How are inspections of fictitious businesses conducted? What do inspectors look for? How should you prepare? And what factors are decisive when defending yourself? A practical guide for employers.
The issue of so-called fictitious businesses is primarily a matter of inspection and evidence for employers. In practice, it is usually not about how the contract is titled, but about what the inspection authority actually finds at the workplace. For this reason, when establishing the terms of cooperation, it is important to keep in mind that the inspection does not evaluate only the text of the contract, but the entire manner in which the cooperation functions, and, at the same time, that the outcome of the inspection usually hinges on specific details, such as: who assigns tasks to whom, who determines the time and place of performance, who approves absences, how compensation is structured, and so on.
What regulatory authorities look for in fictitious self-employment
When assessing whether a relationship constitutes a genuine contractor-client relationship or a disguised employment relationship, the overall picture of the collaboration is primarily examined in practice. It is particularly risky if the self-employed individual:
- works long-term and continuously for a single client,
- performs the work personally and without a realistic possibility of being represented,
- has fixed working hours or regular attendance,
- uses company email and company equipment without a separate contractual arrangement,
- presents themselves externally as a member of the company’s organizational structure,
- bills a regular monthly flat rate or time, not results,
- does not bear their own business risk.
This means that the combination of factors is decisive. A single element on its own may not necessarily indicate illegal employment, but if several are combined, the regulatory authority will begin to assess the relationship substantively, i.e., based on its actual substance.
How to prepare for an inspection before it begins
The most common mistake employers make is that they only begin preparing for an inspection once the inspection itself is underway. By then, it may already be too late. The foundation is an internal audit of all potentially risky collaborations.An entrepreneur should be able to answer several practical questions about each of their suppliers:
- What is the exact subject of the supply?
- Is it defined by the result or merely by the activity?
- Does the supplier have real autonomy in organizing their work?
- Can they refuse an assignment?
- Can they perform the activity through a representative or subcontractor?
- Do they use their own resources?
- Do they have other clients?
- Does this person operate differently at the workplace than an internal employee?
It is very important to align three levels in a mutual chain:
The contract must align with invoicing ® invoicing must align with reality ® reality must comply with legal requirements.
If the contract specifies results-based collaboration but in practice involves daily operational work according to the manager’s instructions, the audit will be based on the actual situation, not the contractual declaration.
In practice, this means ensuring the following areas are in order:
- Compensation should be tied to delivered outputs, milestones, or the project.
- Orders, assignments, acceptance documents, handover protocols, and proof of receipt of outputs should be available.
- If a self-employed person uses company equipment or premises, this must be specifically addressed in a legal agreement.
- A contractor should not be treated as an employee in the company’s HR processes and structure; they should not have vacation entitlement, internal benefits, or typical elements of subordination.
How a Labor Inspectorate audit typically proceeds
An inspection may be announced or unannounced. In practice, inspectors try to use the element of surprise, as this allows them to gain an authentic view of how the collaboration actually functions. It is important for the employer to know that an inspection often does not begin only when the inspector enters the workplace. Even before the visit, the inspection authority can evaluate publicly available information, such as the company’s website, job postings, social media, public profiles of individuals, business registries, or the way the company communicates its teams and positions to the outside world.
The inspection itself, if conducted on-site, usually consists of the following phases:
1. Entry into the workplace and initial findings
- The first few minutes of the inspection are extremely important. Inspectors note who is present at the workplace, where they are seated, what equipment they use, whether they have company identification, whether they are part of the internal system, and how naturally they fit into the company’s operations. In other words, even before reviewing contracts, the inspector assesses the established regime at the workplace—whether a person is acting as a contractor or as an employee.
2. Identification of individuals and verification of the reason for their presence
- In this phase, inspectors determine who is an employee, who is an external contractor, who is a visitor, and what the legal basis is for each person’s presence.
- From the employer’s perspective, it is critical that it be immediately clear under which status a specific person is operating. Chaotic or inconsistent answers significantly raise suspicion. The company must therefore be clear about which individuals are internal and which are external.
3. Interviews and Questioning
- During inspections of fictitious businesses, interviews are often more decisive than the contracts themselves. The inspector asks factual and practical questions:
- who assigns the work,
- who determines the order of tasks,
- who monitors performance,
- who approves absences, whether a task can be refused, and so on.
- This is precisely where it becomes clear whether the business model is truly functional. If a freelancer says that “they go to work every day at nine,” “their manager assigns their tasks,” “they must request vacation time in advance,” and “they work exclusively for this company,” the inspection gains very strong grounds for concluding that this constitutes dependent employment.
- For this reason, it is important for employers to ensure that people understand their actual status and can truthfully describe how the collaboration works.
4. Request for Documents
- The inspection authority typically requests contracts, purchase orders, invoices, handover reports, internal records, organizational charts, communication regarding assignments, documentation regarding the use of company equipment, and other documents that will help compare the formal status with reality.
- Here, an important practical principle applies: documents should not only be correctly formatted; they must also reflect the actual setup of the collaboration arrangement. If an invoice contains only a general item such as “monthly services,” and there are no deliverables, acceptance records, or specific assignments, the defense is weakened.
Paper vs. Reality: The Most Common Problem in Audits
Most penalties arise because the documentation contradicts the actual operations at the workplace, and this is precisely what is absolutely critical during audits.
A typical high-risk situation looks like this: the contract refers to an independent contractor, yet the individual holds an internal title—a position within the organizational structure—performs daily reporting, handles the company’s day-to-day operations, the work has a fixed schedule, they use company equipment, receive a regular monthly flat rate, and work exclusively for a single client. In such a case, the regulatory authority will very quickly conclude that the contractual form merely masks an employment relationship.
For the employer, this yields a practical lesson: if the relationship cannot be justified directly at the workplace, even a well-drafted contract will not justify it externally.
How the employer should proceed during an inspection
During an inspection, objectivity and cooperation are essential.
In practice, it is beneficial for a company to designate a responsible person to liaise with the inspection authority who understands the issues. This person coordinates the submission of documents, keeps track of what has been provided, and ensures that the company’s responses do not change depending on the situation. During an audit, the employer should pay particular attention to the following principles:
- cooperate, but communicate in an orderly manner and through the designated person,
- submit documents systematically and in a manner consistent with the specific relationship,
- do not create documents retroactively or retroactively supplement the history of cooperation,
- keep an internal record of the course of the audit and the questions asked,
- and summarize the identified weaknesses immediately after the audit.
It is also certainly advisable for this internal person to have the option of immediately contacting a legal advisor during an inspection—one who is familiar with the situation and can oversee the legitimacy of the inspectors’ procedural actions and the overall course of the inspection, either remotely or by being present on-site.
Inspection Report, Corrective Measures, and Post-Inspection Defense
Following the completion of the inspection activities, a report is issued, and further administrative proceedings may follow. In this regard, it is necessary to verify: whether the report accurately describes the facts of the case, whether the findings are based on evidence actually gathered during the inspection, and whether the company can raise specific and substantive objections to incorrect conclusions or an incomplete evaluation of the evidence.
At the same time, corrective measures should not be neglected. Even where a company challenges a legal conclusion, it is often prudent to adjust processes that are objectively weak. It is important to correctly assess the situation and choose an appropriate course of action.
Fines for Illegal Employment: Why This Issue Should Not Be Underestimated
Penalties for illegal employment are significant for employers not only financially but also in terms of reputation and operations. When a violation is detected, it is not just about the fine. It is also followed by the need for procedural defense, the correction of internal collaboration models, and often an examination of related tax and contribution implications. In practice, therefore, what is more important than the amount of the fine itself is that the detection of illegal employment tends to trigger a broader problem. A single inspection can thus affect labor law, tax, and internal compliance aspects.
Overlap with Financial Administration Inspections
Employers often underestimate that the reclassification of an employment relationship may not end with just a labor inspection. If it turns out that the self-employed person was in fact in the position of an employee, a tax risk also arises. The Financial Administration will examine whether the remuneration should have been treated as income from employment and whether the tax regime for the entire collaboration was correctly set up.
This is crucial from the employer’s perspective. It is therefore not enough to simply defend the contract. One must also be able to justify the invoicing, the economic logic of the relationship, and the contractor’s independence as an entrepreneur.
The area of VAT is particularly sensitive. If a service that is formally invoiced is in fact the performance of dependent work, the question arises as to whether it was an independent economic activity at all. In practice, this can lead to a dispute not only over the classification of income but also over the correctness of invoicing and related tax costs. It is also risky if a company, without a proper legal basis, bears costs for a self-employed person that the self-employed person would have to bear themselves in a real business model.
Conclusion
In inspections of fictitious self-employment, the employer who succeeds is the one who can justify the business cooperation as a functional business model, not merely as a contractual form. In practice, the inspection is decided on three levels: how the relationship appears in the workplace, what the inspectors learn during interviews, and what evidence the company can provide to support this.
If an employer wants to reduce risk, they should regularly verify that external collaborations have not slipped into a regime of internal employment. The most effective prevention is not the legal wording itself, but a consistent approach to the entire collaboration: clear performance objectives, contractor autonomy, proper invoicing, evidence of deliverables, separation from the HR system, and the company’s readiness to handle an audit objectively, calmly, and with supporting evidence.
