Courts adopting stricter stance on ‘Svarc system’ – what to watch out for?
Situations where cooperation with entrepreneurs may be classified by the authorities as illegal work are a frequent cause for concern among employers. Structuring these relationships in a way that avoids falling under the definition of the ‘Svarc system’—where dependent work is formally carried out by independent contractors —can be particularly challenging. Failure to do so may result in substantial penalties, including not only fines but also other sanctions for the companies. As to taxation, companies may also face significant additional tax assessments. In this article, we explore how to mitigate the risk in this area.
Cooperation options and types of activities
Before engaging self-employed persons for specific tasks, employers must first assess the nature of the work involved. Self-employed persons by definition (in Czech OSVČ or independent gainfully active persons) cannot perform dependent professions. Activities such as cashier or warehouse worker do not allow for any degree of independence.
The greatest risk arises for employers in cases involving ambiguous activities, i.e. those that allow for both work performed under an employment contract and work based on cooperation with an entrepreneur (self-employed person). If an employer opts for the latter, they must ensure that the work does not show characteristics of dependent work. Otherwise, the arrangement may be deemed illegal work. The characteristics of dependent work include the personal performance of work, a relationship of superiority and subordination, and execution of work on behalf of and according to the instructions of the employer. On the other hand, the length of work performance is not significant.
New clues for determining illegal work
While in the past it seemed that that courts were becoming more lenient in their assessment of the ‘Svarc system’, their current decision-making practice shows the opposite, as they now consider not only the formal definition of cooperation in the contract, but also its actual functioning. Case law provides many clues that make it easier to identify illegal work.
An example of this is a recent ruling (8 Ads 65/2024-53) of the Supreme Administrative Court, according to which income from cooperation with a single client should not exceed 50% of the total income of a self-employed person.
Another significant shift in understanding the matter is the conclusion that self-employed persons planning their own work and not renting work equipment from the client is not automatically proof that there is no ‘Svarc system’.
The courts have also rejected the practice of combining both types of cooperation simultaneously for the ambiguous activities. Such an arrangement would only be permissible if the employee/self-employed person performed clearly distinct tasks under each form of cooperation.
Moreover, having a self-employed contractor switch to an employment relationship may not necessarily eliminate legal exposure. Contrariwise: labour inspectorates may interpret such a change as a retrospective confirmation that the previous arrangement did constitute illegal work under the ‘Svarc system’.
Risks for employers
Engaging in illegal work practices may expose employers to significant sanctions, including fines of up to CZK 10 million, a prohibition on conducting business activities for up to two years, and the public disclosure of the penalty decision for a period of one year. In addition, employers may temporarily lose their eligibility for state support and subsidies, or the right to employ foreign nationals. Notably, the risk also extends to the individuals involved—employees or self-employed persons—who may face fines of up to CZK 100,000.
Employers also potentially face the risk of being subject to additional assessments of social security contributions, health insurance premiums and income tax they would have been obliged to pay on behalf of their employees/self-employed persons, including related penalties and default interest accruing for each day of delayed payment.
Conclusion
It is important to comprehend that many of the characteristics commonly associated with the ‘Svarc system’ may also occur in practice within legitimate cooperation with self-employed persons. Their presence does not automatically constitute a breach of law. A thorough assessment of the specific circumstances and the actual nature of the cooperation is therefore essential.
If you are uncertain whether your cooperation complies with legal requirements, we would be pleased to assist you in structuring the cooperation appropriately and mitigating the risks associated with the ‘Svarc system’.