safety, in the scheduling of working hours, in the provision of various allowances, the use of paid leave etc.).

In many sectors, for example in IT (developers, UX designers) or marketing (consultants, specialists), it is common for a company to conclude a framework cooperation agreement with an self-employed worker, which defines the subject of cooperation and mutual rights and obligations in the context of longer-term service provision.

The Pitfalls of the Illegal Employment

For the „employer“ there are numerous risks of such setup of a relationship with a self-employed worker, among the most painful is a fine of up to a CZK 10 million from the Labour Inspectorate (but at least CZK 50,000) or the threat of contributions being collected by the competent authorities, including penalties for late payment. Operating on the illegal employment may also involve, for example, liability for possible work-related accidents. As of 1 January 2024, there is also a new risk of disqualification order for up to 2 years.

Avoid Sanctions Once and for All

The most important thing is a properly set up contract on cooperation with a self-employed worker (freelancer, contractor, entrepreneur) and its consistent observance in practice.

 Are you interested in preparing a bulletproof cooperation agreement? See how we prepare a cooperation agreement ↗ .

How Does the Labour Inspectorate Inspects Illegal Employment?

The inspection typically starts with the inspectors arriving at the premises of the person being inspected (the employer) and showing their service cards (in most cases the inspection is announced in advance, sometimes it is done remotely, however, in the case of illegal employment the inspectorate needs to find out and document what the actual situation is at the workplace, so logically it is not announced to you in advance).

Then, the selected persons present at the workplace will be identified and documentation will be submitted, showing the relationship of these persons to the employer (employment contracts, agreements for work outside the employment relationship, contracts for work or supply of services contracts in the case of self-employed workers etc.).

Documentation Must be Kept at the Workplace or There is a Risk of a Fine

The employer should not forget that they are obliged to keep copies of documents proving the existence of the employment relationship at the workplace pursuant to Section 136 of the Employment Act ↗. The fine for violation of this obligation may sum up to CZK 500,000 (compliance with this obligation is not required if the employer has fulfilled the obligation to notify the regional office of Czech Social Security Administration of the date of the employee's commencement of employment, which established their participation in sickness insurance pursuant to the Sickness Insurance Act).

At the same time, inspectors can request the assistance needed to carry out the inspection, which in the case of illegal employment typically includes questioning the employer and the persons present at the workplace. What do they ask?

What Does the Labour Inspectorate Ask?

During an inspection, inspectors may "interrogate" persons present at the employer's workplace (i.e. both employees and self-employed workers present).

Given that the subject of the inspection is illegal emloypment, it is probably not surprising that inspectors ask questions in this area.

The problem can arise when inspectors start questioning self-employed workers (or even a less knowledgeable employer) in a way that can be confusing to them.

For example, in questions asked the inspectors may use such terminology that evokes dependent work under the Labour Code without the 'average' respondent realising this.

The questions may look like this:

• "To whom are you subordinate?"
• "Who checks your work?"
• "Who sets your work assignments?"
• "What are your working hours?"

By subordination, the "average" person can understand the answer to the question to whom they send the completed work, work tasks can be understood as individual orders etc.

Similarly, other questions can be framed through the lens of the Labour Code:

• "How are working hours recorded?"
• "Who keeps records of working hours?"
• "Which colleagues do you work with at your employer's workplace?"
• "Who do you rotate shifts with?"
• "Who approves of your absence?"
• "What is your wage?"

It is not uncommon for the person answering to (logically) state in the answer the terms that were mentioned in the question. Ideally, however, this should not happen at all, because if the company has a genuine business relationship with the self-employed worker (not only on paper, but also outside it) nothing in the Labour Code applies.

In short, this means that there was no subordination, no one recorded anyone's working hours, and the wage does not correspond either (because the self-employed worker invoices, has no wages, nor extra pay for overtime, night work etc.).

What Comes After the Inspection?

The inspectorate then draws up a report on the inspection process, in which it states the formalities (who, when, where and what was checked) and, in particular, the inspection findings.

This finding shall contain a statement of the findings, specifying the lackings and the legal provisions which have been infringed, including the grounds which the findings are based on.

If the employer disagrees with the inspection findings, they must submit written objections to them within 15 days of receiving the report.

Are you currently under inspection by the Labour Inspectorate, or would you prefer to avoid such an inspection? We will review your documentation, please contact us. ↗

In the objections, the employer shall state which inspection findings they disagree with and why. The inspectorate will then deal with the objections and may do so in several ways:

• either the head of the inspection team or the inspecting inspector fully complies, or
• refers them to a superior, who either fully or partially complies with them, or rejects them (in practice, rejection of objections is by far the most common procedure. This does not mean, of course, that it is pointless to submit them).

The inspection usually ends with the delivery of the resolution of the objections. However, if the inspectorate finds that an offence has been committed based on the inspection, it will initiate a subsequent administrative procedings in which the employer may exercise all the rights of a party to the procedure under the Administrative Procedure Code. For example, to appeal against the decision of the Regional Labour Inspectorate to the State Labour Inspection Office in Opava, or to defend oneself in administrative courts.

Luck Favours the Prepared

As the best defence is prevention, both the company and the self-employed should clearly understand the nature of their business relationship and approach any inspections accordingly.

The interviewee should not be "boiled" into thinking that someone is assigning them work and that working from home is actually an approved home office, but should explain to the inspectors that they are actually operating as an independent entrepreneur. This will be greatly helped, for example, if they have other customers to whom they providestheir services. Then it will not be such a problem for them to realize and possibly explain to the inspectors that they do not receive wages, but that they invoice several of their clients for the work they do. At the same time, they should be able to explain and justify some of the exceptions (e.g. why they do not have their own computer but uses company equipment) without any problems.

Understanding (and adhering to) the fact that a self-employed worker is not just another employee but an independent entrepreneur can then, in the event of an inspection, contribute, together with properly set up contractual documentation, to reducing the risk of the inspection office assessing the situation as illegal employment. Needless to say, if the parties stop complying with the agreed rules, the self-employed worker will, over time, "blend in" with the other employees and come to see themself as a solid and indispensable part of the team. Then the problem is ready to happen and even a well-written contract will not save this "deviated" state.

We often organize training sessions directly in companies. We can also guide you through the pitfalls of illegal employment, go through and review the documentation you have set up with the self-employed. Feel free to contact David directly. ↗