Recently, the tax authorities have focused heavily on investigating business cooperation between mainly manufacturing companies and so-called "quasi" employment agencies. In this article, I would like to share with you the problems and pitfalls that such cooperation poses for the recipients of these services. They are not only of a tax but primarily of a labour law nature. In my point of view, neither should be underestimated.
The increase in the number of "quasi" employment agencies, i.e. entities that provide labour to various establishments or businesses providing services consisting of less skilled work (various cleaning services, security guards, etc.), has caused a huge shortage of human capital on the domestic labour market. Why am I talking about "quasi" employment agencies? These entities do not have a permit issued by the General Directorate of the Labour Office under the Employment Act, nor do they fulfil other obligations arising from the status of an employment agency (mandatory reporting, deposit, etc.).
The people behind these companies are of course aware of the situation, which is why they do not formally offer human capital to their clients. They are willing to enter into work contracts or similar agreements in order to make the cooperation appear on the surface to be a supply of work, not of labour. However, the reality is different in most cases. To meet the demand for their products or services, the clients of these "quasi" agencies are joined by foreign workers in their premises or workplaces, whose working arrangements are essentially the same as those of their core employees. They carry out their work activities under the supervision of a manager of an ordinary employee, using the work tools or machinery of the undertaking. Finally, the invoicing itself is based on the hours worked by these foreign workers. All the sub-aspects of the business cooperation indicate that it is not a supplier-customer relationship (based on a work contract). On the contrary, it is in fact the hiring of labour (employment agency).
Clearly the provision of foreign workers without proper authorisation will not be recognised as correct and desirable by law (otherwise the Employment Act would not have to contain such rules). Until 1 August 2021, only the provider of labour could be punished for so-called disguised employment agency. However, with the amendment to the Employment Act with effect from 2 August 2021, the recipient of this service (i.e. the person for whom the workers concerned perform activities) is also at risk of a fine of up to CZK 10 million. The Labour Inspectorate, a public authority responsible for examining compliance with the Employment Act, always primarily assesses and evaluates the facts and not the formal state of affairs during inspections. Therefore, if it finds that despite the existence of a contract for work the cooperation in question shows real signs of employment mediation, the provider and the recipient are more than likely to be fined.
According to information we have received from the regional labour inspectorates through the Public Access to Information Act, many dozens of inspections targeting disguised employment agency are carried out in a single year. Publicly, in the context of a significant increase in the number of foreign nationals (mainly Ukrainians), even more intensive checks in this area are declared. It should be added that foreign workers (whether from countries inside or outside the European Union) are appearing in these "quasi" employment agencies in significant numbers.
In terms of the burden of proof, the misdemeanour proceedings in which the fine of up to CZK 10 million may be imposed operate in the same way as criminal proceedings. It is the public authority (the Labour Inspectorate) that must prove beyond any doubt that there were signs of disguised labour mediation. This gives the recipient of the service the opportunity to wait passively to see what is established and whether the Labour Inspectorate carries its burden of proof.
The problem arises when the relationship is first investigated by the tax office. In tax proceedings, the burden of proof in relation to the claimed deduction lies with the recipient of the service (in the model case, the manufacturing company). The amount of evidence that the recipient of the labour (formally, the recipient of the work) needs to provide may, of course, vary from case to case, and in practice does indeed vary. Thus, the manufacturing company cannot remain passive in terms of defending its claim for deduction. On the contrary, the onus is on it to prove to the tax authorities that the agreed work has been carried out to the extent declared. In doing so, however, it must be weighed based on what evidence the work will be proved. In fact, many of those I have encountered in practice have been quite instructive in pointing out that what was actually at issue between the supplier and the customer was not the supply of work, but rather the provision of labour. Although the tax administrator is not entitled to immediately forward the information obtained in the tax proceedings to the regional Labour Inspectorate in an official way, it cannot be ruled out that this will not be done unofficially. I liken the situation to walking on a tightrope: a significant lean to one side or the other means a fall.
The objective need for external workers in production, in operations or in the segment of less skilled work has given rise to many entities that in most cases have consciously operated on the market without proper authorisation for employment agencies. It was natural, however, that at the time (most notably between 2018 and 2021) businesses were not so concerned about from whom or under what regime they were purchasing much needed foreign human capital. I hope my article has pointed out the risks of working with these "quasi" agencies. If your company is currently covering its staff shortage in this way, I recommend contacting experts to review the situation with you. With a thorough analysis, a scheme can be set up that complies both with tax law and labour law.