The term “Švarc system” refers to dependent work performed by a self-employed person (hereinafter “SEP”) outside of an employment contract or a similar working relationship with an employer. However, the Švarc system is illegal, as it involves the covert performance of dependent work. This system can have negative consequences for both parties.
The Švarc system is becoming increasingly common here, yet there are still many people who are unfamiliar with the term. The term is derived from Miroslav Švarc, a construction entrepreneur who, in the early 1990s, restructured his business by terminating the employment contracts of all his employees, encouraging them to obtain trade licenses, and subsequently entering into business contracts with them, while the content and manner of their work remained unchanged.
Dependent Work Under Current Law
Dependent work is defined in Section 1(2) of Act No. 311/2001 Coll., the Labor Code (hereinafter the “Labor Code”), as follows: “Dependent work is work performed within a relationship of the employer’s superiority and the employee’s subordination, personally by the employee for the employer, according to the employer’s instructions, on the employer’s behalf, during working hours determined by the employer.”
According to the Labor Code, work is considered dependent in the case of personal performance of work, superiority and subordination, i.e., the principle of subordination; at the same time, the work must be performed on behalf of the employer and in accordance with the employer’s instructions, and it must be performed during working hours determined by the employer.
These characteristics distinguish dependent work from the concept of “business.” Business is defined by Act No. 513/1991 Coll. Commercial Code (hereinafter “ObchZ”), or Act No. 455/1991 Coll. on Trade Licensing (hereinafter “Trade Licensing Act”), according to which business is an independent gainful activity performed in one’s own name, on one’s own responsibility, for the purpose of making a profit. An employee does not perform work under an employment relationship for the purpose of making a profit, but is entitled to wages for the work performed pursuant to § 118 et seq. of the Labor Code.
Furthermore, the Labor Code stipulates in Section 1(1): “Dependent work may be performed exclusively under an employment relationship, in a similar employment relationship, or, exceptionally, under the conditions set forth in this Act, also in another labor-law relationship. Dependent work may not be performed under a contractual civil law relationship or a contractual commercial law relationship pursuant to special regulations.”
Reasons for Using the Švarc System
Entrepreneurs often require various support and ancillary activities in their business operations. Collaborating with external resources offers entrepreneurs several benefits, including the ability to focus on specific activities not directly related to core business operations, access to specialized knowledge and experience that would otherwise be difficult or impossible to obtain, and the ability to adapt to changes in demand or production, as they can easily adjust the scope of services provided by external resources.
Slovakia is among the countries with a high tax and social security burden, which is borne not only by the employee but, to a large extent, by the employer. The parties generally choose this method of employment in an effort to save on contributions and to avoid the rules that employers must comply with regarding their employees under the Labor Code.
The tax and contribution burden on labor in Slovakia is relatively high. Employees pay:
- income tax at a rate of 19% and
- social security and health insurance contributions totaling 13.4%.
The contributions paid by the employer on behalf of the employee amount to 35.2%. The cost of an employee’s labor is thus burdened by contributions totaling 48.6% and tax amounting to 19%.
Self-employment is preferred due to the lower tax base; that is, while a self-employed person also pays relatively high contributions of 33.15%, if their income does not exceed €49,790 (per year), the income tax rate is 15%.
This means that a self-employed person can have a higher net income than an employee in an employment relationship. The termination of an employment relationship is precisely regulated by the Labor Code, and thus the advantage of the “Švarc system” may also lie in the simpler termination of the contractual relationship.
Based on the above, an employee is more expensive for the employer than working with a self-employed person. The problem, however, is that the “Švarc system” is illegal under Act No. 82/2005 Coll. on Illegal Work and Illegal Employment and on Amendments to Certain Acts (hereinafter the “Act on Illegal Employment”). According to Section 2(1) of the Act on Illegal Employment: “Illegal work is dependent work performed by a natural person for a legal entity or a natural person who is an entrepreneur and
a) does not have an employment relationship or a civil service relationship with the legal entity or the natural person who is an entrepreneur under a special regulation, or
b) is a national of a country that is not a Member State of the European Union, another contracting state to the Agreement on the European Economic Area or the Swiss Confederation, or a stateless person (hereinafter referred to as a “third-country national”), and the conditions for his or her employment under a special regulation are not met.”
Furthermore, pursuant to Section 2(2) of the Act on Illegal Employment: “Illegal employment is employment by a legal entity or a natural person who is an entrepreneur, if they utilize dependent work
a) a natural person and does not have an employment relationship or a civil service relationship with that person under a special regulation,
b) a natural person with whom it has established an employment relationship or a civil service relationship pursuant to a special regulation and has not registered them in the register of insured persons and old-age pension savers within seven days of the expiration of the deadline pursuant to a special regulation6) for registration in this register, but no later than the commencement of an inspection for illegal work and illegal employment, if the inspection began within seven days of the expiration of the deadline under a special regulation for registration in this register, or
c) a third-country national and the conditions for their employment under a special regulation are not met.”
The main advantages of the Švarc system are, therefore, primarily the provision of a certain degree of flexibility for irregular but necessary activities and lower costs.
On the other hand, it is also necessary to mention the disadvantages of this system. In an employment relationship based on an employment contract, the employee is always considered the weaker party. However, this does not mean that the Labor Code does not grant them any rights; quite the contrary. The Labor Code grants employees a higher level of protection and rights that the employer must respect and ensure. The main disadvantage of the “Švarc system” lies in the fact that a self-employed person does not enjoy the same rights as an employee, such as meal provisions, entitlement to paid vacation, severance pay if legal conditions are met, work breaks, the right to have work tools provided by the employer, limited liability, and others. Ultimately, the “Švarc system” is also less advantageous for the state.
When can we speak of the “Švarc system”?
The performance of work by a self-employed person for a legal entity or a natural person who is an entrepreneur cannot under all circumstances be subsumed under the definition of the “Švarc system.” We can speak of the “Švarc system” when all the following characteristics of dependent work are met:
- there is a relationship of superiority and subordination, with the self-employed person carrying out the employer’s instructions,
- the work is not limited by a specific timeframe, e.g., the completion of a project,
- the self-employed person uses the employer’s tools and premises to perform work activities (without a lease or any agreement),
- the self-employed person works on behalf of the employer (e.g., uses the employer’s business cards, thereby giving the impression that they are an employee rather than a contractor),
- performance of work at the expense and under the responsibility of the client,
- performance of work during fixed and regular working hours,
- performing work on a long-term basis and exclusively for a single employer.
When using the “Švarc system,” the employer retains, to a certain extent, the same level of rights and control over the self-employed person as it has over employees under the Labor Code.
However, dependent work is tied to a relatively high number of indicators. Each case must be assessed individually, and the assessment of specific cases should be based on all the circumstances of the particular case. The contract itself does not determine whether the work is dependent employment or the “Švarc system.” The actual substance of the legal relationship must always be examined.
Some of the characteristics of dependent employment in the case of hiring a self-employed person could be present to such an extent that they would raise doubts, and the legal relationship could be assessed as dependent employment. To determine whether it is dependent employment or a “Švarc system,” all circumstances must be assessed in their entirety.
Work performed under other contracts, e.g., a cooperation agreement, a commercial agency agreement, a mandate contract, an agency contract, or a contract for specific work, in the form of one-time or recurring services, where the contractor uses their own premises and work equipment (or the employer’s premises and work equipment, which the self-employed person leases) and is not subject to the employer’s work instructions regarding work procedures and working hours, or the performance of services provided in this manner to multiple clients, etc., does not meet the criteria for dependent work and may also be performed under a commercial or civil law contractual relationship, i.e., it does not constitute a “Švarc system.” An important factor in assessing the performance of work—namely, whether it can be classified as a “Švarc system”— is whether the employer employs, in addition to self-employed persons, employees of the client who have concluded employment contracts or agreements on work performed outside an employment relationship in identical positions, and whether the self-employed persons perform work under the same conditions as these employees, e.g., they have the same working hours, scheduled breaks for rest and meals, take vacation as granted to employees under the Labor Code, and so on.
In addition to the above, in order for dependent work to fall under the concept of the “švar system,” it is essential that such disguised dependent work be performed by a natural person—an entrepreneur, i.e., a self-employed person. According to Section 11(1) of the Labor Code: “An employee is a natural personwho, in employment relationships, and if provided for by a special regulation, also in similar employment relationships, performs dependent work for an employer.” A supplier-customer relationship between two commercial companies is absolutely excluded in this case.
Penalties for Using the “Švarc System”
Compliance with labor regulations is also governed by Act No. 125/2006 Coll. on Labor Inspection and on Amendments to Act No. 82/2005 Coll. on Illegal Work and Illegal Employment and on Amendments to Certain Acts (hereinafter referred to as the “Labor Inspection Act”). The competent state administration authorities in the field of labor inspection for the performance of labor inspections are, within the meaning of this Act, the Ministry of Labor, Social Affairs and Family of the Slovak Republic, the National Labor Inspectorate, and the labor inspectorates. Pursuant to Section 5(1) of the Act on Illegal Employment, the labor inspectorate is responsible for monitoring illegal work and illegal employment. In addition to these authorities, the “Švarc system” is also monitored by administrative authorities in the field of health and social insurance, as well as by tax authorities.
The legislature’s primary concern was to protect employees performing dependent work and to provide them with adequate social protection, as well as to ensure the protection of public resources intended, among other things, for the implementation of the state’s social policy.
Employers face severe fines for administrative offenses listed in Section 19 of the Inspection Act. Pursuant to Section 19(2) of the Inspection Act, the Labor Inspectorate shall impose a fine of between €2,000 and €200,000 on an employer or natural person for violating the prohibition on illegal employment, and in the case of the illegal employment of two or more natural persons simultaneously, a fine of at least €5,000.
In the event of a repeated imposition of a fine for violating the prohibition on illegal employment, the Labor Inspectorate even notifies the relevant Trade Licensing Office of this repeated imposition of the fine, for the purpose of revoking the business license.
Can I, as an employer, use the “Švarc system”?
Many entrepreneurs have been inspired by the “Švarc system,” prompting the state to intervene to monitor such illegal conduct more rigorously and impose stricter penalties. This situation is undesirable; concealing an employment relationship has a host of negative consequences.
The “Švarc system” represents, to a certain extent, an understandable—though not legitimate—interest on the part of employers to ensure that work is performed outside of labor-law relationships, particularly outside of an employment relationship. It can help entrepreneurs focus on their core business activities by having an external party—in this case, a self-employed person—take on certain tasks not directly related to the core business, or it can help them adapt to current shifts in market supply and demand.
The use of the “Švarc system” is considered a circumvention of the law because it involves the concealment of employment relationships; however, the employment of a self-employed person does not automatically always mean that it constitutes dependent work—i.e., the “Švarc system”—even if certain characteristics of dependent work are present. Among other things, the intent of the contracting parties, the actual manner, form, and purpose of the collaboration are important.
