Svarc system under scrutiny: watch out for risky relationship structures
The ‘Svarc system’, where work is performed under a contract governed by commercial law but is in fact a dependent work, is still a widespread phenomenon in the Czech Republic. Legally, dependent work can only be performed in an employment relationship governed by labour law. Sanctions are most often imposed in cases concerning low-skilled jobs, as here, the Svarc system is most easily detected and proven. However, the State Labour Inspection Office in its newsletter warns against the use of the Svarc system not just for blue-collar workers but also for qualified professions.
The Labour Inspection Office mentions concrete instances of the Svarc system detected: a dispatcher carrying out work under a contract for transportation services, and a transport department head carrying out work under a mandate contract. In both cases, the office found the characteristics of dependent work and concluded that the commercial-law contracts were simulated legal acts in which the acting parties only imitated certain legal acts, while the true purpose was to conceal factual employment relationships.
The office thus concluded that the concealed employer enabled the performance of illegal work, and in the subsequent administrative proceedings fined them almost half a million Czech crowns. A decisive aspect in determining the legal qualification was namely the integration of these workers into the company’s organisational structure: specifically, the dispatcher cooperated on a regular and daily basis with other departments of the employer whose requests for transportation she handled; the worker in the position of head of the transport department organised, directed, and supervised the work of his subordinate employees, although he was not formally an employee himself.
In our experience, the above-described setup is rather common. However, the integration of external collaborators in the employer’s organisational (hierarchical) structure (where external collaborators routinely assign or receive tasks to and from individual employees) is quite risky: a standard commercial relationship is characterised by an independent performance of a particular activity where the entrepreneur is responsible solely for the result. Yet, employees are often not even aware that certain persons integrated in their employer’s organisational structure are not actually employees at all.
Therefore, if you have been cooperating with self-employed individuals based on commercial-law contracts, we recommend reviewing these relationships from a labour-law perspective, especially with regard to the risk that such collaboration may be viewed as the Svarc system. Should this be the case, the concealed employer could face a penalty of up to ten million Czech crowns, an additional assessment of tax and social and health insurance contributions, as well as a temporary ban on employing foreigners. For most serious cases of large-scale structures set up to reduce tax liability, there is even a threat of criminal sanctions against the company and its managers.