What he's doing is not legal, and legally tax avoidance, in a lot of European countries.

What he's describing is known as a disguised employee/employment, and they or all their workers (probably their workers if they're operating as 'companies') might suddenly find themselves open for massive tax bills for unpaid employment taxes in their country.

On top of that, this setup is open for the disguised employees being able to sue the company for unpaid holiday + benefits.

Probably never get noticed at that scale though. And can't say for certain as he hasn't listed the country, but if this was happening in the UK, I'm 90% certain it'd be classified as tax avoidance in the UK, and all the 'employees' would be on the hook for something like 14% employer national insurance contributions. The big problem HMRC would have is that no-one's paying the employer NIC, and as his employees are officially the companies, they'd be on the hook for it.

Every country within Europe is different in some capacity so it's difficult to say with absolute certainty that he is breaking the law -- the language in my comment was vague because I'm mostly addressing the spirit of his behaviour, rather than the law. That said, certainly in my European country he would be open to issues with the tax authority if he were to attract their attention.

The United States is very permissive when it comes to employment, the majority of states could be described as "anything goes" (relative to Europe) and so dodging employment taxes is pretty much fair game... whereas in Europe a lot of regulation exist very specifically to address companies organising their business in this way. I'd be very surprised if he didn't face significant fines (I don't know of any examples of this behaviour leading to prison terms, but significant fines are very common and serve as a deterrent).