Who will Cobra bite? Authorities are preparing coordinated approach against illegal work
Illegal work, the ‘Svarc’ system, and disguised agency employment are not new concepts. Yet many companies perceive the risk of sanctions as marginal – operating beyond the law is often simply more advantageous. A new initiative by three ministries and other administrative authorities now aims to change this: they have joined forces in the fight against illegal work and adopted a joint memorandum called Cobra 26.
At the same time, courts are applying stricter approach in their decision-making practice, so companies should review how they cooperate with external contractors and foreign workers – before the inspectors come knocking.
Disguised employment mediation, illegal work under the ‘Svarc’ system and employing foreigners without the required permits have long been on the agenda in the Czech Republic. Even so, many companies still believe the issue does not concern them. This is often because they rely on well-drafted contracts governing cooperation with external contractors (unlicensed agencies and the self-employed (OSVČ)) although the reality – which authorities now examine carefully – is often quite different from what is written on paper. The truth is that, until recently, authorities have not systematically inspected some widespread practices, and/or sanctions were not always particularly painful.
A fundamental change in approach is brought by the new Cobra 26 memorandum. Until now, authorities’ inspections were carried out in isolation. For example, if the labour inspectorate found an offence, it would impose a fine but would not inform the financial administration or other supervisory bodies that may impose additional sanctions based on such illegal practice. Information generally did not flow in the opposite direction either.
Under the new approach, authorities should share their findings and coordinate their inspection activities. Companies will therefore feel breaches of rules more strongly – in addition to a fine, there may also be additional assessments of statutory insurance contributions and other sanctions or reputational impacts. Under Cobra, authorities are also expected to focus even more on detecting these offences, which significantly increases the likelihood that they will be uncovered.
Court decision-making practice is also becoming stricter, particularly as regards the ‘Svarc’ system. Courts place increasing emphasis on the actual conditions of cooperation rather than the formal wording in the contract. They also stress that it does not matter whether both parties wanted to collaborate outside an employment relationship or whether the model is common in the industry. What matters is who directs the work, controls it and bears responsibility.
In its recent decision, the Supreme Administrative Court took a firm stance against the long-established practice of the ‘Svarc’ system in the IT environment. It emphasised the long-term nature of cooperation, economic dependence and the integration of programmers into the client’s team. Crucially, the programmers could not realistically refuse assignments, bore no entrepreneurial risk and worked under the client’s management. The argument that this was a standard model in the sector did not convince the court.
If you cooperate with external contractors, we recommend not waiting until a Cobra inspection reaches you, but reviewing contracts, processes, and day-to-day practice as soon as possible. If you identify shortcomings, they can be addressed; however, the situation needs to be handled proactively.