Employment vs. Self-Employment: When Is It Dependent Work and When Is It Business?

1. Introduction to the Issue

Illegal employment is a significant problem in the labor market, leading to economic losses and social insecurity. The most common way of circumventing an employment relationship is hiring workers as self-employed while fulfilling the characteristics of dependent work, known as the "Švarc System." This practice is against the law and can result in high fines and legal consequences.

2. Dependent Work vs. Self-Employment

The main difference between dependent work and self-employment lies in the worker's level of independence.

Characteristics of dependent work according to the Labor Code:

• A relationship of superiority and subordination,
• Work is performed under the employer's supervision and according to their instructions,
• The employee works within a designated working time and at a specified location,
• The employer is responsible for the results of the work and bears the business risk,
• The employer provides work tools, meal vouchers, and benefits.

Characteristics of Self-Employment (Sole Trader/Freelancer):

• The entrepreneur decides on the method, time, and place of work execution,
• The entrepreneur bears the business risk and is responsible for the results of their work,
• The entrepreneur provides their own work tools and equipment,
• The entrepreneur is not entitled to paid leave, sick leave benefits, meal allowances, or other benefits,
• Payment is based on the completed work or service, not a fixed salary.

3. The Švarc System – Illegal Employment Through Self-Employment

The Švarc System is an illegal form of employment in which a work relationship formally takes the shape of a commercial contract (such as a cooperation agreement or mandate contract) but in reality constitutes dependent work. Employers use this scheme to evade tax and social security obligations, gaining an unfair competitive advantage.

Indicators of the Švarc System:

• The worker performs activities exclusively for one employer,
• The worker uses the company’s tools, premises, and is integrated into the company,
• The worker receives a regular fixed monthly payment,
• The worker follows a set working schedule and adheres to the employer’s instructions,
• The worker has no option to refuse work or provide services to other clients,
• The worker is included in the company's internal record-keeping systems, just like employees.

This system is named after Czech entrepreneur Miroslav Švarc, who, in the 1990s, dismissed his employees and forced them to work as sole traders to avoid employer obligations.

4. Penalties for Illegal Employment

Compliance with labor regulations is subject to inspections conducted by labor inspectorates. Additionally, the Ministry of Labor, Social Affairs, and Family of the Slovak Republic, social and health insurance authorities, and tax offices may also carry out inspections.

Employers found guilty of illegal employment may face the following penalties:

• A fine ranging from €2,000 to €200,000,
• Additional assessments for unpaid social and health insurance contributions,
• Exclusion from public contracts and subsidies,
• Criminal liability in cases of repeated violations.

5. How to Avoid Illegal Employment?

To ensure compliance with the law, employers should:

• Employ workers under an employment contract if they perform dependent work,
• Allow self-employed individuals to work for multiple clients,
• Not enforce fixed working hours or issue internal instructions for sole traders,
• Structure commercial contracts with self-employed individuals in a way that does not include characteristics of dependent work.

6. Conclusion

The Švarc System and illegal employment are serious issues in the labor market, leading to the violation of employee rights and losses in tax and social security contributions. Thorough control of employment relationships and adherence to legislation are essential to maintaining a fair business environment and protecting workers. If you have doubts about the proper structuring of labor relationships, consulting legal and tax experts is strongly recommended.