The issue of illegal work has recently been at the centre of public attention in the Czech Republic. This is not only due to the simple existence of this issue, but also due to legislative changes that should lead to more effective sanction against parties carrying out such illegal work, and above all of the parties that allow for the execution of such work.
At the end of 2011 two major amendments to the Employment Act were approved that provide for more detailed and extended definition of illegal work and significantly increase the penalties that may be imposed for the allowing of the execution of illegal work.
The first amendment is effective as of 5th January 2012 and is aimed at the illegal work of third-country nationals. It incorporates the well-known EU Directive 2009/52/ES providing for minimum standards on sanctions and measures against employers of illegally resident third-country nationals.
The second amendment is effective as of 1st January 2012 and is aimed at the sanction of illegal work represented by the execution of dependent work by self-employed individuals outside an employment relation. These are the cases when a provider of services (an individual) and the service subscriber enter into a formal commercial relationship, when in reality it should be an employment relation (i.e. a relation between an employer and an employee). These relations are referred to as the “Schwartz System” (named after the entrepreneur who first used such a model for relations with his co-workers) and is very widely used in the Czech Republic. The employers are mostly driven by their desire to save on mandatory payments for health and social insurance for their employees.
To be able to make a final conclusion regarding whether a commercial relation should be classified as Schwartz System, we must first analyse and answer the key question, which is whether the respective activities show signs of dependent work pursuant to the definition provided by Labour Code and are covering an actual employee-employer relationship and therefore illegal work. To be able to prove the execution of illegal work pursuant to the second amendment of the Employment Act remains more complicated than to prove the illegal work of third-country nationals.
Nevertheless, both of the above specified amendments strengthened the powers of the competent authorities to fight against the performance of illegal work. The controlled entities should face a vast increase in the number of inspections carried out by the competent authorities, as well as a significant increase in the penalties that may be imposed. Entities that allow the execution of illegal work by third-country nationals and/or the Schwartz System may face penalties of up to CZK 10,000,000 / Euro 400,000 (with minimum rate CZK 250,000 / Euro 10,000); the individuals that perform such illegal work may face a penalty up to CZK 100,000 / Euro 4,000.