The “Švarc System” vs. Dependent Employment as of 1 January 2026 – Employers and Sole Traders, Beware of Legislative Changes, Significant Fines and Other Risks
As of 1 January 2026, Slovak legislation tightens the rules and strengthens enforcement mechanisms aimed at detecting illegal dependent work performed through fictitious sole trader arrangements (the so-called Švarc system).
A cooperation model where a sole trader (self-employed individual) performs “dependent” activities for a business entity is therefore becoming a significant legal risk.
The amendment to legislation governing labour inspection and illegal employment responds to the long-standing and widespread practice of the Švarc system and fictitious sole trader arrangements in Slovakia. The sanctions regime for illegal employment is being tightened, and in practice an increased focus on inspections can be expected—particularly in sectors where this model is more common (e.g. construction, IT, consulting services, etc.).
For companies as well as individuals, this means higher legal and financial exposure. Contractual and factual arrangements that may previously have “passed” scrutiny are likely to be assessed much more strictly and with considerably more serious consequences.
How Should Dependent Work Be Assessed After the Amendment to the Labour Code? Where Is the Line Between a Sole Trader and an Employee?
The definition of dependent work has changed as of 1 January 2026. The amendment to the Labour Code removed the criterion of “work performed during working hours determined by the employer.”
As a result, flexible working time arrangements—or the argument that a sole trader “determines their own working hours”—no longer automatically exclude the existence of dependent work.
At first glance, this may appear to be a minor change. In reality, the opposite is true. It is a clear signal that the decisive factor will be the actual substance of the cooperation.
The distinction between a sole trader and an employee is not determined by the title of the contract, but by the real manner in which the work is performed. The risk of a Švarc system arrangement arises where the cooperation appears entrepreneurial “on paper,” but in practice the sole trader functions as an internal employee—i.e. is managed by a superior, integrated into the company’s team, and performs work personally within a relationship of subordination.
In such cases, the supervisory authority may classify the relationship as illegal employment, regardless of the contractual label or invoicing model.
Why Is Cooperation with Sole Traders So Attractive—and Where Does the Greatest Risk Lie?
In practice, cooperation with sole traders is attractive to both parties primarily because it offers greater flexibility and often lower overall costs compared to standard employment relationships.
At the same time, these very “advantages” may push the arrangement into the risk zone of the Švarc system—i.e. a situation where the relationship is formally structured as a business cooperation but is in reality performed as dependent work.
The most common reasons for using commercial (business-to-business) cooperation models include:
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Flexibility in setting up and terminating the cooperation – contractual freedom is significantly broader than in employment relationships.
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Lower administrative burden – no employment-law agenda arises, nor statutory entitlements such as paid leave or obstacles at work.
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Cost predictability and efficiency – remuneration is typically invoiced as a single amount representing a direct business cost, whereas employment entails higher overall costs due to social security contributions and statutory benefits.
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Different liability regime – entrepreneurs are primarily subject to contractual (commercial law) liability under agreed terms, rather than the employee liability regime under the Labour Code.
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Ability to work for multiple clients – sole traders may provide services to multiple customers and develop their own business activities.
What Are the Consequences for a Company if Illegal Employment Is Detected?
The detection of illegal employment (including the Švarc system) does not involve only one supervisory authority. In practice, it may trigger combined actions by several institutions, in particular:
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the Labour Inspectorate,
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the Social Insurance Agency,
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health insurance companies, and
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the tax authorities.
If the Labour Inspectorate determines that an individual formally registered as a sole trader is in fact performing dependent work, the outcome is typically an inspection report. This report often serves as a basis for subsequent proceedings and may initiate a chain of official measures.
Where illegal employment is established, the employer faces substantial sanctions. The Labour Inspectorate may impose a fine ranging from EUR 4,000 to EUR 200,000 (as of 1 January 2026, the minimum fine has increased from EUR 2,000 to EUR 4,000), depending on the severity and extent of the breach.
Such a finding also results in entry into the register of illegal employers, which carries significant reputational and practical consequences. In addition, there is typically an obligation to pay outstanding social contributions and taxes.
Beyond financial penalties, further consequences may include:
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inclusion in public registers,
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restrictions in public procurement procedures,
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negative impact on eligibility for grants or public funding, including EU funds.
In the most serious cases—particularly where findings involve systematic circumvention of obligations or substantial underpayment of taxes or social contributions—criminal liability cannot be excluded.
Are You Concerned About These Changes and Want to Ensure Your Sole Trader Arrangements Are Properly Structured?
A thorough review of existing relationships, assessment of their legal nature, and proper structuring of contractual documentation can significantly reduce the risk of reclassification and help avoid unpleasant surprises during inspections.
We would be pleased to prepare a comprehensive assessment of your contractual relationships and cooperation models (including contracts, processes, management and communication structures), identify potential risks, and provide concrete recommendations to ensure compliance with applicable legislation—ideally before any inspection takes place.
Please feel free to contact us. We will be happy to assist you.