The ‘Švarc’ scheme in the IT sector: a new ruling from the Czech Republic serves as a warning to Slovak companies too

The Financial Administration has been focusing on uncovering fictitious self-employments for several years, but in the IT sector, proving their existence has been more difficult due to the nature of the work. That could change now. This is suggested by a ruling from the Supreme Administrative Court of the Czech Republic.

The Czech court ruled unequivocally: the IT workers in question were fictitious sole traders 

The Supreme Administrative Court of the Czech Republic examined a company’s collaboration with three programmers who formally operated as self-employed individuals (SZČO). This is a common model of collaboration in Slovakia too, where workers in the IT sector do not carry out their gainful activity under an employment contract but as self-employed individuals. Such an arrangement may be legitimate in practice if it genuinely constitutes self-employment. However, a problem arises when a relationship that is formally classified as a commercial one actually bears the hallmarks of dependent employment. This phenomenon, often referred to as ‘fictitious self-employment’ or the so-called ‘Švarc system’, poses a risk not only to public finances and fair competition, but also to the workers themselves, who may be deprived of the protection afforded by labour law. 

The court concluded that, in reality, rather than business activity, this constituted the performance of dependent work outside an employment relationship. The judgement of the Czech court of 16 March 2026 (case no. 7 Ads 52/2025-27) thus suggests that even the IT sector is not beyond the reach of regulatory controls. 

The facts of the case 

The company collaborated with three programmers (self-employed individuals) on the basis of commercial contracts. The programmers issued invoices to the company for services rendered, were paid on an hourly basis, recorded the hours worked and, in accordance with the contracts, were responsible for their deliverables. The company argued that this constituted a legitimate business collaboration between entrepreneurs. It emphasized that the programmers acted as independent contractors, invoiced for their services, and were not formally subjected to the employment regime. However, the administrative authorities concluded that the actual nature of the collaboration met the criteria for dependent employment. The local labour inspectorate therefore found the company guilty of an offence under Section 140(1)(c) of the Czech Employment Act, as it had enabled three individuals to carry out illegal work. 

When assessing whether a business is fictitious or not, the decisive factor is the actual nature of the relationship, not its formal designation (i.e. substance over form): 

• One of the key conclusions of the judgment is the confirmation of the principle that, when assessing the ‘Švarc system’, the actual substance of the cooperation is decisive, not its formal legal designation. 

• The mere fact that the programmers had concluded commercial contracts, issued invoices or opted for the self-employment regime was, according to the court, not decisive. If the actual conditions of the collaboration fulfil the characteristics of dependent employment, such work must be carried out within an employment relationship, unless specific regulations provide otherwise. 

• The evidence revealed that there was no difference between the conditions for employees and those for self-employed persons, with the exception of invoicing. 

• The court also emphasised that if the administrative authorities demonstrate that the characteristics of dependent employment are met, the company cannot successfully invoke autonomy of will or freedom of contract. 

In reaching its decision, the court also assessed economic dependence in the context of all the circumstances. The key arguments leading to the judgment were as follows: 

• The programmers worked for the company on a long-term basis, to an extent corresponding to full-time employment, for approximately eight hours a day. They recorded their work in an internal system, followed the company’s ongoing instructions and had no realistic opportunity to use their working capacity for other clients. Furthermore, they could not refuse assignments (refusal was only possible if the company failed to pay them) and their income from the company constituted their main source of income. 

• According to the court, these facts, combined with other indicators of cooperation, were sufficient to conclude that the programmers were not, in reality, commercially autonomous in their relationship with the company. 

A significant conclusion of the judgement was that the voluntary choice of the self-employed status is not decisive in assessing whether a particular case constitutes genuine self-employment. The voluntary choice of self-employed status does not in itself rule out the existence of illegal employment. The fact that the programmers chose this status 

because it was more economically advantageous for them, this does not automatically mean that they were self-employed. The decisive factor is whether they had genuine entrepreneurial autonomy, or whether they were in fact carrying out work under conditions typical of employees. And this was not the case here. 

The judgement states that individual indicators must always be assessed holistically. The Supreme Administrative Court emphasised that none of the individual circumstances need, on their own, to prove dependent employment. Hourly billing, time recording, working from home, flexible working hours or contractual responsibility for deliverables do not necessarily mean the ‘Švarc system’. The decisive factor is the overall picture of the collaboration. If these features are accompanied by others typical of dependent employment, the supervisory authorities are highly likely to conclude that the arrangement constitutes a fictitious business. 

In the case under consideration, hourly invoicing was significant particularly in conjunction with other characteristics, such as the personal performance of work, the long-term nature of the collaboration, the performance of work in accordance with the company’s instructions, time recording in an internal system, integration into the company’s teams, working from home in a manner comparable to that of employees, the inability to refuse assignments, and the economic dependence of the programmers. 

Practical significance of the judgment 

The judgment of the Supreme Administrative Court of the Czech Republic confirms that, when assessing fictitious self-employment, it is not the formal structure of the contractual relationship itself that is decisive, but how it actually functions in practice. The IT sector is no exception in this regard. If cooperation with a self-employed person exhibits characteristics typical of an employment relationship, a company cannot rely solely on the existence of invoicing, a commercial contract or the designation of the cooperation as a business arrangement. Every company should therefore critically assess such contractual relationships and consider converting them into employment relationships. Otherwise, it risks a fine for illegal employment and the imposition of additional income tax advances.