The decision whether to employ someone or cooperate with them on a trade licence goes far beyond administration. It determines who pays contributions, who bears the business risk and what protection the person actually doing the work has. That is precisely why the authorities keep an eye on it — and why room for abuse arises here.

If cooperation with a sole trader looks like business on the outside but actually replaces ordinary employment, we are talking about the švarcsystém. The line between legal cooperation and the švarcsystém is not a matter of the name in the contract, but of the real content of the relationship — and that is assessed by the labour inspectorate. The following text explains how the two relationships differ, how the authority recognises disguised dependent work, what it carries, and how to set up cooperation with a sole trader so that it holds up.

How an employee and a contractor really differ

An employee works in an employment relationship, according to the employer's instructions and for a wage, from which the company remits contributions and a tax advance. On the employer's side come contributions of 33.8 % of the gross wage and a range of labour-law obligations — entitlement to holiday, notice periods, protection on termination. In exchange the employee bears no business risk: when the company has no orders, their wage runs on.

A sole trader is the opposite. They do business on their own account, organise their own work and time, bear the risk, invoice for the work delivered and deal with contributions and tax themselves. A company cooperating with them incurs no contribution or labour-law obligations. And it is precisely this saving that makes cooperation on a trade licence tempting — but it is also the root of the problem when used for work that actually has the nature of employment.

When cooperation becomes the švarcsystém

The švarcsystém is a disguised employment relationship: a sole trader formally acts as an independent contractor, but in reality performs dependent work like a rank-and-file employee. Czech law prohibits such a model and the labour inspectorate actively checks for it. The key is that it assesses the real content of the relationship, not how it is named on paper — a contract for work or invoicing on a trade licence will not save anything on its own.

The signs of dependent work are taken to be, in particular, that the person:

  • works according to the company's instructions and under its management,
  • works personally and continuously, not as a one-off delivery,
  • works in the company's name and at times the company sets,
  • uses the company's premises, tools and facilities,
  • has, in effect, a single customer.

No single sign automatically means the švarcsystém — the overall picture decides. The more signs are met, the more likely the authority is to assess the relationship as dependent work with all its consequences. A typical case is a person who for years comes daily to one company, works under its management on its equipment, but invoices on a trade licence instead of having an employment contract.

Why the švarcsystém does not pay off

The lure is the saving. The company avoids the 33.8 % of contributions and labour-law obligations, while the sole trader can use an expense allowance or the flat-rate tax and remit less than an employee. At first glance both sides gain — which is exactly why the švarcsystém is widespread.

The risk, however, is disproportionate. On inspection the authority reclassifies the relationship as employment and back-assesses the unpaid contributions and tax with penalties, as if it had been an employee from the start. On top of that, for enabling illegal work a legal person faces a penalty of up to CZK 10,000,000, an individual up to CZK 5,000,000, but at least CZK 50,000. And it is not only the company that can be penalised — a sole trader who takes part in the švarcsystém is also exposed to sanctions. A saving of a few tens of thousands of crowns a month can thus quickly turn into a many times higher cost.

How to set up cooperation so that it holds up

Safe cooperation rests on reality, not on wording in a contract. In practice this means the sole trader has several clients, decides on their own time and way of working, uses their own equipment, bears business risk and invoices for a result or a work, not for time worked. The more independently they act, the safer the relationship — and conversely, wording about working hours, subordination and exclusive work for one company brings it closer to dependent work.

The difference is well illustrated by a simple example. A graphic designer who works for several clients, from home and on their own computer, and invoices individual jobs, is a legal contractor. The same designer who comes every day from nine to five to one company, works only for it, on its equipment and according to its instructions, meets the signs of dependent work — even though they issue an invoice on a trade licence. What decides is the reality of the relationship, not the heading of the contract.

The direction of travel is hinted at by the planned regulation of platform work. The Ministry of Labour is preparing rules that would, for work via digital platforms, introduce a rebuttable presumption of employment — the relationship would automatically be treated as employment where the signs of dependent work are met, unless the company proves otherwise. This is not yet an effective law, but it shows the direction the assessment of dependent work is taking.

Conclusion

The difference between an employee and a sole trader is not about the name of the contract, but about the real nature of the work. The švarcsystém is illegal and the penalties run into the millions, plus back-assessment of contributions and tax. If a company cooperates with a sole trader, it pays to set the relationship up so the sole trader genuinely acts independently — otherwise the apparent saving turns into an expensive problem. The obligations of proper employment are summarised in the article employing people in Czechia.

Frequently asked questions

What is the švarcsystém?

A disguised employment relationship — a sole trader formally acts as an independent contractor, but in reality performs dependent work like a rank-and-file employee. The company thereby avoids contributions and labour-law protection. In Czechia it is illegal and the labour inspectorate assesses it by the real content of the relationship, not the name of the contract.

What are the penalties for the švarcsystém?

For enabling illegal work a legal person faces a penalty of up to CZK 10,000,000, an individual up to CZK 5,000,000, but at least CZK 50,000. On top of the penalty the authority back-assesses the unpaid contributions and tax with penalties. A sole trader who takes part can also be penalised.

When is cooperation with a sole trader legal?

When it has the signs of genuine business — the sole trader has several clients, decides on their own time and way of working, uses their own equipment, bears business risk and invoices for a result, not for time worked. The more independently they act, the safer the relationship. Reality decides, not the wording of the contract.