The term "švarcsystém" refers to dependent work performed by a self-employed person (hereinafter referred to as "SZČO") outside of an employment relationship or similar working relationship for an employer. However, švarcsystém is illegal, as it involves the concealed performance of dependent work. This system can have negative consequences for both parties.
The Švarc system is becoming increasingly popular in our country, but many people are still unfamiliar with the term. It is named after Miroslav Švarc, a businessman in the construction industry who, in the early 1990s, restructured his business by terminating the employment of all his employees, encouraging them to obtain trade licenses, and then entering into commercial contracts with them, while the content and manner of their work remained unchanged.
Dependent work according to the existing legal status
Dependent work is defined in Section 1(2) of Act No. 311/2001 Coll. Labor Code (hereinafter referred to as the "Labor Code") as follows: "Dependent work is work performed in a relationship of superiority of the employer and subordination of the employee, personally by the employee for the employer, according to the employer's instructions, on his behalf, during working hours determined by the employer."
According to the Labor Code, dependent work is personal performance of work, superiority and subordination, i.e. the principle of subordination, at the same time it must be work performed on behalf of the employer and according to the employer's instructions, and at the same time it must be work performed during working hours determined by the employer.
These characteristics distinguish dependent work from the concept of "entrepreneurship". Entrepreneurship is defined by Act No. 513/1991 Coll. Commercial Code (hereinafter referred to as "ObchZ"), or Act No. 455/1991 Coll. on Small Business (hereinafter referred to as "Živnostenský zákon"), according to which entrepreneurship 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 in an employment relationship for the purpose of making a profit, but is entitled to wages for the work performed in accordance with the provisions of Section 118 et seq. of the Labor Code.
Furthermore, the Labor Code in Section § 1(1) stipulates: "Dependent work may be performed exclusively in an employment relationship, in a similar employment relationship or, exceptionally, under the conditions laid down in this Act, also in another employment relationship. Dependent work may not be performed in a contractual civil law relationship or in a contractual commercial law relationship under special regulations."
Reasons for using the Švarc system
Entrepreneurs often need various support and ancillary activities in their business. Cooperation with external resources has several benefits for entrepreneurs, namely focusing on certain activities that are not directly related to the main business activities, providing expertise and experience that would otherwise be difficult or impossible to obtain, or adapting to changes in demand or production. because they can easily change the range of services they provide with resources outside the company.
Slovakia is one of the countries with a high tax and social security burden, which is borne not only by employees but also, to a large extent, by employers. This way of working is usually chosen in order to save on contributions and rules that employers must comply with towards their employees under the Labor Code.
The tax and contribution burden on labor in Slovakia is relatively high. Employees pay:
- income tax of 19% and
- social security and health insurance contributions totaling 13.4%.
The contributions paid by the employer for the employee amount to 35.2%. The cost of an employee's work is thus burdened by contributions of 48.6% and tax of 19%.
Self-employment is preferred because of the lower assessment base, i.e. self-employed persons also pay relatively high contributions of 33.15%, but if their income does not exceed EUR 49,790 (per year), the income tax is 15%.
This means that SZČO may have a higher net income than an employee in an employment relationship. The termination of employment is precisely regulated by the Labor Code, and therefore the advantage of the švarcsystém may also lie in the simpler termination of the contractual relationship.
Based on the above, an employee is more expensive for an employer than cooperation with a self-employed person. However, the problem 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 referred to as 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 civil service relationship with the legal entity or 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 of the Agreement on the European Economic Area or the Swiss Confederation, or a person without nationality (hereinafter referred to as a "third-country national") and the conditions for his or her employment under a special regulation are not met."
Furthermore, according to Section 2(2) of the Act on Illegal Employment: "Illegal employment is employment by a legal entity or natural person who is an entrepreneur if they use dependent work
a) a natural person and does not have an employment relationship or civil service relationship with them in accordance with a special regulation,
b) of a natural person with whom it has an employment relationship or civil service relationship under a special regulation and has not registered them in the register of insured persons and old-age pension savers within seven days of the expiry of the period under a special regulation6) for registration in this register, but no later than the start of the inspection of illegal work and illegal employment, if the inspection began within seven days of the expiry of the deadline for registration in this register under a special regulation, or
c) a third-country national and the conditions for his or her employment under a special regulation are not met."
The main advantages of the Švarc system are therefore, in particular, a certain degree of flexibility and irregular but necessary activities, and lower costs.
On the other hand, the disadvantages of this system must also be mentioned. 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 disadvantage of the Švarc system lies mainly in the fact that self-employed persons do not enjoy the same rights as employees, e.g. provision of meals, entitlement to paid leave, severance pay if the legal conditions are met, breaks at work, entitlement to work equipment provided by the employer, limited liability, and others. Ultimately, the Švarc system is also disadvantageous for the state.
When can we talk about the Švarc system?
The performance of work by a self-employed person for a legal entity or natural person who is an entrepreneur cannot be subsumed under the definition of the Švarc system in all circumstances. We can talk about the Švarc system if all the following characteristics of dependent work are met:
- there is a relationship of superiority and subordination between the self-employed person and the employer, who carries out the employer's orders,
- the work is not limited in time, e.g. by the completion of a project,
- the self-employed person uses the employer's equipment and premises to perform their work (without rent 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 and not a contractor),
- the work is performed at the expense and under the responsibility of the customer,
- the work is performed during fixed and regular working hours,
- work is performed on a long-term basis and exclusively for one employer.
When using the švarcsystém, the employer retains to a certain extent the same rights and control over the self-employed person as it has over employees under the Labor Code.
However, dependent work is linked 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 case. The contract itself does not determine whether the work is dependent or a Schwarz system. The actual content of the legal relationship must always be examined.
Some of the characteristics of dependent work in the case of self-employed persons may be present to such an extent that they raise doubts and the legal relationship may be assessed as dependent work. In order to determine whether it is dependent work or a Schwarz system, all circumstances must be assessed as a whole.
Work performed on the basis of other contracts, e.g. a cooperation agreement, a commercial agency agreement, mandate contract, agency contract or contract for work, in the form of one-off or recurring services, where the contractor uses their own premises and work equipment (or the premises and work equipment of the employer, which the self-employed person rents) and is not subject to the employer's work instructions regarding work procedures and working hours, or services provided in this manner to multiple customers, etc., does not meet the characteristics of dependent work and may also be performed under a commercial or civil law contractual relationship, i.e., it is not a švarcsystém. When assessing the performance of work, it is also important to consider whether it can be subsumed under the concept of a švarcsystém, i.e. whether the employer employs employees of the customer in the same positions alongside self-employed persons, who have concluded employment contracts or agreements on work performed outside of employment, and whether the self-employed persons perform work under the same conditions as these employees, e.g. they have the same working hours, they have set breaks for rest and meals, they take holidays as granted to employees by the Labor Code, and so on.
In addition to the above, in order for dependent work to be subsumed under the concept of a "subcontracting system," it is necessary that the concealed performance of dependent work be carried out 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 an employment relationship and, if so provided by a special regulation, also in a similar employment relationship, performs dependent work for an employer." A supplier-customer relationship between two commercial companies is absolutely excluded in this case.
Penalties for using the švarcsystém
Compliance with labor law is also regulated by Act No. 125/2006 Coll. on labor inspection and amending and supplementing Act No. 82/2005 Coll. on illegal work and illegal employment and amending and supplementing 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 labor inspectorates. According to Section 5(1) of the Act on Illegal Employment, the labor inspectorate is responsible for inspecting illegal work and illegal employment. In addition to these authorities, the black labor system is also inspected by administrative authorities in the field of health and social insurance, as well as tax administrators.
The legislator's main concern was to protect employees performing dependent work and to provide them with adequate social protection and to ensure the protection of public resources intended, among other things, for the implementation of the state's social policy.
The administrative offences referred to in Section 19 of the Inspection Act are punishable by severe fines for employers. According to Section 19(2) of the Inspection Act, the labor inspectorate shall impose a fine of between EUR 2,000 and EUR 200,000 on an employer or natural person for violating the prohibition of illegal employment.000, and in the case of illegal employment of two or more natural persons at the same time, a fine of at least EUR 5,000.
In the event of repeated imposition of a fine for violation of the prohibition of illegal employment, the labor inspectorate shall even notify the relevant trade licensing office of this repeated imposition of a fine for the purpose of revoking the trade license.
Can I use the Švarc system as an employer?
Many entrepreneurs have been inspired by the Švarc system, prompting the state to intervene to monitor such illegal activities more closely and punish them more severely. This situation is undesirable, as concealing employment relationships has a number of negative consequences.
The Švarc system is, to a certain extent, an understandable but not legitimate interest of employers to ensure that work is performed outside of employment relationships, especially outside of employment. It can help entrepreneurs focus on their core business activities by allowing a person outside the company – in this case, a self-employed person – to take on certain activities that are not directly related to the core business activities, or it can help them adapt to current developments in market supply and demand.
The use of the Švarc system is considered to be circumvention of the law because it involves the concealment of employment relationships, but the employment of a self-employed person does not necessarily always mean that it is dependent work, i.e. the Švarc system, even if it shows some signs of dependent work. Among other things, the will of the contracting parties, the actual manner, form and purpose of the cooperation are important.
