Unregistered labour (sometimes called illegal labour or the ‘schwartz system’) is a work that meets the criteria for dependent work, is performed by any person (e.g. freelancer) for an entrepreneur or a company where such person does not have an employment or other employment-like relationship with the entrepreneur or company (instead, a contract is concluded on the basis of civil or commercial law).
The criteria for dependent work are:
- the employer is in a superior position and the employee is subordinate;
- the employee personally performs work for the employer;
- the work is performed according to the instructions of the employer;
- the work is performed on behalf of the employer; and
- working hours are set by the employer.
Therefore, if the aforementioned criteria of dependent work are met, but there is no employment or employment-like relationship between the worker and the entrepreneur or the company, the work can be considered as unregistered labour and the self-employed person and the entrepreneur or the company are exposed to legal sanctions.
The most serious sanction is that the authorities (specifically the Labour Inspectorate) can impose a fine from EUR 2,000 up to EUR 200,000 for each violation of the ban on unregistered labour.
If the work performed by self-employed persons does not meet the criteria of dependent work, then such work cannot be considered as unregistered labour, and therefore falls under the Act of the Slovak Republic no. 513/1991 Coll. Commercial Code as amended.
In assessing whether work falls under unregistered labour, the specific relationship between the person (employee) and the company (employer) should be examined.
Furthermore, the fact that the services provided meet certain criteria for dependent work does not mean that in the case of an inspection by the Labour Inspectorate these services will be considered as unregistered labour, as all five criteria for dependent work must be met and clearly proven by the Labor Inspectorate.
Criteria for Dependent Work
One of the above criteria of dependent work, which is considered to be the most relevant in practice, is the criterion of the relationship of “superiority and subordination” between the parties. This criterion is key in distinguishing between dependent work (which is regulated by the Labour Code and requires an employment or employment-like relationship) and entrepreneurship (which is regulated by the Commercial Code and the conditions agreed in the commercial contract).
Subordination may arise if:
- the company determines the working time, duration and place of work and the way in which the work will be performed (instructions);
- the company gives work instructions to the employee, while the employee has little decision-making ability;
- the company bears financial responsibility for the project carried out; and
- the employee acts on behalf of and under the responsibility of the company.
On the contrary, a contractor relationship is a commercial contractual relationship and should be balanced. Therefore, it should not contain provisions on working time, place of work and work instructions. Commercial (contractor) contracts contain provisions on service orders (delivery specification), invoicing mechanism, warranty, contractual liability for damage, confidential information and non-compete and should be formulated to create a balanced relationship between the parties, where they both act in their own name and on their own responsibility.
Another important criterion to consider is contractual freedom. The contracting parties are free to choose the manner of their mutual cooperation if such a choice is not made e.g. under pressure.
Another tool useful for judging whether the relationship between the parties is that of a contractor or an employee is the International Labor Organization Recommendation concerning Employment No. 198 of 2006. In point 13 of Article II, the International Labor Organization lists specific indicators of the existence of an employment relationship. These indicators are:
- the fact that the work is carried out according to the instructions and under the supervision of another party;
- includes the integration of the employee in the organization of the company;
- is performed exclusively or mainly for the benefit of another person;
- must be performed in person by a worker;
- is performed during specified working hours;
- is performed at a workplace designated or approved by the party requesting the work;
- has a specific duration and has a certain continuity;
- requires the presence of the worker;
- includes the provision of tools, materials and machinery by the party requesting the work;
- the regular payment of remuneration to the worker and the fact that such remuneration constitutes the sole or main source of income of the worker;
- payment of remuneration in kind, such as food, accommodation or transport;
- reimbursement of travel expenses necessary for the performance of work to workers by the party requesting the work;
- granting benefits such as weekly rest and annual leave; and
- absence of financial risk for the employee.
The above facts can serve as indicators which, if met, increase the likelihood that the criteria of dependent work will be met.
Software development – the latest development of market standards
We understand that the mode of providing services by software developers may fall under both the employment and contractor relationships, depending on the conditions of cooperation, processes and agreement between the parties.
In cases where the self-employed person provides the company’s services according to instructions provided by third parties (company clients), provides project-based services (often remotely), does not enjoy internal company benefits (eg. holidays, free meals), provides services using their own tools (eg. personal computer), follows the payment conditions according to market standards (eg. payment in advance), and sufficiently guarantees the quality of delivered services, then the relationship does not represent dependent (illegal) work.
In Slovakia, a large part of software development companies enters into business relationships with software developers with the above-mentioned aspects of a contractor relationship. Each case of a relationship between a self-employed person and a company should, however, be assessed individually, as there is no simple division between employment and business relationships.