You may know it – you get an interesting job offer, everything looks great, but then comes the question, “You have a trade license, right?” While working on a trade license is common and legal in many industries, sometimes there is something else behind it – the shvarcsystem. This type of employment is illegal in the Czech Republic and can be a real pain in the ass for you and your “employer”. How to spot and avoid the shvarcsystem? Find out in this article.
The shvarcsystem means that instead of signing a regular employment contract with you, the company forces you to work as a self-employed person. At first glance, this may look advantageous – you get a higher wage, you pay less tax and you seemingly have “more freedom”. But in reality, the employer is circumventing the law, avoiding paying social security and health insurance and absolving themselves of liability.
For you, this means:
And most importantly – if you get into a dispute, you have no possibility to defend yourself as a regular employee. So beware, the shvarcsystem is a risk for you, not an advantage.
As Seznam Zpravy reports, the shvarcsystem got its name from a former entrepreneur Miroslav Švarc, who had his own construction company after the revolution and employed workers on the shvarcsystem. In 1992, the state explicitly banned his shvarcsystem business and prosecuted his company with severe fines.
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The shvarcsystem is an illegal way of performing work, where the working relationship between the employer and the worker, although formally appearing as a relationship between two business entities – i.e. as a cooperation between a company or an entrepreneur and a freelancer, in reality has the character of an employment relationship.
In the Czech Republic, the shvarcsystem is prohibited, and although it has no separate legal interpretation, several laws are related to it. For example, the Employment Act states that an employer may not replace an employment relationship with another form of cooperation if it fulfils the characteristics of dependent work. The Labour Code defines dependent work and the conditions of the employment relationship that are not fulfilled in the case of a shvarcsystem. Thanks to the Labour Inspection Act, the Inspectorate can control and fine illegal employment. And the Income Tax Act addresses the tax implications of the shvarcsystem, such as the assessment of levies.
Under these laws, an employee and employer must have an employment relationship based on an employment contract if the employer determines the place, time and manner of work. If you don’t determine when and how you work, you are not self-employed, but an employee – and your employer is breaking the law with the quarantine system.
It should be noted, however, that some companies use freelance work quite legally, for example by hiring external specialists for project work. The difference, however, lies in the way they approach their co-workers. Because as soon as a company hires you for a long term work on a trade certificate, but treats you as a regular employee, you should be careful and make sure that you are not part of a shvarcsystem.
Ask yourself the following questions:
If you answered yes to most of these questions, then you are probably not self-employed, but an illegal employee. Your “employer” is committing an offence. You should therefore consider whether you want to continue to be part of this illegal employment process, where you do not have the rights of a regular employee, while being restricted in your freedom to make decisions and function as a person working under a trade license.
Tip: Can’t decide whether to choose a trade or a job and would prefer to have both? No problem, it’s possible. In our article you will find out how to proceed in such a case.
A shvarcsystem is not just a small offence for which a company gets a warning. The penalties are harsh. And it’s not just the ’employer’ who faces them, but the worker themselves.
Fines for companies. Under the Employment Act, this fine can be up to CZK 10 million. The minimum fine for a shvarcsystem is around CZK 50,000 for minor offences. In addition to these fines, the employer is also liable to be charged for unpaid social security and health insurance contributions and may also be liable to penalties for late payment. The scarcity system can therefore be easily liquidated.
Penalties for the worker: even a worker who becomes part of a shvarcsystem is not safe. For that reason alone, he should be careful not to participate in the scheme. He can face a fine of up to 100,000 crowns from the Labour Inspectorate. In addition to this, he may also be liable for additional health and social insurance, because if the authorities decide that it was not a business, but an employment, they may demand that the self-employed person pay the difference between the contributions paid and what the employee would have paid.
Inspections can be carried out in companies by labour inspectorates, tax authorities andthe Czech Social Security Administration. In addition, a company found to be operating a shvarcsystem may lose the possibility of receiving subsidies and public contracts, and the tax office may levy income tax on it, as the worker’s income will be considered as wages at that point.
If a company offers you a job on a trade licence but you still feel it is a shvarcsystem, beware and ask about the conditions. If the company won’t allow you to work for other clients or wants to set your working hours, this is a bad sign. In this case, you should insist on an employment contract.
If you are unsure about anything, you can use our legal advice service or contact the National Labour Inspectorate. And definitely don’t be afraid to refuse an offer, because if the employer is only offering you a shvarcsystem, it might be better to look elsewhere after all. Don’t forget that you could also face a fine.
Tip: Employment through an employment agency also brings with it a lot of questions and risks if the system is not set up according to the right rules. Find out what the agency’s obligations are and what the employee is entitled to.
A quasi-system is an illegal form of employment where a company forces a worker to work as a self-employed person, even though the work meets the characteristics of a traditional employment relationship. In doing so, the employer circumvents the law, does not pay social security and health insurance for the worker and absolves itself of liability. For the worker, this means no entitlement to holiday, sick pay or severance pay, a weaker legal position and the risk of additional tax payments. The shvarcsystem is banned in the Czech Republic, with fines of up to CZK 10 million for the company and CZK 100,000 for the worker. It is controlled by labour inspectorates and tax authorities. If your cooperation has the characteristics of an employment relationship but you are self-employed, it is probably a shvarcsystem. In this case, it is advisable to insist on an employment contract or contact the State Labour Inspection Office.
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Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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