The Labour Inspectorate Tightens Checks on the Švarcsystém from January
Since 2012, the švarcsystém has been illegal in the Czech Republic. The period following the Velvet Revolution in 1989 brought not only new political conditions but also the renewal of private enterprise. With the rise of capitalism, local entrepreneurs quickly began looking for ways to reduce costs. One of them was Miroslav Švarc, who employed workers on a large scale through trade licenses. In reality, the staff of his construction company performed dependent work.
Formally, however, these workers were classified as self-employed persons (sole traders). Švarc, after whom the entire model was later named the švarcsystém, thus avoided paying taxes. For this reason, Czech lawmakers repeatedly attempted to prohibit this practice. From 1 January 2012, such masking of dependent work has been illegal. With the start of the new year, inspection authorities are planning to focus on this issue even more intensively.
Current case law provides a number of guidelines
In some positions, it is by their very nature impossible to use sole traders. This applies, for example, to cashiers or warehouse workers, as they always work in a dependent relationship. The risk of the švarcsystém therefore arises mainly in so-called dual-purpose activities. These are types of work that can be performed both by employees and by self-employed individuals.
At the same time, it has not always been easy to distinguish legitimate cooperation with freelancers from a disguised employment relationship. Fortunately, there has been progress in this area in recent years. Based on the decision-making practice of Czech courts, the švarcsystém can now be identified using the following indicators:
Most income from a single company
Case law is based on the principle that the economic dependence of a self-employed person on a single business partner should remain limited. If income from one cooperation were to constitute more than half of total revenues, a court may assess this as an illegal švarcsystém. Although many freelancers receive most of their income from a “main” client, it is still important for them to maintain a balanced diversification of income sources. Long-term dominance of a single source represents a significant risk factor.
Mere signs of independence do not exclude the švarcsystém
This point represents a significant shift in the assessment of disguised employment relationships. Independent time management, entrepreneurial risk, or the use of one’s own tools by a self-employed person do not automatically mean that the law is not being violated. Inspection authorities always assess these attributes in the broader context of the specific cooperation. What matters is the overall nature of the relationship between the parties. During inspections, particular attention is paid to the degree of actual dependence, integration into the client’s organizational structure, and the real ability to operate independently on the market.
Caution is also required when transitioning to an employment relationship
The risks associated with the švarcsystém do not concern only ongoing cooperation. They may also arise when such cooperation ends. After a freelancer transitions to an employment relationship, inspection authorities may retrospectively examine whether the previous arrangement corresponded to the actual nature of the work performed. A sudden change in legal form naturally raises doubts as to whether the relationship had already constituted disguised employment earlier. For this reason, it is advisable to pay increased attention to the continuity of activities, the scope of work, and the conditions before and after concluding an employment contract.
What penalties may be imposed for the švarcsystém?
The consequences of illegal employment are usually far more extensive for employers than the sanction imposed by the labour inspectorate alone. Legislation allows for fines of up to CZK 10 million. In serious cases, a ban on performing business activities for up to two years may also be imposed. Penalties for the švarcsystém often include the publication of the final decision imposing the sanction, which remains publicly accessible for one year and represents a significant reputational risk.
Negative impacts also extend to other areas of business. Employers lose entitlement to state subsidies, grants, or investment incentives. At the same time, they may lose the ability to employ foreign workers. These restrictions are particularly significant in practice for companies dependent on foreign labour or public funding. In addition to administrative sanctions, there are also financial consequences in the area of public contributions. Inspection authorities retrospectively assess all amounts that the employer failed to pay due to the švarcsystém, including social security contributions, health insurance, and income tax. These amounts are then increased by penalties and late-payment interest, meaning that the original attempt to save costs can ultimately become very expensive.
