What does it mean to work on an “IČO”?

Employer costs per employee

Employees are very expensive. In order to pay an employee a net wage of CZK 20,000, an employer must pay approximately CZK 5,000 more in gross wages. On top of this, there are health and social security contributions that the employer pays on top of the gross wage. The total wage costs for a given employee then amount to almost CZK 35 000.

Employee vs self-employed

In practice, working under an IČO means that you set up a trade and become self-employed. If the employer hires the same person as a sole trader, i.e. as a self-employed person, he or she will not have to pay any state contributions and the net income of the person will increase. Nevertheless, it cannot be said unequivocally that the self-employed person’s status is more advantageous than that of an employee. In addition to some disadvantages in the area of social security, it should be pointed out in particular that the Labour Code does not protect self-employed workers and does not guarantee them, for example, a minimum wage or protection in case their employer wants to part with them. Setting up a trade brings greater freedom but also greater responsibility, including the obligation to pay insurance and taxes. Self-employed workers have to deal with tax returns and health and social security contributions themselves, so it also means a significant administrative burden. Or extra costs in the form of an accountant’s fee.

It’s mainly worth it for the employer

From the employer’s point of view, it is therefore very advantageous to make the employee self-employed. However, the law does not always allow such a change. The principle is that employees must always perform so-called dependent work in an employment relationship and not as a sole trader. In such a case, concluding an employment contract or one of the agreements on work performed outside the employment relationship will be necessary. In the event of a breach of this rule, not only the employer but also the employee is liable to a fine.

What is dependent work

What is meant by dependent work? It should be work where the employee is under the regular control of the employer, who gives specific instructions on how the work should be performed. He or she sets the hours and place of work and bears the cost and responsibility for the outcome of the employee’s actions.

Tip: How to set up a relationship with a service provider? Does signing a non-disclosure agreement (NDA) imply a lack of trust towards the other party? And what form of cooperation with a freelancer should be chosen so that it is not a so-called “shvarc system”? In our video, we focus on these and other aspects of the relationship between entrepreneurs and suppliers in the form of freelancers or smaller companies.

Self-employed workers can be hired for a one-off service

The opposite of dependent work would be a situation where the employer orders certain services from the self-employed worker by articulating what result it expects, but leaves the details (the method of performance, the time and place where the work will be performed, etc.) to its contractor, who would fulfill its obligation at its own expense and responsibility. Example: a company orders a graphic design of advertising leaflets from a self-employed person.

Illegal employment

In real life, it is very difficult to assess whether a particular activity falls within the definition of dependent work or not. There have been many cases where entrepreneurs have tried to make tradesmen out of workers who it was clear were in fact doing dependent work – after one such entrepreneur, this system of illegal employment is now called the ‘shvarcsystem’.

Reject the employer’s idea

Particularly in the case of employees who were previously employed and are now to be newly converted to the self-employed scheme, there is a relatively high risk that the activity they are performing will be considered dependent work and thus the newly introduced scheme will be in breach of the law.

Incidentally, in 2017, even the CJEU ruled that under such a “shvarcsystem”, the relationship may be retrospectively assessed as an employment relationship, which may have unpleasant consequences for employers.

Not worth the risk

Even if this change is legal, you need to consider the risks involved: in particular, that your employer will one day stop giving you contracts and you will find yourself out of work without any right to notice and severance pay. We would therefore not recommend the procedure proposed by your employer. If you are thinking of working as an IČO, it is a good idea to first find out what the trade entails in terms of legislation and practice.

Summary

Working on an IČO may look advantageous at first glance – the net income is usually higher and the employer saves on tax. In reality, however, such an arrangement often hides risks. If you perform dependent work (e.g. you have fixed working hours, a fixed place of work or work under supervision), you must have an employment relationship. Switching to self-employed status, i.e. setting up a trade and working “for yourself”, means not only losing the protection of the Labour Code, but also a higher administrative burden and legal uncertainty. In addition, you need to know the basic concepts such as trade and what is an IČO. Illegal employment (the so-called “shvarcsystem”) can have serious consequences for both the employer and you. It therefore pays to be cautious and consider all the terms of cooperation carefully.