Disguised employment

What it means

The Švarc system is the name for a situation in which a person does work for a company that has the features of employment but, instead of an employment contract, works as a self-employed contractor on invoice. The name comes from a businessman who promoted the model on a mass scale in the 1990s.

What decides are the features of dependent work: the work is done personally, on the company’s instructions, during its working hours, at its premises, with its tools and at its responsibility, with the person working long-term for a single client. If these features are present, the title of the contract does not matter.

For the company the Švarc system is cheaper, as it pays no employer contributions and does not deal with leave or notice periods. The law, however, treats such work as illegal employment where it is dependent work outside an employment relationship.

How it works in practice

When clients work with self-employed contractors, we assess the real substance of the relationship. A contract for work or services should describe an outcome, not a job; the contractor should have several clients, their own tools and freedom in how and when the work is done.

If the arrangement clearly has the features of dependent work, we recommend switching to employment or a work agreement. We compare the costs of both options so that the client can see that, once risk is factored in, the difference is often smaller than it seems.

In a labour inspectorate check, inspectors look at workers’ statements, attendance records, emails with instructions and whether the contractor invoices anyone else. The company should be able to answer these questions with documents.

What to watch out for

The consequences hit both sides. The company is fined for illegal employment and may have to pay contributions; the contractor is fined for illegal work. The company is also placed on a list that excludes it from grants and public procurement for a period.

The Švarc system is not good for the worker either. They have no right to paid leave, sick pay, severance or protection against dismissal. In a dispute they may have the relationship recognised as employment, and the company then faces claims going back in time.