The “Švarc” System in Slovakia: When Can a Self-Employed Person Truly Be Considered a Contractor?

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The Švarc system is currently one of the topics causing growing uncertainty in the business community. Peter Varga and Tomáš Demo therefore addressed it in the latest episode of Highgate Talks. This is also the fourth podcast in a series through which we are gradually exploring the topics of the November conference , “Why and How to Stay in Slovakia?”

At Highgate Group, we have long been addressing the issue of the “Švarc system”—from legal and tax perspectives, as well as in terms of how companies operate in practice. In fact, real-world experience shows that the simple rule of thumb—“a sole proprietor or limited liability company (s.r.o.) instead of an employee = the ‘Švarc system’”—may not adequately reflect the complexity of the issue.

It must be a salesperson in a shopping center be an employee?

One example Peter Varga has recently used to illustrate the distinction between employment and a contractor relationship is that of a salesperson in a shopping center. At first glance, one might conclude that a person working in a specific store must, by the nature of their work, be an employee.

According to Peter Varga, however, even a situation like this may not necessarily be black and white. In his recent expert presentations at various forums, he has sought to demonstrate under what circumstances such a person can be a contractor.

What matters most is the specific nature of the relationship and how the collaboration actually works in practice. For example, there may be a difference between a situation where a company unilaterally dictates when an employee must work and a situation where the company asks the employee when they are available to provide services. It may also be significant whether the contractor operates through their own limited liability company (s.r.o.) and what legal and economic reasons underlie this arrangement.

The broader social and economic context is also important here. The rules governing dependent employment were developed under specific labor market conditions. Today’s situation may be significantly different, and therefore, in our view, current economic realities cannot be completely ignored when interpreting the law.

We explored these very questions on our Highgate Talks #50, which was dedicated to the “Švarc system.” In the podcast, Peter Varga and Tomáš Demo shared their different perspectives, showing that the line between legitimate contracting and illegal employment remains a significant issue in practice. Listen to the full podcast here:

The problem isn’t just the fines imposed by the labor inspectorate

In discussions about the “švarc” system, attention often focuses primarily on inspections by labor inspectorates. For business owners, however, the broader financial implications of a potential reclassification of a contractor relationship may pose a significantly greater problem.

If the relevant authorities determine that the collaboration constitutes dependent employment, not only may sanctions under labor law apply, but there may also be tax and social security implications.

Audits may be conducted or financial claims asserted by various authorities and institutions, ranging from the Labor Inspectorate to the tax administration and the social and health insurance funds. This may result in an obligation to pay back taxes, social security and health insurance contributions, late-payment interest, and other penalties.

For larger companies, therefore, this is no longer a negligible risk.

In the podcast, we present a model example of an IT company with ten contractors, each of whom invoices approximately 4,000 euros per month. If such relationships were retroactively reclassified and a multi-year period were taken into account, the total financial exposure could, depending on the specific circumstances, exceed one million euros.

This is precisely why we encounter the “švarc” system in M&A transactions and legal due diligence as well. A large number of contractors may be identified in the transaction documentation as a significant risk, which in turn affects negotiations between the buyer and the seller.

The question, however, remains not only what penalties the law theoretically permits, but also what penalties are actually imposed in practice and to what extent the accumulation of individual consequences may be proportionate.

At Highgate Group, we also address these issues when advising clients and engaging in expert discussions about the limits of the Švarc system.

Can Ibe švarc systeméand criminalácriminal dimension?

An even more sensitive issue is the potential overlap with criminal law.

This is an area that has so far been significantly less explored in the context of the “Švarc system.” It is therefore not possible to make a blanket statement that the use of contractors automatically gives rise to criminal liability. At the same time, however, we believe it is not appropriate to ignore this aspect entirely.

For example, a situation may be significant in which a business owner has already been subject to administrative sanctions for a specific action, yet continues to operate in the same manner and knowingly disregards the conclusions of the relevant authorities.

Uncertainty is a particular problem for the business environment.

Companies need to know where the line lies between a legitimate business decision, an administrative offense, and a potential criminal law issue. Without sufficiently predictable case law, it is difficult for a businessperson to assess the actual risk of their decisions.

That is why the “Švarc system” will be a separate topic at our November conference , “Why and How to Stay in Slovakia?” We do not want to address this issue solely through the lens of taxes or labor law. We’ll also look at real-world experiences, actual inspections and penalties, and the threshold at which the problem can become a criminal offense.

The government is cracking down on the “Švarc” system. At the same time, it offers economic incentives for contracting.

One of the greatest paradoxes of the entire discussion is the discrepancy between the declared fight against the “švarc” system and the economic framework for business in Slovakia.

On the one hand, the government is tightening certain penalties and declaring its intention to curb illegal employment. On the other hand, however, the tax and social security contribution system can create a significant economic incentive for certain income groups to work as contractors rather than employees. And the government is supporting this to a relatively significant extent through its recent legislative actions.

In the podcast, Peter Varga points out several legislative changes in recent years that reinforce this asymmetry. These include, for example, differences in the tax and social security burden, the structuring of certain tax breaks to benefit contractors (such as tax credits or deductible items), preferential treatment for contractors regarding old-age pensions, and preferential taxation of smaller legal entities and dividends.

The result is a systemic contradiction.

If the government truly wants to address the “Švarc system,” simply increasing penalties may not be enough. First, it should answer a fundamental question: what kind of labor market model does it want to promote?

Should contracting be a legitimate part of a flexible economy, or should most relationships between companies and individuals be brought under the framework of labor law?

The answer requires a comprehensive view of labor law, the tax and social security system, criminal law, and economic realities.

We’ll discuss more about the Švarc system, inspections, actual penalties, and practical ways to set up cooperation with contractors. 25. November 2026 atth conference “Why and how to stay in Slovakia? “

We are the Highgate Group, modern advisors for your legal, tax, and financialaccountingaccountingaccountingall under one roof.under one roof.

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If you are interested in this topic, please do not hesitate to contact us:

Peter Varga, e-mail: peter.varga@highgate.sk

You can find more information about the Švarc system on our website in this section: “Employment” of Self-Employed Individuals (Švarc System)

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You can address your specific questions during a consultation with our partner, Peter Varga, who specializes in financial regulation and tax law. You can schedule a consultation here: