Answers to the most frequently asked questions from the webinar on labor law: the “Švarc system,” inspections by the Labor Inspectorate and the Tax Office, single-member limited liability companies (s. r. o.), high-risk occupations, and new obligations for employers under the Equal Pay Act.
Will the inspection address the situation where an employee works part-time and also invoices through their own single-member s. r. o.? Do they have jurisdiction over s. r. o.s?
The Labor Inspectorate has the authority to inspect limited liability companies as well. Providing services through a limited liability company does not offer protection against penalties for illegal employment. Inspectors assess the actual situation—whether the same person is performing the same work both as an employee and as a contractor. If the work performed as an employee is the same or similar to the invoiced work, this constitutes the so-called “Švarc system,” and invoicing through a limited liability company is viewed as a means of circumventing tax and social security obligations.
The concurrent existence of an employment relationship and the provision of services through a limited liability company (s. r. o.) is justifiable only if the work activities and the services are completely different in nature. That is, the type of work and its brief description in the employment contract, or in the employee’s job description, must differ from the services provided in the business relationship with the limited liability company (s. r. o.).
To justify such a concurrent arrangement, it is also necessary for the limited liability company to use its own equipmentwhen providing services, for the contracted activities to be defined by project or by result, and for invoicing to correspond to this (not invoicing by time).
During a labor inspection, the limited liability company must submit all documents that the inspector deems necessary for conducting the inspection, including contracts, invoices, delivery notes, and the like. Failure to provide the requested documents cannot be justified on the grounds that they constitute trade secrets and may be subject to penalties.
How are audits conducted by the tax office? How do they distinguish between a fictitious business and a real contractor?
The tax administrator focuses on the proper taxation of income. Unlike the labor inspectorate, the tax administrator may review records and assess additional taxes retroactively for up to 5 years.
Inspection Process:
- Data Analysis: The tax authority cross-checks reports. If a contractor (self-employed individual or single-member limited liability company) has, over a long period, received all income from a single partner, this is assessed as a red flag.
- Substantive test: The tax authority then assesses the actual nature of the collaboration; as part of this assessment, it may review, for example, email correspondence between the contracting parties. It examines whether the arrangement constitutes self-employment or disguised dependent employment.
Risk factors for classifying a B2B relationship as dependent work include, in particular, being bound by the client’s instructions/the inability to refuse an order, compensation based on hours worked, performing work on the client’s premises using the client’s equipment, and the absence of other clients.
Factors indicating a business relationship include a project-specific order, the contractor bearing the business riskand the associated liability insurance, the contractor’s own equipment for carrying out business activities, and invoicing for a specific result, project, or work product.
The consequence of reclassifying a contractor relationship as dependent employment is back taxes and, following a referral to the Social Insurance Agency and health insurance companies, contributions—for both the client and the contractor. Furthermore, the reclassification may also negatively affect VAT deductions.
How will an audit assess dependent employment if an employee is on a part-time employment contract and also invoices the same company as a limited liability company (s. r. o.)?
This question is closely related to the first question we discussed above, and the answer remains the same.
The Labor Inspectorate has the authority to inspect limited liability companies (s. r. o.) as well. Providing services through a limited liability company (s. r. o.) does not offer protection against penalties for illegal employment.Inspectors assess the actual situation—whether the same person is performing the same work both as an employee and as a contractor. If the work performed as an employee is the same or similar to the invoiced work, this constitutes the so-called “Švarc system,” and invoicing through a limited liability company (s. r. o.) is viewed as a means of circumventing tax and social security obligations.
The concurrent existence of an employment relationship and the provision of services through a limited liability company (s. r. o.) is justifiable only if the work activities and the services are completely different in nature. That is, the type of work and its brief description in the employment contract, or in the employee’s job description, must differ from the services provided in the business relationship with the limited liability company (s. r. o.).
To justify such a concurrent arrangement, it is also necessary for the limited liability company to use its own equipmentwhen providing services, for the contracted activities to be defined by project or by result, and for invoicing to correspond to this (not invoicing by time).
During a labor inspection, the limited liability company must submit all documents that the inspector deems necessary for conducting the inspection, including contracts, invoices, delivery notes, and the like. Failure to provide the requested documents cannot be justified on the grounds that they constitute trade secrets and may be subject to penalties.
What information must an employer disclose to candidates prior to an interview?
The adoption of the Equal Pay Act has tightened the rules governing job postings and hiring processes. The goal is to ensure that differences in employee pay are based on objective criteria that are not grounded in discrimination.
The applicant must be provided with information no later than before the employment contract is concludedregarding:
- the starting salary or the range of the starting salary. Effective August 1, 2026, the starting salary must be determined according to criteria set forth in the established compensation structure,
- the provisions of the collective bargaining agreement, if it governs compensation.
The employer is required to provide this information in a manner and at a time that ensures informed and transparent salary negotiations. If this information is included in the job offer (advertisement), this requirement is met.
A key change is the prohibition on requiring a candidate to disclose information about their previous or current salary. If an employer were to attempt to obtain such information through a recruitment agency, this would constitute a circumvention of the law and thus a violation of it.
Both the job title and the text of the advertisement must not be based on a single gender; that is, they must be gender-neutral. For example, instead of “warehouse worker,” use both forms “warehouse worker (male/female)” or “person working in a warehouse” / “person performing warehouse work.”
Which HR processes will companies need to revise first?
In connection with Act No. 76/2026 Coll. on Equal Pay for men and women for equal work or work of equal value and on amendments to certain laws, we recommend prioritizing the following two steps in terms of timing:
1. Compensation Structure (by July 31, 2026)
Preparations should begin as soon as possible, because creating a compensation structure requires defining evaluation criteria and establishing employee categories, with the participation of employee representatives, if any are present at the employer’s organization. Creating a compensation structure that defines the value of work based on objective and non-discriminatory criteria (complexity, responsibility, physical demands, working conditions, and other relevant factors) requires time and the involvement of more than just the HR department.
2. Revision of the recruitment process (effective June 7, 2026)
- Job Postings: Ensure that job titles are not gender-specific. Include the starting salary or salary range. Identify the provisions of the collective bargaining agreement that govern compensation and include them in the job posting.
- Interviews: Adjust the interview process to comply with Act No. 76/2026 Coll.; retrain recruitment staff and all those involved in the recruitment process (e.g., managers participating in the selection process) on the obligations arising from Act No. 76/2026 Coll.
- Contracts with Agencies: Add to contracts with staffing agencies and ADZ the obligation to comply with Act No. 76/2026 Z. z. (job title, requirements of the job offer, etc.)
How will the Labor Inspectorate approach inspections of single-member limited liability companies (s. r. o.)? Do they even have the authority to inspect a s. r. o. if they do not physically find an employee at the workplace?
The Labor Inspectorate has the authority to inspect even a single-member limited liability company (s. r. o.). Providing services through a limited liability company does not offer protection against penalties for illegal employment. The Labor Inspectorate can verify the relationship between the client and a single-member limited liability company acting as a contractor even without direct contact with the managing director of the single-member limited liability company.
Labor Inspectorate Procedure:
- Analytical phase: Inspectors gather evidence in advance from public sources (LinkedIn, websites), registries, and advertisements. They monitor who is listed as part of the team.
- Documentary approach: If the inspected entity is not present on-site, the inspectorate requests contracts, invoices, emails, and access to systems. Pursuant to Section 12(1)(d), the inspector is authorized to request the submission of documentation, records, or other documents necessary for conducting a labor inspection and to request copies thereof. Entities are legally required to provide them.
- Witness questioning: Inspectors may ask other persons present about the nature of your working relationship.
Obstruction of the inspection by any person (e.g., failure to submit documents) may result in a fine. Furthermore, the Labor Inspectorate works closely with the Financial Administration. If the evidence in the documents indicates dependent employment, penalties and the assessment of back taxes and subsequent social security contributions may follow, even in the absence of the managing director of a single-member limited liability company.
What are the most common job positions that the Labor Inspectorate (IP) identifies as high-risk in practice in terms of the so-called “Švarc system”? You mentioned the IT sector, sales representatives, ...
The Labor Inspectorate (IP) does not conduct inspections at random, but targets specific sectors where hidden employment is most likely:
- Sales representatives: The main risks include exclusivity of services for a single company, mandatory daily reporting, use of a company car without a specific legal basis, and acting on behalf of the company.
- Construction and installation: The LI monitors workers wearing identical work uniforms who use company tools and follow operational instructions from the client’s staff, with hourly pay without defined performance targets.
- IT sector: Developers and testers are at risk if they work “9 to 5” at the client’s premises with assigned hardware as regular team members.
- Marketing and media: Graphic designers, editors, and copywriters are subject to scrutiny if they perform daily operational tasks exclusively for a single client and under the client’s direct supervision.
Regardless of the sector, the risk of reclassification of a business relationship as dependent employment exists when providing services if a superior-subordinate relationship is evident between the client and the self-employed individual, or if other characteristics typical of a regular employee are present.
If we have a Commercial Agency Agreement with a sales representative, can we assign a company car to them?
Assigning a company car to a self-employed individual (as well as assigning other means of production) is viewed as a sign of dependency.
The labor inspectorate considers the provision of a motor vehicle free of charge to be an employee benefit. The car is regarded as a work tool provided by the company, which indirectly demonstrates that the agent does not bear his own business risk.
A key step in classifying the relationship with a sales representative as a business relationship is entering into a lease agreement. However, this must be a genuine contract with a market-rate rent that the sales representative duly pays to the principal and records in their accounting records. In addition, the agent should use their own phone and computer, and their compensation should be tied to results (closed deals), not to hours worked or the number of kilometers driven.
On the other hand, the risk of the relationship being classified as dependent employment increases if other factors are added to the use of a company car without a formal contract:
- Supervision and management – mandatory morning meetings, daily reporting in the CRM system, and a set number of working hours per month.
- Dependency – use of a company email account without marking it as external, working exclusively for a single client.
Are labor inspections conducted in a similar manner in nonprofit organizations as well?
The nonprofit sector is subject to labor inspection to the same extent as business entities. 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 does not in any way restrict labor inspectorates with regard to the legal form of the inspected entity. If a nonprofit organization is an employer or illegally employs another natural person, all provisions of Act No. 125/2006 Coll., including penalties, apply to it.
The labor inspectorate has the right at any time and without prior notice to enter the premises of a nonprofit organization, request contracts (including volunteer service agreements), and conduct on-site interviews with individuals.
With regard to volunteering, we draw attention to the possibility that a volunteer’s work may be classified as dependent employment if such activity exhibits the characteristics of dependent employment under Section 1(2) of the Labor Code.
A legally enforceable fine for illegal employment is a significantly negative sanction for nonprofit organizations, which may disqualify them from applying for, for example, grants from EU-funded calls for proposals, or result in an obligation to return funds already received.
