Ing. Marcel Muráni, LL.M.
Tax Advisor
False self-employment refers to a situation where a company uses self-employed individuals instead of employees in an employment relationship to perform the same activities and under the same conditions as if they were employees.
The “advantages” of false self-employment and how the law views it
The main “advantage” of false self-employment lies in the company’s lower costs for a self-employed individual compared to an employee. The employer’s total costs for an employee are approximately one third higher than the employee’s gross salary. By contrast, a self-employed individual is responsible for paying their own taxes and social security contributions.
If the remuneration of a self-employed individual is set above the employee’s gross salary but below the employer’s total employment costs, a situation arises where the company’s costs are lower than in the case of an employee in an employment relationship, while the self-employed individual receives a higher net income.
Another advantage from the company’s perspective is often greater flexibility in terminating the cooperation and the absence of several legal entitlements that would otherwise belong to an employee under the Labour Code, such as entitlement to paid leave, obstacles at work or severance pay.
However, the law prohibits replacing an employment relationship with self-employment. This prohibition follows from the Act on Illegal Work and Illegal Employment, hereinafter referred to as the “ZNP”, and from the Labour Code itself, hereinafter referred to as the “ZP”.
Section 1(2) of the Labour Code defines dependent work as work performed in a relationship of superiority of the employer and subordination of the employee, personally by the employee for the employer, according to the employer’s instructions and in the employer’s name.
Furthermore, Section 1(3) of the Labour Code states that dependent work may be performed exclusively in an employment relationship, in a similar employment relationship or, exceptionally, under the conditions laid down by the Labour Code.
In addition to defining illegal work and illegal employment, the ZNP also regulates sanctions for such conduct. A company that illegally employs individuals may face a fine ranging from EUR 4,000, or EUR 8,000 if more than two individuals are involved, up to EUR 200,000. In addition, the company may be required to pay outstanding taxes and contributions that were not properly paid. An individual performing illegal work may be fined up to EUR 331.
When is it false self-employment and when is it a contractor relationship?
First of all, it should be emphasised that not every self-employed individual performing activities for a company automatically falls under false self-employment. The decisive criterion is whether the activity performed meets the characteristics of dependent work.
The definition of dependent work contains four basic characteristics:
- a relationship of superiority and subordination
- personal performance of work
- performance of work according to instructions
- performance of work in the employer’s name
In practice, these characteristics may appear in various circumstances. The more characteristics of dependent work are present, the higher the risk that the relationship will be assessed as illegal employment. For this reason, it is important that the contract itself is properly set up not only from a formal perspective, but also in terms of its content.
It is recommended in particular to:
- define the cooperation for a specific project or a time-limited period
- regulate the conditions for using the company’s premises, or address their use through a lease or a similar legal relationship
- expressly state that the activity is performed at the self-employed individual’s own cost, risk and responsibility
- avoid setting fixed working hours; exceptions may apply where coordination of activities, compliance with legal obligations or physical presence at the company’s premises is required
- avoid non-compete clauses or provisions that would prohibit the self-employed individual from providing services to other clients
However, the labour inspectorate will not examine only the content of the contract. The actual manner in which the activity is performed is also essential. In particular, it will assess whether the self-employed individual outwardly acts as an employee of the company and whether such an impression is created towards third parties.
If it is necessary for the self-employed individual to communicate with the company’s clients, it is recommended to regulate such authorisation through a power of attorney. Even in such a case, however, it should be clear that the person is not an employee of the company. Risky situations may include, for example, using business cards identifying the self-employed individual as an employee of the company or stating a company job title in an e-mail signature.
The basic starting point when setting up a relationship between a company and a self-employed individual is that the contract must have a commercial-law character and be governed by the relevant provisions of the Commercial Code. Its content, as well as the way in which it is performed, must show that the relationship is between two independent business entities and not a disguised employment relationship.
At the same time, it is important to keep in mind that when assessing potential false self-employment, the formal wording of the contract is not the only factor considered. The labour inspectorate, as well as the courts, primarily rely on the actual content of the legal relationship and the way it is performed in practice. Therefore, the decisive factor is not the title of the contract or the person’s status as a self-employed individual, but whether the characteristics of dependent work under Section 1(2) of the Labour Code are met. If the manner in which the activity is performed corresponds to dependent work, the relationship may be classified as illegal employment regardless of the fact that the parties formally concluded a commercial-law contract. When setting up cooperation, it is therefore not enough to focus only on the correct wording of the contractual documentation; it is equally important that the everyday performance of the relationship corresponds to its commercial-law character.
The above information on this website is intended to give you a basic overview of tax, accounting and legal regulations. It is in no way intended as a guide to their application in practice, which may differ significantly from the legislation in force at any given time. The information on this website does not guarantee legal, accounting, tax or other professional advice or services. As such, the information should not be taken as a substitute for professional consultation with accounting, tax, legal or other advisors. EMINEO PARTNERS shall not be responsible or liable for any discrepancies, omissions or results obtained from the use of this information. All information and examples are provided without any warranty as to their applicability in practice. EMINEO PARTNERS is not obliged to reflect the applicable legislation on the information and examples provided on this website.
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Article summary
False self-employment refers to a situation where a company formally cooperates with a self-employed individual, but in practice the work resembles an employment relationship. The key question is whether the self-employed individual works personally, according to the company’s instructions, in its name and in a relationship of subordination. If these characteristics are present, the cooperation may be assessed as illegal employment. When setting up a relationship with a self-employed individual, a properly drafted contract is therefore not enough; the actual manner in which the work is performed is also important.
FAQ
What is false self-employment?
False self-employment is a situation where a person formally works as a self-employed individual, but in reality performs work as an employee. The problem arises especially when the person works according to the company’s instructions, personally, in the company’s name and in a relationship of superiority and subordination.
Is working as a self-employed person for one company automatically false self-employment?
No, cooperation between a self-employed individual and one company does not automatically mean false self-employment. What matters is how the cooperation is set up and how it works in practice. If the self-employed individual acts as an independent entrepreneur, bears their own risk, works on their own responsibility and does not perform work as an employee, it may not be false self-employment.
What are the main characteristics of false self-employment?
The main risk characteristics include a relationship of superiority and subordination, personal performance of work, work performed according to the company’s instructions and acting in the company’s name. The risk also increases if the self-employed individual uses a company e-mail address, business cards, a company job title or appears to clients as an internal employee.
What fine may be imposed for false self-employment?
A company may face a fine ranging from EUR 4,000 to EUR 200,000 for illegal employment. If more than two individuals are involved, the minimum fine may be higher. In addition to the fine, the company may also be required to pay outstanding taxes and contributions that were not properly paid. This is why potentially risky cooperation models should be assessed in advance, including from the perspective of tax advisory and the correct setup of the contractual relationship.
How should cooperation with a self-employed individual be set up to avoid false self-employment?
The cooperation should be set up as a commercial-law relationship between two independent business entities. It is advisable to clearly define the project or service, state that the self-employed individual works at their own cost, risk and responsibility, avoid setting standard working hours and avoid restricting them from working for other clients. In regular cooperation, it is also important to correctly set up invoicing, document records and accounting.
What does the labour inspectorate check when assessing cooperation with a self-employed individual?
The labour inspectorate does not assess only the contract, but also the actual manner in which the activity is performed. It examines whether the self-employed individual acts as an employee, whether they work according to the company’s instructions, whether they are in a relationship of subordination and whether they create the impression towards third parties that they are part of the company as an internal employee.
Can a self-employed individual communicate with the company’s clients?
Yes, a self-employed individual may communicate with the company’s clients, but it is advisable to properly define the scope of authorisation, for example through a power of attorney. At the same time, the communication should make it clear that the person is not an employee of the company, but an independent contractor or external collaborator.
Why is a properly drafted contract not enough?
A properly drafted contract is important, but it is not sufficient on its own. If the cooperation functions in practice as an employment relationship, it may be assessed as false self-employment even though a commercial-law contract has been formally concluded. The decisive factors are the actual content of the legal relationship and the everyday manner in which the work is performed.
