Avoiding the Švarc System: Lawful Use of Self-Employed Contractors

What Has Happened with Disguised Employment Recently – Legal Developments

In recent years, there has been a significant escalation in legislative practices to combat disguised employment (the 'švarcsystém'). The maximum fine for a legal entity or a self-employed individual enabling illegal work was increased to CZK 10 million by an amendment to the Employment Act, which took effect on July 1, 2023. At the same time, a stricter assessment of what is considered illegal work has been applied for a long time.

The requirement of "continuity" as one of the main characteristics for determining illegal work is no longer the primary deciding factor. This means it is sufficient for an inspection to identify even a few signs of a worker's dependency and subordinate position, and it does not need to prove months of systematic work. Inspectors can thus focus on the very nature of the relationship, not its duration.

Furthermore, from 2026, the State Labour Inspection Office (SÚIP) will intensify its inspection activities. This is no longer just random supervision. Inspections are planned and targeted directly at companies in sectors where disguised employment is most common: construction, manufacturing, IT, logistics, and services.

The Financial Administration of the Czech Republic is also involved in uncovering hidden employment relationships, as from its perspective, this constitutes tax evasion, and requires back-assessment of VAT, social security, and health insurance contributions. In practice, it is therefore worthwhile to assess the setup of relationships also from the perspective of labour law, because back-assessments and penalties usually follow the conclusion that dependent work exists. The most important news for you so far: inspections are not just a threat. Thousands of them take place annually, and if you are in a higher-risk sector, your chance of an inspection in the next 24 months is significant.

How the Labour Inspectorate Defines Disguised Employment – Signs of Dependent Work

Here we get to the core of the problem. It is important to understand that the Labour Code does not define disguised employment directly. It defines so-called dependent work and stipulates that such work must be performed within a labour-law relationship; no other arrangement is legal. Therefore, any dependent work outside a labour-law relationship, including that performed by a self-employed person (on an IČO), is illegal. If you are considering alternatives like an agreement to complete a job (DPP) or an agreement to perform work (DPČ), an overview of the new limits and contributions for agreements to complete a job in 2026 may also be helpful.

The Labour Code defines dependent work by these characteristics (according to Section 2(1) of Act No. 262/2006 Coll., the Labour Code):

• Work in a relationship of superiority of the employer and subordination of the employee – the employee accepts instructions from the employer regarding the manner, time, and place of work performance.

• Work in the name of the employer – the worker does not represent their own business interests.

• Work according to the employer's instructions – the performance is not a matter of the worker's free decision, but of management and control by the client.

• Personal performance of work by the employee for the employer – the worker cannot delegate the work to a third person without permission.

• Work performed at the employer's cost and responsibility – the employer bears responsibility for the result and for any damage to third parties.

• Work performed during working hours at the employer's workplace or at another agreed location.

If the relationship between your limited liability company (s.r.o.) and an installer or designer meets some or all of these characteristics, it is dependent work. When such work is not covered by an employment contract, an agreement to complete a job, or an agreement to perform work, it is considered illegal employment under the law, i.e., disguised employment.

Practical Signs of Disguised Employment for Installers and Designers

In practical inspections, the Labour Inspectorate looks for specific behaviours. For installers and designers in a manufacturing s.r.o., this typically looks like this:

Time constraints and work management – The installer arrives every day at 7:00 AM and leaves at 3:30 PM. They record their time in an attendance sheet alongside "ordinary" employees.

The design is not the result of a single project but a continuous output that the designer creates according to the project manager's instructions, contributes to meetings where they receive feedback and corrections. All this points to managed work with a fixed rhythm.

Place of performance – Both groups work in your company's offices and workshops. The installers receive keys, have assigned workstations, and use all the equipment (machines, software, safety equipment).

The designers sit in the office next to other employees, use a company computer, and software with licenses paid for by the s.r.o.

Part of the team – The installer and designer are integrated into the work process. They participate in teambuilding events, training, and meetings.

Their names appear in internal communications and on projects as part of the team, not as an external supplier.

Exclusivity – The installer works exclusively for your s.r.o., or is explicitly prohibited from working for competitors. Similarly, the designer dedicates their capacity primarily to you. It's not a Wednesday morning that they "rent out" to other clients.

Financial aspects – Both individuals receive a monthly invoice for an "hourly rate" or a "monthly flat fee," which in practice corresponds to the salary of an employee in this field. If the month is not at 100% capacity, the invoice is lower, but on average, they earn the same as an employee. They never charge for their own equipment costs, transport to the workplace, etc.

Responsibility – When an installer spoils a part or a designer creates material that is not correct, the s.r.o. bears the responsibility towards clients. It is not the installer's or designer's problem.

If they get injured at work, an ambulance is called, and the s.r.o. deals with reporting the accident.

Absence of individual business risk – The installer and designer are not playing on their own account. They are not building a portfolio, not getting business contracts, not exposed to competition.

Their "income" is a monthly invoice for a predefined capacity.

If several of these elements appear in your collaboration, it is a signal. Inspectors check exactly this – not the contractual designation, but the actual behaviour.

New: The Impact of the Transposition of the European Directive on Platform Work in 2026

During 2026, the Czech Republic will transpose the European Directive on improving working conditions in platform work (Directive (EU) 2024/2831). Although this directive is primarily intended for digital platforms (e.g., in the transport and delivery sectors), its transposition into the Czech legal system may bring important changes to the understanding and proving of dependent work, which may also affect other areas.

Its key element is the introduction of a rebuttable presumption of employment for persons performing work for a digital platform if certain indicators of control over the performance of work are met. These indicators may include, for example:

• setting the level of remuneration,

• supervising the performance of work,

• restricting the freedom to organise one's work or working hours,

• restricting the ability to establish business relationships with other entities,

• controlling the worker's appearance or behaviour.

What does this mean for you in practice? Although the directive primarily concerns platforms, Czech law will have to take into account the principles of assessing dependent work based on the degree of control.

This may lead to an even greater emphasis being placed on the actual degree of control and management by the client, even in traditional sectors. If you claim that your designers and installers are not "subordinate" – they work flexibly, have freedom in their methods, manage their own time – this will become an even more critical defence against a fine.

Risks and Penalties for Disguised Employment

Let's be specific. When the Labour Inspectorate discovers that an installer or designer is actually working under a disguised employment scheme, a series of penalties follows. Many of them are not only financial but also have long-term consequences for your company.

Fines and Prohibitions

For a legal entity or a self-employed individual (i.e., your s.r.o. or you as a self-employed entrepreneur hiring installers):

• Fine: a minimum of CZK 50,000, a maximum of CZK 10,000,000 – depending on the severity, scope, and number of affected persons (under Section 139a(1)(a) of the Employment Act, as effective from July 1, 2023).

• Prohibition of activity: up to 2 years (for example, a ban on construction or manufacturing activities, under Section 139a(2) of the Employment Act).

• Publication of the decision: Your name will be published on the SÚIP's official notice board for 1 year (under Section 139a(3) of the Employment Act).

• For the individual (the installer or designer on a business ID who performs illegal work): A fine of up to CZK 100,000 (under Section 139a(1)(b) of the Employment Act).

However, it should be mentioned that within the transposition of the Platform Work Directive and related discussions in the Czech Republic, it is being considered whether individuals (workers) should only be punished in cases of significant misconduct, and not automatically.

A much more aggressive approach is taken towards employers who order the work. The inspectorate understands that the worker is often in a disadvantaged position and finds it difficult to say "no".

Back-Assessment of Insurance Contributions and Taxes

A fine is just the beginning. If the Labour Inspectorate finds disguised employment, it is usually followed by a back-assessment of social and health insurance contributions for up to 3 years. This means the company will face:

• Unpaid employer contributions to social security (24.8% of the assessment base, for 2026). You can find the insurance rates on the website of the Czech Social Security Administration.

• Unpaid employer contributions to health insurance (9% of the assessment base, for 2026). You can find the insurance rates on the website of the General Health Insurance Company (VZP).

• Penalties and interest on late payments.

For a three-year period alone, the total amount for one installer or designer can be hundreds of thousands of crowns.

Tax and Legal Consequences

The Financial Administration of the Czech Republic may separately assess whether it constitutes tax evasion. If it concludes that you have unlawfully deducted costs or issued invoices without real economic substance, this can also be grounds for criminal proceedings for fraud.

The employee (i.e., the person who was formally self-employed) has the right to later claim so-called "retroactive benefits" – i.e., employee benefits they were deprived of by not having insurance paid. In practice, this means they can demand payment of sick pay they did not pay for, or even pension insurance.

How to Properly Structure Contractual Relationships – A Practical Guide

Now for the constructive part. How should you structure the contractual relationship with installers and designers in your s.r.o. to be legal and, at the same time, work well for you?

Step 1: Decide Whether It's an Employee or a Truly External Self-Employed Person

The first decision is – if you have these people long-term and their activity is part of your core business (production, assembly), the safest solution is to convert them to an employment relationship.

It's not cheaper, it has a number of administrative obligations, but you avoid disguised employment. Inspections are intensifying, so the "savings" on insurance contributions could come back to you in the form of high fines and back-assessments.

If you decide on a self-employed solution, it should really be an external supplier. This is a person who has multiple clients, who works under their own business ID, who bears business risk, and whom you can hire and dismiss flexibly.

Step 2: The Contract Must Be Very Specific About the RESULT, Not the PROCESS

Here is the crucial difference. Contracts with self-employed persons should define:

• What is being delivered – for example, "The contractor undertakes to assemble 50 units of complete assemblies of type X in technical quality according to standard Y, with a completion deadline of the 30th of any month."

• Do not confuse this with: "The contractor will be present in the workshop from 7:00 AM to 3:30 PM and will perform work under the direction of the workshop manager according to his instructions."

The second case is clear disguised employment. The first is exactly what you want – the result is defined, but the path to it is the business of the self-employed person.

Step 3: Let the Installer or Designer Have Visible Independence

In practice, this means:

• They work for multiple clients – or at least have the legal option to do so (the contract does not contain a non-compete clause or a ban on working for others).

• They work from a different location or flexibly – If it is technically possible (for example, a designer can work from home or their own office), let them do so.

• An alternative is for them to have a lease agreement for a space with you, rather than "working in the s.r.o.'s office."

• They do not follow detailed instructions, but deliver results – You should not say: "On Monday, you will incorporate this, on Tuesday that." You should say: "By March 31st, you will deliver the design for these five products."

• They do not have equipment purchased for them – If they must use your equipment, it should be agreed in the contract as a "lease of equipment service," not as a normal part of the performance.

Step 4: Not Attendance, but Evidence of Performance

The installer should not be recorded in an attendance system alongside employees. The correct way would be for them to:

• Keep their own time – and invoice you accordingly (e.g., "30 hours in April at CZK 600/hour").

• Be responsible for meeting the contractual deadline themselves – if they don't make it, it's a matter between you, not a matter for a manager's reprimand.

• Not be registered in employee systems – if you have an attendance system, they should not appear in it. The equivalent is an overview of invoices for individual months.

Step 5: Benefits and Insurance – Be Careful

Providing benefits in itself does not have to be proof of employment. However:

• If you provide benefits, explain them in a written agreement. For example: "The self-employed person may insure their liability at their own expense. If they do so, the s.r.o. will reimburse them XXX CZK per year as a contribution to the insurance premium."

• Benefits should not be called "employee" benefits – this sends the wrong signal to an inspector.

• Provide them to all self-employed persons equally, so that it looks like a business custom, not like "disguised employment."

Step 6: Equipment and Work Tools

If the installer is tied to your workshop or the designer to your office, you should:

• Arrange a lease of space within the contract – For example: "The self-employed person has the right to use workstation XXX in the office room free of charge from 9:00 AM to 5:00 PM on working days for the purpose of creating the design."

• Specify the equipment clearly – What you provide to the self-employed person, what they must provide for themselves.

• Do not register the self-employed person as an employee in the system – If you have access cards, the self-employed person should have their own, marked as "external partner," not "employee."

What is the Impact of the Intensified Focus on Illegal Work

In 2026, the State Labour Inspection Office has launched a systematic inspection program focused specifically on illegal employment. According to the plan, inspections will be aimed at:

• Construction, manufacturing, and services – precisely the sectors where installers and designers are most common.

• Employment of foreigners and posting of workers – here, inspections will focus not only on disguised employment of Czechs but also on the work of foreigners without proper permits.

• Deadlines and notification duties – the inspectorate will be very strict about whether labour-law relationships are properly reported and whether documents are available at the workplace.

Inspectors have the right to take photographic documentation and audiovisual recordings if it is necessary to fulfill the tasks of the inspection (under Section 6(1)(h) of the Labour Inspection Act). This means that an inspection can be very thorough – inspectors are interested in what the workers are saying and what is actually happening.

The Financial Administration of the Czech Republic, in turn, is focusing more intensive efforts on the tax aspects – i.e., whether invoices were issued for work that should have been coded as employment, and whether this inadvertently contributed to tax evasion.

What does this mean for your s.r.o.? You must expect that in the next 24 months, the probability that an inspection will affect you is quite high, especially if you operate in manufacturing or construction. You cannot rely on the fact that "everyone is doing it."

Link to Work Rules and Internal Documentation

If you decide that you will, after all, have your installers on an internal employment contract, you should have high-quality work rules that clearly explain:

• Working hours and their flexibility.

• Obligations in the area of occupational health and safety.

• Remuneration, bonuses, penalties.

• Rules for overtime, holidays, sick leave.

• Procedure for termination of employment.

It is also extremely important to keep proper records of working time so that they are conclusive. If an inspection checks them and finds that they do not differ from reality, then you have clear proof that the workers are employed.

If they differ and a worker listed in the "core group" never appears in the attendance records, the inspection will know that it is a case of disguised employment. The lawyers at ARROWS law firm can ensure a review of your work rules and verify that they comply with current legislation in the field of labour law.

Specifics for the Construction and Manufacturing Industries – What Else You Must Address

In the construction and manufacturing sectors, there are additional obligations:

Occupational Health and Safety (OHS)

Whether they are employees or self-employed persons, if they work at your workplace, you must ensure safe working conditions and coordinate OHS. This means that:

• Training – persons must be familiarized with the risks and OHS rules at the workplace.

• Personal protective equipment – must be provided and used, but for self-employed persons, it is crucial that they use it at their own responsibility, or provide it themselves. The provision of PPE by the client can be another sign of dependency.

• Inspection and maintenance of equipment – all machines and tools available at the workplace must be in good working order.

• Accident logbook – if something happens at the workplace, it must be recorded.

• Medical check-ups – in some cases, they are mandatory even for self-employed persons if they are exposed to risk factors.

OHS inspectors come just as often as labour inspectors and combine their inspections. If they find safety deficiencies, this is added to the fines for disguised employment.

Insurance and Liability

If you have a self-employed installer and they get injured while working at your workplace, your liability for any health damage will be assessed according to the general principles of liability for damages, not according to the regime of objective employer liability for work-related accidents.

For their own protection, a self-employed person should take out liability insurance for damage caused by their activities. If the self-employed person does not have this insurance, it is a sign that they are not transferring business risk, which can be another argument for the inspection.

How to proceed if an inspection has already taken place

If an inspection has already affected you, the case is not lost. Here is the usual procedure:

• The inspection conducts a check – the inspector will write down their findings and give you time to respond.

• You have the right to respond – within 30 days (often extendable), you can submit a written objection and your arguments.

• The inspectorate issues a decision – if it stands by its findings, it will issue a decision on the offence and set a fine.

• You can appeal – you have the right to file an appeal within 30 days to the superior inspectorate.

• Court – if necessary, the matter may end up in an administrative court.

At any of these stages, it is critical to have legal representation. The lawyers at ARROWS law firm have experience with the construction and manufacturing industries and know what arguments inspectors listen to. They can:

• Analyze the inspection's findings and identify weak points in their position.

• Prepare an expert statement that will help you.

• Lead negotiations with inspectors and discuss the possibility of a settlement or a reduction of the fine.

• Represent you in administrative court if it comes to that.

Without legal support, you risk that your statement will be poorly formulated and the inspection will surprise you with an argument for which you have not prepared an answer.

Final Summary

Disguised employment is not just a legal abstraction. It is a reality that is intensively monitored by the State Labour Inspection Office and also the financial administration. If you have installers or designers on their own business ID who work long-term for your s.r.o., are on your premises, receive instructions, and have no opportunity to work elsewhere, it is highly likely a case of disguised employment.

The consequences are not just a fine – it is a back-assessment of insurance contributions for three years, a two-year ban on activities, the publication of your company on the internet as a lawbreaker, and reputational damage. The worst part is that it is becoming discoverable.

You have three paths:

• Legalize the relationship – take these people on as employees. It is more expensive, but it is safe.

• Fundamentally change the contractual relationship – truly let the self-employed person work independently, for their own result, for multiple clients. This is possible, but it requires a revision of your processes.

• Get help from experts – the lawyers at ARROWS law firm can conduct a legal audit of your practice and propose a solution that would be most optimal for your situation.

The sooner you act, the better. Inspections are coming, and if they affect you and you are in violation, it will be too late. Do not hesitate and contact consultation@arws.cz – the lawyers at ARROWS law firm are ready to help you with this issue, whether it's an audit, contract preparation, or representation during an inspection.