In the course of last few years we have concentrated on the issue of misclassification of employees as independent contractors (known also as the “Svarc system” in the Czech Republic) several times. Since this issue is still topical and quite often discussed, let us turn our attention to it again, this time from the viewpoint of the Supreme Administrative Court judges and their judicature. Thanks to the decisions of the Supreme Administrative Court in the case of the “Svarc system” the line between employment activity and entrepreneurship is becoming more distinct and most importantly more predictable.

The core of the problem in the sphere of taxes and in the sphere of social and health insurance is  how to face the situation, when two contracting parties agree an agreement under the valid private law regulation, when one party performs for the other party some business activity which could be performed also in the regime of the dependent work of an employee for the employer. The provision of such activity, so-called based on an invoice, is just from the standpoint of levies of taxes and social and health insurance for both participating parties markedly cheaper than performance of the same activity in the labour-law relationship.

The definition of income from dependent activity under Income Tax Act refers to the supply in the form of income from the current or former employment relationship, service or membership relationship and from a  similar relationship, in which when performing the work for the payer, the tax payer is obliged to follow his instructions. As it derives from the definition, only such relationship may be similar which fulfils all definition characters in the listing of stated relationships. The second feature is that it has to involve provision of work. The third feature is then that the person performing the work has to follow payer´s instructions when performing this. It is very hard to grasp the interpretation of the term: „following payer´s instructions“. However, there is not only an employee in the employment relationship, but also for instance a painter who you invited for redecoration of an apartment. However, in case of a painter nobody will require from you that you conclude a labour contract.

Let´s have a look together at the most significant court decisions in this sphere. The Supreme Administration Court assesses in its decisions always both the fact of each situation, and the private law aspects of the concluded agreement or contract. The term „dependent activity“ was specified by the Supreme Administration Court in the verdict 2 Afs 62/2004-70 as of 24. 2. 2005 as follows: „The specification of the term „dependent activity“ under the provision of § 6 Sec. 1 letter a) Income Tax Act can´t be limited only to the activity performed under pertinent instructions, but it has to be an activity really dependent on a person of the payer. The definition element of the dependence will be thus given especially by the character of the performed activity (typically a work performed on one place exclusively for one employer) and also in the case, when it will be a long-term activity and when the labour-law relationship should be concluded especially in the interest of a person performing this activity whose legal sphere the non-conclusion of this relationship finally damages. On the contrary, it does not involve a dependent activity, when it concerns a specialized activity performed only for a short time or not systematically whose performance is conditioned by factors largely independent from the will of the submitter (for instance seasonal work, work dependent on weather, work conditioned by the realization of a one-shot received order etc.). These facts have to be also accepted by the application of tax regulations as, if it be to the contrary, it would be an illegitimate burdening element of the private sphere. The employment increase by instruments of acting the country, namely by tax instruments as well, can´t thus consequently lead to the fact so that labour-law relationships are concluded also in the face when two-sided interest is not given to conclude this. Such interpretation would also deny the mere private law nature of the employment law.“

The cited decision led to the emphasis on the subjective side of the relationship, that´s on the real will of parties: „With respect to the character of performed work it was more profitable for the plaintiff to conclude fixed job contracts than to employ own employees. When the contracting parties decide, in compliance with general principles of the contracting law (contracting freedom, good faith, non-abuse of the economically stronger position etc.), that they enter into this contractual relationship and when it is really realized, it is not a covered legal act.“

The following court decision of the Supreme Administration Court solving more long-term relationships than the cited court decision (it solved seasonal brickwork) emphasized the subjective side of the relationship (2 Afs 173/2005-69 from 27. 7. 2006 and 7Afs 72/2008-97 from 15. 1. 2009). The Supreme Administration Court designated as a dependent relationship the accounting services agreement, where an accountant, besides bookkeeping, visited meetings and she performed further administrative and auxiliary work based on the supervisor´s command. „The real subject of agreements concluded between the complainant and two taxpayers was an unlimited work performance of the activity. The subject of an oral treaty of the complainant with Ing. P. (for years 1997 and 1999) was bookkeeping of a tax subject and the cooperation with the customs office, whereas part of the bookkeeping was also the issue of invoices for the tax subject. The accounting was processed in the registered office of the complainant with help of software which was his property and who paid also the update of software when changing accounting regulations, whereas PC, software, operating expenses related to the processing the accounting, as for instance costs of paper, print and copying and other, were paid only by the complainant. According to he needs the named woman handled affairs for the complainant for instance at the customs, in the bank etc., in exceptional cases the complainant entrusted ing. P. also with transport of the employees, she also participated in the management meetings where she was entrusted with processing of various data from the complainant´s accounting.“

It derives from the court decisions that it is hard to generalize criteria of judging the relationship.  A big part of the court decisions follows the verdict 2 Afs 62/2004-70 and judges the will of both parties. To be in the contrary, other verdicts judge and examine the real content of the relationship and they try to find qualification criteria, how intensively the employee is controlled, how detailed and how frequent instructions he gets, which work tools he uses, whether he works in the registered office of the employer or not (6 Ads 46/2013-35 published under no. 3027/2014 Coll.).

The extended chamber of the Supreme administration court solved a problem whether the responsible representative, named under the Trade licensing act, may be remunerated based on a contract on services, from which the levies for social and health insurance haven´t to be levied and it is subject only to 15% withholding tax? He inclined to the opinion that it is necessary to respect the freely named will of both parties regardless of the fact whether the parties inclined to such agreement also for the reason that the social and health insurance premium is not levied thereof (6 Ads 48/2009-87 from 16. 11. 2010). The Supreme Administration Court pointed out this way that it inclines unambigously to judging the subjective will of parties, as the main criterion for judging the concluded contracts.

In the given spirit also cases of professional sportsmen were solved, where the Supreme Administration Court deduced that such activity may be very well performed in the regime of a separate activity (however, its performance in the labour-law relationship is not excluded as well). The Supreme Administration Court also solved the situation when the independent gainful activity was made without a valid trade licence. In this case it inclined to the opinion that it can´t involve an income from entrepreneurial activity and the independent gainful activity, but that it concerns an income from the dependent activity, or from the labour-law or similar relationship, or it can involve another income from occasional activities under § 10 Income Tax Act. In the verdict 6 Afs 85/2014-39 the Supreme Administration Court continued to examine the will of parties in case of contracts of sales representatives who performed their activities as freelances. The Supreme Administration Court stated in this verdict: „We may thus distinct three types of activities. In the first case it involves activities performable exclusively as independent activity, no matter if because of a legal regulation (for instance judicial executor, notary) or from the nature of thing (with respect to the scope, kind of activity, for instance the complex productive activities, certain types of business activity, a big estate agency etc.). In the second case it concerns activities of the ‚both‘ nature (vast majority of smaller tradesmen like bricklayer, plumber; free-lance activities, assistance activities; the diverse services like accountant, hairdresser etc.), in the third case it concerns activities solely dependent (for instance cashier of a supermarket). The judicature subsequently came into the conclusion that activities of ‚both‘ natures do not fall, from the tax and legal point of view, into the category of the unpermitted Svarc system‘. However it can’t concern a pretence of the independence and the concealment of the real state consisting in the solely dependent activity and not even in the misuse of the right. In this direction the way of securing usual tasks deriving from the subject of the activity of the work recipient is decisive which shouldn’t run for instance by an outsourcing of typically dependent (especially labouring) activities.“

The definition of the term dependent work is contained in the court decision concerning the illegal employment 6 Ads 46/2013 - 35 z 13.2.2014. „The common feature and such key note of all features of a dependent work delimited in the Labour Code is a personal or economic dependency of the employee on the employer. These features serve to distinguish a dependent work from other economic activities  (especially from independent business activity), but also from activities of another character (especially human help)“, is stated in the decision of the Supreme Administration Court which judged the penalty assessed for the performance of an illegal work. According to the Supreme Administration Court when recoursing the illegal work, the administration authorities have to prove to the accused person the fulfilment of following features – the employee performs work personally and continuously on behalf of the employer and under his instructions, whereas he is towards the employer in the subordinate relationship.

„The Supreme Administration Court is not planning to make light of the issue of an illegal work and its recourse. However, it is necessary to distinguish the dependent work from the human help“, stated the judge reporter in this matter Tomáš Langášek. „Proving the features like systematics or relationship of the subordination towards the employer represents in specific cases for labour inspectorates a very complicated task. However, nevertheless we may not resign them and instead of distinguishing of different activities to declare one of them as non existing – therefore to say that the dependent work is in fact any activity performed by one man for another man under his requirements. It is simply not possible to liquidate the common civil life within the fight against the undesirable practice of the illegal employment,“ commented Langášek concerning the decision. 

How to conclude? At the end we can only repeat the fact which says also Mr JUDr. PhDr. Karel Šimka in his article in the newsletter of the Chamber of Tax Advisors no. 4/2014 that each case is individual by its nature and it is quite complicated to find generalized criteria of judging the relationship between the customer and supplier, or the relationship between the employee and employer.