Employing freelancers (the “Schwarz system”) and the legal and tax context

Our services in the field of employment of “contractors”

In the area of employment of “contractors” we provide our clients with:

• a financial analysis of the impact of employing “contractors”;
• Comparison of a limited company with a trade for the client’s contractors;
• analysis of the impact on social insurance benefits for specific individuals;
• analysis of the limits and possibilities of employing “contractors” in the light of current case law with regard to the so-called “contractors”. the schvarc system;
• drafting cooperation agreements with regard to:
• eliminating the risks associated with the “shvarcsystem”;
• protecting the company from “bad leaver” situations;
• protection of IP and other company assets.

Employment law at Highgate Group

Highgate Group is a tax and accounting company and law firm. In one place our client can meet a payroll accountant as well as a lawyer who deals with employment law. On the basis of inquiries from our clients, we find that such a concept represents unquestionable added value not only for our clients, but also for our colleagues. They can thus seek professional support within the office.

Such a concept must undoubtedly also mean a more comfortable position for clients as recipients of payroll accounting services. In practice, we see situations where accountants build legal information and awareness by searching for information on the internet. This information may be misinterpreted and may not even agree with the current case law of the courts.

Samples of legal documents for our clients

Our clients have the opportunity to use several templates of legal documents prepared by our law firm Highgate Group free of charge. Clients can use templates of employment contracts, termination agreements, cooperation agreements, etc.

Employment in a “trade”

Given the significant differences between standard employment and employment as a “trade”, this topic is relevant for almost every client. We look at it not only from a tax and levy point of view, but also from a legal point of view as well as with regard to social insurance benefits.

The difference between a trade and employment

Suppose an employer has an employee who is paid a gross salary of EUR 2 000. Suppose they agree that the employee will set up a business and invoice the employer for his work, with aninvoice amount of EUR 2 000.

Suppose:

• the employee has one child under the age of 6 for whom he/she claims a tax bonus;
• the employee does not claim any other tax bonus;
• the employee does not claim the non-taxable part of the tax base for the spouse or any other non-taxable part except for that under Art. 2 of the Income Tax Act;
• as a sole trader, the employee claims flat-rate expenses;
• as a self-employed person, the employee is subject to an annual social insurance settlement;
• as a self-employed person, you don’t pay unemployment insurance;
• the employer has a positive tax base;
• the employer is subject to a 21% tax rate.

What are the tax and levy implications for both legal forms? The table is based on the current tax and levy situation in force in the second half of 2021.

	Employee	Freelancer
Gross wage	EUR 2 000	–
Employer costs	EUR 2 704	EUR 2 000
Health levies	268 EUR	76 EUR
Social contributions	704 EUR	181 EUR
Income tax	211 EUR	15 EUR
Net amount	EUR 1 521	1 728 EUR
Employer’s tax shield	568 EUR	420 EUR
Employer costs	2 136 EUR	1 580 EUR

The financial differences between the two forms of ’employment’ are thus significant not only from the employer’s point of view, but also from the ’employee’s’ point of view. However, if the employee as a sole trader is in the so-called. levy holidays, the financial difference would be even more significant:

	Employee	Freelancer
Gross wage	EUR 2 000	–
Employer costs	EUR 2 704	EUR 2 000
Health levies	268 EUR	76 EUR
Social contributions	704 EUR	0 EUR
Income tax	211 EUR	52 EUR
Net amount	EUR 1 521	EUR 1 872
Employer’s tax shield	568 EUR	420 EUR
Employer costs	2 136 EUR	1 580 EUR

However, a completely different tax-tax situation arises if the contractor cooperates with the company through its legal entity. In such a case, there are other aspects that come into play that can significantly adjust the resulting savings figure.

Impact of a trade on social insurance benefits

It is not possible to look at the benefits of ‘trade’ employment in isolation through the lens of the above tables alone. The complex picture is also completed by the effect on social insurance benefits, the amount of which varies depending on a number of circumstances, including the legal form under which the individual carries out gainful employment.

The situation is also different for social security benefits for contractors who provide their services through a legal person.

Trade and maternity

The basic condition for entitlement to maternity pay is that the person has been insured for at least 270 days in the last two years before giving birth. If the sole trader is in the so-called. is not paying social security contributions as a voluntary insured person, he or she may not be entitled to maternity pay. The amount of the maternity allowance is normally 75% of the so-called. the daily assessment base. The daily assessment base is derived from the average of the assessment bases in the so-called. crucial period. The decisive period varies depending on the circumstances of the case. To simplify, the amount of maternity pay for a self-employed person depends on how much and when the self-employed person contributed to social insurance. However, it is precisely in the case of maternity allowance for sole traders that the Social Insurance Act allows for flexibility to reach a situation where the sole trader receives the maximum maternity allowance. The maximum maternity allowance for 31-day months is slowly approaching EUR 2 000 each year. For more information, arrange a personal consultation with Peter Varga. Our accounting clients enjoy a 50% discount.

Trade and incapacity for work

In general, a tradesperson may be found unfit for work in the event of illness, accident or isolation/quarantine. The standard amount of sickness benefit is based on the tradesman’s social insurance contributions as well as the type of sickness absence (the amount may be different for pandemic sickness absence).

If the self-employed person meets the conditions for sickness benefit (e.g. he/she is liable for social security contributions or is in the so-called protection period), the amount of sickness benefit is similar to that for employees, namely :

• 25 % of the daily assessment base in the period from 1. to 3. on the day of the PN;
• 55 % of the daily assessment base from 4. on the day of the PN.

The amount of the daily assessment depends on a number of factors. In general, however, sole traders using flat-rate expenses pay social security contributions on lower tax bases. This also has an impact on the calculation of the daily assessment. It should also be taken into account that a self-employed person cannot estimate the amount of sickness benefit in advance to the same extent as he or she can do for maternity pay.

Trade and nursing

Nursing care became an important social supplement during the pandemic and school closures. It helped not only the employees/employers but also the employers themselves in terms of cash-flow to get through the difficult pandemic period of a suspended economy.

A self-employed person is normally entitled to sick pay as long as he or she pays social security contributions or is in the so-called. the protection period. The amount of the sickness benefit also depends on the daily assessment base, which is based on the contributions of the self-employed person to the social system in the so-called. crucial period. The amount of the sickness allowance is 55 % of the daily assessment calculated in this way. Thus, similarly to sickness benefit, the amount of sickness benefit for a sole trader is affected by the lower contribution obligation of sole traders compared to employees.

Trade and pension

Although pensions are an abstract topic for many of our clients’ contractors, some of them are still interested in analysing the effects of converting to a trade in terms of future pension income. For pensions, the merit principle is normally applied – the more the insured person contributes to the social system, the higher the pension will be. However, this merit-based system is influenced by a social element, which is mainly represented by pension ceilings, the coefficient for higher pensions as well as the institution of the minimum pension.

For example, if the conversion from employee to sole trader means a lower pension of, say, €200, then with a 15-year pension the total amount is €36,000. And that is the relevant amount. Thus, when converting from employment to “contractors”, we also analyse this aspect for our clients on request.

Trade and unemployment benefit

A self-employed person is entitled to unemployment benefit only if he or she has paid voluntary unemployment insurance for at least two years in the four years before being registered as a jobseeker. A self-employed person must pay voluntary unemployment insurance to qualify for this benefit.
The amount of the benefit is 50 % of the daily assessment base, which is based on the average of the assessment bases in the reference period. The reference period for unemployment benefit is different from that for maternity or sickness benefit, for example. The decisive period for establishing the daily assessment base is the two-year period preceding the date on which entitlement to unemployment benefit accrued.

Is the “scarc system” legal?

The Schwarz system is not legal. In addition to the administrative sanction, it is also possible to fulfil the factual essence of one of the tax offences (in particular, tax and insurance premium evasion) in the case of a shvarc system. It is thus important, when setting up relationships with contractors or converting employees to contractors, to understand these steps as a project that also deserves consideration from a legal perspective. However, the aim is not only to minimise the risks associated with state sanctions, but also to set up contractual relations with contractors in such a way that the company is protected (for example, in relation to IP rights).

What does the case law of the courts have to say about the “shvarc system”?

The case law is relatively diverse. A great inspiration should be sought in the Czech judicial practice, which has produced not only the term “shvarcsystem” but also a relatively extensive system of court decisions that help us in setting up defensible legal and tax-tax frameworks for employment “on a trade”. A partly different tax-tax situation arises if the contractor cooperates with the company through its legal entity.