The Comeback of ‘Švarc System’
20.12.2011Company: Amcham
Entering into the contracts regulated by the Commercial or Civil Code instead of the Labour Code is a phenomenon which has been part of doing business in the Czech Republic from the very beginning. For a long time it has been a topic of frequent discussions and, whether you like it or not, it is often used by those who want to avoid complications caused by a literal interpretation of the labour-law (as well as tax) regulations. When the discussion subsides someone stirs the issue of the ‘Švarc system’, a form of concealed working relationship bearing the name of Miroslav Švarc, an entrepreneur, again. This time, both the Parliament and the courts have joined the debate and dealt with the issue independently of each other.
MPs have approved a government bill amending the Employment Act. Another in the line of attempts to adopt tougher regulations of the ‘Švarc system’. From 1 January 2010 this type of working relationship will be deemed illegal with a maximum penalty of CZK 10,000,000 for employers and CZK 100,000 for an individual who is a party to this “illegal working relationship”.
However, the rub has always been in the nature and functioning of the system itself. Once again our lawmakers have tried to come up with a clear cut definition of the impalpable and vague terms, changing the definition of the elements of employment (legal relationship) and its conditions.
Despite all efforts, surely well-intentioned, the application of labour law regulations in the particular cases will be decided upon by particular interpretations.
To make matters more interesting, even the Supreme Administrative Court joined the debate as it issued a ruling at the end of November stating that in some cases a contract regulated by the Civil (or other) rather than Labour Code is more suitable. The ruling applies only to a limited number of cases, including specific working tasks or activities which are difficult to regulate by the legally binding provisions of the Labour Code (i.e. mandatory breaks, vacation, working tasks performed out of the working place, etc.).
Of course, we should not rely too much on the ruling. The aforementioned situation described a relationship between a professional sportsman and his club. If we relied on a literal interpretation of the ruling and applied its provisions to another specific situation, it might have an interesting impact on the interpretation of labour and tax regulations.
Daniel Kovačovič
RSM TACOMA TAX Consultant
daniel.kovacovic@rsm-tacoma.cz
