Pitfalls of outsourcing: The ‘Švarc system’ and agency employment
With the recent economic growth, the demand for employees has been increasing, making them scarce goods. Shortages of staff may be partly resolved by outsourcing some activities. This approach, however, entails numerous pitfalls, most importantly the prohibited ‘Švarc system’ (using sole traders/self-employed workers instead of employees) and agency employment contrary to law.
Employers, or service recipients/clients, tread on rather thin ice here: depending on the nature of the carried out activity, there is a risk that it may be viewed as employment. Public authorities then may assess additional charges/contributions to the public budget, and levy a penalty.
The Supreme Administrative Court (SAC) in its case law distinguishes between three types of activities. The first one are independent activities involving no risk for the client; this may ensue from the law (for instance for court bailiffs, public notaries), or from the nature of the activity (e.g. a complex manufacturing activity). The second type involves activities of an ambiguous nature. Finally yet importantly, there are purely dependent activities that can only be carried out under employment.
The problematic ‘Švarc system’ concerns the ambiguous activities. The SAC considers these to include activities by small-sized sole traders, assistance activities or liberal professions. However, if the content of the activity implies that it is a dependent activity, then it can only be carried out under employment. The SAC considers a dependant activity to be the one that meets certain ‘material’ characteristics: if the activity is carried out in one place, exclusively for a single employer issuing binding instructions, and if it involves a mutual and lasting relationship for consideration, then it is most likely a dependent activity that as such cannot be outsourced without circumventing the law.
This year, a case pointing to yet another manner of finding workers attracted the media´s attention – the outsourcing of certain activities to ‘pseudo’ employment agencies. In response to this case, rather than facilitating the employment of foreign workers, legislators came up with an amendment to the Employment Act, making it even harder. It defines ‘disguised agency employment’ and creates new types of offences, committed by those who mediate employment in a disguised manner. The new provision seems rather redundant, as even before the amendment, the regulation contained a similar offence, i.e. the mediation of employment without a licence. The difference consists in the severity of the penalty, which is now five times higher. It is also unclear whether both penalties may be levied simultaneously.
All employers who use one of the above mentioned types of outsourcing should therefore be very cautious when assessing whether the nature of the requested activity allows for its provision by a person other than an employee, or whether it is not in fact a purely dependent activity.