Schwarz System under Scrutiny Again: Supreme Administrative Court Confirms Strict Approach
The Supreme Administrative Court of the Czech Republic (hereinafter “SAC”) has once again taken a firm stance against illegal freelance arrangements that, in reality, meet the criteria of an employment relationship. In its recent ruling (8 Ads 65/2024-53), the Court made it clear: contractual form is not enough—what matters is the actual substance of the working relationship.
The case of HENNLICH, s.r.o., which was fined CZK 445,000 for engaging two workers on an invoicing basis, highlights the significant risks to which companies face when contractual arrangements do not reflect the real nature of cooperation.
Indicators of Employment Cannot Be Disguised
According to the Supreme Administrative Court (SAC), the decisive factor is whether the characteristics of dependent work, as defined by the Labor Code, are fulfilled. In its ruling, the court emphasized that dependent work is primarily characterized by the personal performance of tasks in a relationship of subordination to the employer, carried out on behalf of the employer and according to his instructions—rather than by what is stated in the contract. Additional indicators of dependent work include the employee’s economic dependence on the employer and integration into the employer’s organizational structure. Regular payments, use of company facilities, long-term cooperation, and the full integration of workers into the company’s internal operations played a key role in assessing the actual situation.
Ambivalent Nature Activities and Outsourcing Are Not Automatic Defences
The company tried to argue that the tasks in question were of an “ambivalent nature”—i.e., that they could legally be performed either under an employment contract or as independent business activities. However, the SAC reiterated that if the real conditions reflect the characteristics of employment, contractual arrangements do not prevail.
The Court also dismissed the argument of outsourcing operational tasks (such as dispatching), stating that such activities typically require an employment relationship, not an external commercial agreement.
Stricter Oversight of the Labour Market Continues
The Court further confirmed that protecting the labour market from disguised employment (Schwarz System) is a legitimate restriction of the freedom to conduct business. This ruling illustrates that both labour inspectors and the courts will continue to closely examine the real conditions under which work is performed.
Our Recommendation: Don’t Underestimate the Risks—Consult Experts
The Schwarz System carries significant risks for companies—not only financial penalties, but also reputational damage and tax implications. Even well-intentioned cooperation can be deemed illegal if structured incorrectly. We strongly recommend companies regularly review their contractual relationships with the individuals from a legal perspective.
If you are not sure whether your company’s contractual arrangements are correctly structured, do not hesitate to contact our experts. We can help you assess the risks and align your business practices with current case law and legal requirements.
Authors:
Gabriela Ivanco, Tax Department Manager
Anna Klímová, Newsletter Editor
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