Working with contractors instead of employees — what is allowed

When a small firm's workload grows, it naturally looks at how to add more hands. Hiring an employee means payroll, contributions, holidays and notice periods — so many entrepreneurs prefer to arrange cooperation with a self-employed contractor (OSVČ) who invoices them for the work done. It is a legitimate model, entirely common in Czechia, and there is nothing forbidden about it.

The catch is that what is allowed is decided by the real substance of the relationship, not by the name of the contract. If the contractor in fact works like a rank-and-file employee — every day, in one place, under supervision and only for one firm — the authorities can assess it as disguised employment, the so-called švarcsystém. In this piece we clarify when working with a contractor is fine, where the line lies and how to set the relationship up so that it holds.

When working with a contractor is fine

Cooperation between two businesses is a standard part of the market — a graphic designer, an IT developer, an accountant and a tradesperson all routinely invoice several clients, and nobody sees a problem in it. What matters is that the contractor acts as an independent business: they organise their own work, bear their own commercial risk and are responsible for the result, not the firm that hired them.

You can recognise a healthy arrangement by a few practical signs. The contractor usually has several clients, does the work with their own equipment and tools, decides for themselves when and from where they work, and invoices for a specific piece of work or output, not for hours put in at an assigned desk. For example: a designer who builds a website for a firm does it on her own laptop, alongside other jobs and with her own responsibility for the delivered work — that is safe cooperation, not hidden employment.

Where the line lies: the signs of dependent work

The key concept is dependent work, defined in Section 2 of the Labour Code (Act No. 262/2006 Coll.). Dependent work is an activity carried out in a relationship of the employer's superiority and the employee's subordination, personally, in the employer's name and according to the employer's instructions. The Act adds that it is performed for a wage or salary, at the employer's cost and responsibility, and during working hours at the employer's workplace.

If cooperation with a contractor meets precisely these signs, it is in fact employment — regardless of the parties having signed a contract for work or a services agreement. In practice, warning signals are when the contractor turns up every day at a fixed time, receives tasks on an ongoing basis from a superior, uses the firm's equipment, has no other clients and is paid regularly each month like a wage. The more such signs the relationship has, the closer it is to dependent work. A detailed comparison of the two worlds is set out in the piece on the difference between an employee and a contractor.

The švarcsystém and what it can cost

Disguised employment of contractors is colloquially called the švarcsystém, and Czech law treats it as illegal work under Section 5(e) of Act No. 435/2004 Coll., on Employment. Inspections are carried out by the State Labour Inspection Office, and it is above all the firm that enabled such work which is penalised.

The sanctions are not trivial. For enabling illegal work a firm faces a fine of up to CZK 10,000,000, with a lower limit of CZK 50,000; alongside the fine a ban on activity may also be imposed. On top of that comes, as a rule, back payment of income tax and of social and health insurance contributions for the whole period of cooperation, increased by default interest. It is these back payments that often weigh more heavily in the final bill than the fine itself.

How to set the arrangement up correctly

The good news is that proper cooperation does not need to be worked around in any way — it is enough for the paper and the reality to say the same thing. A contract for work or a services agreement should describe a specific output, not a job position, and the contractor should keep their independence in how and when they deliver the work. If they also have their own equipment, several clients and responsibility for the result, the relationship will hold up even under inspection.

Conversely, if you find that you need the person full-time, daily and under direction, the more honest and safer solution is an ordinary employment relationship. The obligations that go with it are summed up in the piece on employer obligations. Decide on the basis of what you actually need — not on what happens to be cheaper on paper.

Conclusion

Working with contractors instead of employees is legal and, for small firms, often sensible too — as long as it is genuine cooperation between two independent businesses. The line is drawn by dependent work as defined in the Labour Code: once the relationship meets its signs, it turns into the švarcsystém, with penalties and back payments of tax and insurance. The key is for the substance of the relationship to match what is written in the contract. When those line up, the cooperation is clean and the firm has nothing to fear.

Frequently asked questions

Is working with a contractor instead of an employee legal?

Yes, cooperation between two businesses is entirely legal and common in Czechia. What matters is that the contractor acts as an independent business — has several clients, works with their own equipment, organises their own work and bears responsibility for the result. The problem only arises when the arrangement in fact meets the signs of dependent work and amounts to disguised employment.

How do you recognise the švarcsystém?

It is the real substance of the relationship that decides, not the name of the contract. A warning signal is when the contractor turns up every day at a fixed time, receives ongoing instructions from a superior, uses the firm's equipment, has no other clients and is paid regularly like a wage. These are the signs of dependent work under Section 2 of the Labour Code (Act No. 262/2006 Coll.); if the relationship meets them, it is assessed as illegal work.

What penalties apply for the švarcsystém?

For enabling illegal work, the State Labour Inspection Office can impose a fine of up to CZK 10,000,000 on the firm, but at least CZK 50,000, and possibly a ban on activity as well. On top of that usually comes back payment of income tax and of social and health insurance contributions for the whole period of cooperation, including default interest. The total of these back payments is often higher in practice than the fine itself.