Contractor vs Employee in 2026: Avoiding Tax Risks in Czechia

What distinguishes a contractor from an employee: the legal reality

It may seem simple: you sign a contract for work or a mandate agreement with a contractor and that’s it. In practice, however, it is more complicated. Public authorities do not focus only on the title of the contract, but look for the factual characteristics of so-called dependent work.

Under the Czech Labour Code and established case law of the Supreme Administrative Court, the decisive factors are:

• Personal subordination: Does the client decide on the time, place and manner of work and issue binding instructions, or does the contractor manage the work independently?
• Personal performance of work: Must the work be performed by a specific individual, or can the contractor appoint a substitute?
• Performance of work in the employer’s name: Does the person present themselves externally as part of your company, or do they act in their own name?
• Material and social background: Who provides equipment, training and benefits?
• Remuneration: Is the remuneration fixed based on time, or based on the result?
• Organisational integration: Is the person integrated into your company (do they have a permanent workstation, are they in the attendance system)?

SÚIP inspectors examine precisely these characteristics during inspections, and if you have a “contractor” in your company who sits in the office with other employees and uses your hardware, there is a high risk that the inspectorate will conclude that there is a concealed employment relationship.

When it constitutes disguised employment and what it means for you

Disguised employment, i.e. the so-called švarcsystém, is a form of illegal work under the Czech Employment Act. If the Labour Inspectorate, the Czech Social Security Administration (ČSSZ) or the tax authority proves that you in fact employed an individual as a self-employed person (IČO), the consequences are severe.

The fine for enabling illegal work can reach up to CZK 10 million for a legal entity, and a fine may also be imposed on the “employee” themselves.

ČSSZ and the health insurance company will assess outstanding insurance contributions that should have been paid by both the employer and the employee, retroactively. In addition, penalties accrue, which can grow to enormous amounts over several years—so in practice you will pay the contributions you tried to save, plus a sanction.

The tax authority will not recognise invoices from a self-employed person as a tax-deductible expense because it was a disguised arrangement, and will assess additional corporate income tax as well as wage tax.

The fine is also recorded in the register, which creates reputational risk and the possibility of exclusion from public tenders. Banks may tighten your company’s lending terms due to such records.

Specific typical situations: where mistakes are most common

Situation 1: Accountant/Administration on an IČO

A company hires a person on invoices who handles administration 5 days a week, 8 hours a day, in the company’s office, on a company PC. In practice, they follow the managing director’s instructions. Authorities classify this as disguised employment without hesitation. Fines in such cases range from hundreds of thousands to millions of Czech crowns.

Situation 2: IT specialist (“body-shopping”)

A company hires a developer who physically works within the client’s team, attends daily stand-ups and reports to the client’s team leader, which is a highly risky model. If they have no autonomy and merely “rent out” their labour without being covered by a temporary employment agency, this is a high-risk situation.

Situation 3: Independent advisor with a long-term mandate

A consultant works for a client but has their own office and equipment, sets their own working time, invoices for deliverables and is responsible for the result. This model usually withstands scrutiny by courts and the inspectorate, provided there is no micromanagement by the client.

How to structure contractual relationships with genuine contractors without risk

If you want to cooperate legitimately with external experts, you need to set the terms so that they reflect a commercial relationship rather than employment law.

Choose the right type of contract, for example a contract for work for a specific deliverable or a mandate agreement for handling matters. An innominate commercial cooperation agreement is also possible, but it must include features of a commercial relationship, such as liability for defects or contractual penalties.

Ensure genuine independence in practice, meaning the contractor determines the time and place of performance and uses their own equipment. The contractor should bear the risk for the result, and communication should primarily be about the assignment and handover, not ongoing management.

Document the contractual relationship explicitly; the contract should include a clear definition of the deliverables and remuneration tied to the outcome or a fixed fee. Liability for damage under the Czech Civil Code is also important, as is the possibility of substitution—i.e., that the supplier may use subcontractors.

A self-employed contractor (IČO) does not log into the attendance system, does not take vacation, and is not entitled to employee benefits such as meal vouchers or Multisport cards. For inspection authorities, these benefits are a clear signal of disguised employment.

The attorneys of ARROWS, a Prague-based law firm, can help you prepare a so-called Master Service Agreement that will legally support independence.

Tax and contribution aspects

The distinction between an employee and a self-employed person (OSVČ) has a fundamental impact on labour costs. Total social security and health insurance contributions paid by the employer for an employee amount to 33.8% of the gross salary, and it is also necessary to add the costs of vacation and sick leave.

For a supplier (OSVČ), the situation is different because the supplier handles contributions themselves and you pay only the invoiced amount. If the supplier is a VAT payer, you as a company can claim a VAT deduction, which is not possible with wages.

If an authority reclassifies the relationship as employment, it will recover from you as the employer the contributions plus the portion that should have been paid by the employee, retroactively including penalties.

What are the legal alternatives

If you find that your model is risky, you have several options. The first option is part-time employment if you do not need the person full-time, which is a safe and transparent solution.

Change the conditions by abolishing mandatory attendance, taking away the company laptop, and defining the work by tasks rather than by time. This creates a genuinely external relationship (outsourcing), where you let the supplier work independently and without direct management.

Another option is agency employment, where you can use the services of a temporary employment agency that employs the worker and assigns them to you. You pay an invoice to the agency, which is more expensive, but it transfers the employment-law agenda and risks to the agency.

The attorneys of ARROWS, a Prague-based law firm, can assess your situation and propose a model that will be legal and economically sustainable.

How to proceed if an inspection is threatened or already underway

Consult the situation with an attorney immediately: If you receive a notice of the commencement of an inspection, do not provide any statements without consulting a lawyer and have the ARROWS attorneys take over representation.

Map the real state of your documentation. For a successful defence, you (and your attorney) must know exactly what is contained in contracts, invoices, and ordinary email communication. A frequent weak point is that managers unintentionally assign tasks to external contractors in emails as if they were subordinates.

In administrative proceedings, deadlines and the burden of proof matter. Properly filed objections to the inspection report can overturn the outcome of the inspection or significantly reduce the fine.

Final summary

The difference between an employee and a supplier is clearly defined by law. If you use external experts in a way that meets the characteristics of dependent work, you expose yourself to the risk of crippling fines.

A proper solution exists and lies in consistently separating commercial cooperation from an employment relationship, as well as in setting appropriate practice.

The attorneys of ARROWS, a Prague-based law firm, handle situations where companies are in the risk zone, help you set up contracts, and represent you in the event of an inspection.

ARROWS’ professional liability insurance up to CZK 400,000,000 enables us to provide maximum security to our clients when dealing with complex legal issues. Contact the ARROWS attorneys via consultation@arws.cz

Read also:

• Flexible Employment in the Czech Republic: Legal Pitfalls and Compliance Risks
• Agency Employment in the Czech Republic: Training and 2026 Legal Risks
• Who Is Really Liable in the Czech Republic When the Company Gets Fined: The Firm or the CEO?
• Can I Be Personally Liable as a Director of a Czech Company?
• Employment Law Training in Manufacturing: Czech 2026 Obligations and Risks