In a recent ruling concerning the company VELKÁ PECKA s.r.o. (Rohlík.cz), the Supreme Administrative Court once again examined in detail where the line lies between genuine business cooperation and the prohibited Švarc system. The case, in which the company was fined CZK 2.5 million for enabling illegal work, gave the court an opportunity to refine its interpretation of the hallmarks of dependent work and to show how both authorities and courts assess the actual substance of the cooperation in material terms, not merely the formal wording of the contracts.
What is the Švarc system?
The Švarc system describes a situation where dependent work is performed outside an employment relationship, typically on the basis of a civil-law or commercial-law contract (e.g. a contract with a self-employed person), even though the actual circumstances meet the hallmarks of dependent work. Such conduct is classified as illegal work under Section 5(e) of the Employment Act, and enabling it is an offence under Section 140(1)(c) of the same Act.
What does the ruling say and what should you watch out for?
According to case law, what is decisive is the material nature of the relationship, not its formal label. Even where a relationship is established by a civil-law contract, it will be assessed as an employment relationship if the activity actually meets the hallmarks of dependent work (cf. 3 Ads 101/2013-28). The worker's consent to such an arrangement is legally irrelevant (3 Ads 32/2007-66).
The ruling emphasises that when assessing the Švarc system one must start from a material assessment of the actual manner in which the work is performed, not from the contractual wording.
The Supreme Administrative Court regards as decisive, in particular, whether the hallmarks of dependent work under Section 2(1) of the Labour Code are met:
Personal performance of work
- What is decisive is whether the worker actually performs the work personally. A formal possibility of substitution or subcontracting in the contract is not relevant if substitution does not actually occur (cf., e.g., 7 Ads 283/2024-29, 7 Ads 52/2014-37).
Continuity of the work performed
- Continuity can be inferred from the actual regular performance of work and the corresponding invoicing. It is irrelevant whether the wage/remuneration for the work performed is a different monetary amount each month. It is not necessary for the contract to set working hours or a minimum volume of work (1 Ads 437/2017-84; 2 Ads 151/2015-27). Nor does the possibility of refusing an assignment, in itself, rule out a relationship of subordination (5 Ads 208/2019-33).
Performance of work in the name of the employer
- This hallmark is met in particular where the worker acts towards third parties in the name of the company and uses its resources. This hallmark is related to the worker's economic dependence (6 Ads 46/2013-35; 3 Ads 106/2019-29).
Subordination and economic dependence
- Subordination may also follow from the worker's economic dependence on a single customer. It is also relevant whether the business controls the manner in which the work is carried out and compliance with its standards, not merely its result (1 Ads 6/2025-27).
How should we structure contracts so that they are sound (in line with case law)?
Several principles can be inferred from the case law that should be respected when drafting contracts with the self-employed.
- The relationship should be structured as genuine business cooperation, not as a disguised employment relationship. The entrepreneur should act on their own account and at their own risk, not in the name of the client.
- The entrepreneur should have real organisational autonomy, in particular the ability to determine the manner in which the work is carried out, the organisation of the work and, where appropriate, the ability to use their own staff or subcontractors. This possibility must not only be formal but also actually exercised.
- It is advisable to limit situations in which the entrepreneur appears externally as part of the client's organisational structure (e.g. uniform branding, communicating in the name of the company), because it is precisely these circumstances that the Supreme Administrative Court considers significant when assessing the hallmark of performing work in the name of the employer.
- The client should check the result of the service, not the detailed manner of its performance. Intensive monitoring of compliance with internal standards may, according to case law, indicate a relationship of superiority and subordination.
- If a worker performs work personally, on the employer's instructions, within its organisational structure and in the employer's name, the relationship must be set up as an employment relationship or an agreement under the Labour Code. Attempts to formally circumvent these rules through commercial contracts are, according to case law, legally irrelevant, because administrative authorities and courts assess the relationship in material terms.
Current case law, together with the new obligations arising from the Pay Transparency Directive and the single monthly reporting, are tightening oversight of how employment relationships in companies are actually set up.
We therefore recommend reviewing contracts with the self-employed and other collaborators to verify that they reflect the real-life practice and do not create a risk of disguised employment.
If you're not sure, we can help you with the review and recommend suitable adjustments.
