Schwarz system under magnifying glass: How can one check multiply your costs?

Firms are now intensively calculating the impact of consolidation. However, one potential item in the form of state sanctions may surprise more than any higher taxes. It is the reclassification of cooperation with tradesmen/contractors as illegal employment. This is not just a fine from the labour inspectorate, but mainly chain effects, additional levies, taxes, interest and subsequent litigation. These risks and their practical consequences were discussed by Peter Varga as a guest in the Forbes MONEY podcast, where he discussed the topic from the perspective of law, tax and the real practice of companies.

As part of the adjustments related to the fight against illegal employment, the statutory definition of dependent work deletes the feature “working hours determined by the employer“. On first reading, this may appear to be a cosmetic change in the law, as according to some interpretations, it was possible to reclassify a contractor as an employee even if he or she determined his or her own working hours. In reality, however, it is mainly a signal that may influence (encourage) how the control authorities will consider the boundary between employment and business-to-business (or B2B) cooperation.

At the same time, practice has not been entirely uniform as to whether the elements of dependent work must be fulfilled “cumulatively” (i.e. all at the same time). By this deletion, it is as if the legislator wanted to indicate to us that, until now, all the elements of dependent work had to be fulfilled cumulatively. It is therefore also important not to look at the risk only through the text of one provision, but through the overall context: the contract, the actual performance of the work, the communication and the organisation of the cooperation.

But the most important thing is to consult an attorney with business experience on how to set up the business procedurally and structurally so that a reasonable prevention of an attack by the state is avoided and at the same time any sanctions are not liquidating for the entrepreneur (e.g., leaving the company with debts).

Who checks and what is typically asked: the reality of the workplace “visit”

Most often, the labour inspectorate comes into play. The inspection can be invasive: the inspectors enter the workplace, ask for the contracts of the people present on site, ask about the content of the work and what regime the people concerned are working under.

An important practical detail: if the inspector does not work with a “representative sample” of statements and evidence, he creates a procedural weakness. In practice, it is often decided on the basis of whether the inspecting authority has sufficiently established the facts (not just “what is written”, but how things actually work). Here, it pays to have an internal discipline set up from the beginning, who communicates with the control, what documents are submitted, how statements are written down.

The biggest risk is not the fine: Running afoul of the tax office and social security

A fine from the labour inspectorate is often “only” the first wave. The real costs can only be incurred afterwards, if the tax administration and the social insurance company are added.

The logic is simple: if a certain relationship is reclassified, the state will start to retroactively address whether advance tax payments, social security contributions, and interest on late payment should have been paid. With a longer audited period (typically several years back) and a larger number of contractors, the amount can climb to a level that hurts the company in real terms, sometimes to the point of “multiplying annual costs” mode.

At the same time, it is fair to add the flip side: the conclusion of the labour inspectorate does not automatically mean that the tax office or the social security office will make the same decision. These are different legal regimes. In practice, however, this does not mean that the risk does not need to be addressed. It just means that arguments, evidence and process are decisive in a dispute .

How to reduce risk: Three layers of prevention that make sense

At Highgate Group, we take a pragmatic approach to this topic: the goal is not to “repaint reality on paper”, but to set up the cooperation in a way that is sustainable and defensible in the long term (if possible), while at the same time setting up the structure of the entrepreneur so that not only his corporate and private assets are protected, but also the goodwill of his business.

1) Structure setup

A properly set up structure can not only help in reducing the impact of potential sanctions, but also prevent an attack by the state. It is very important for the entrepreneur to know what the consequences are if he leaves the company “just like that” or switches it to a “white horse” and to be able to take this into account in advance when setting up the structure. Unfortunately, the penalties in a shvarc system can be devastating, which is why a properly set-up structure is the cornerstone of a more comfortable business.

2) The contract must fit the reality (and vice versa)

The most common problem in practice is that companies use “relabelled” employment contracts, just with a different name. Standard red flags are, for example, holidays, sick leave, fixed monthly remuneration with no link to output, or over-management of the way work is done. Eliminating these is generally not enough.

3) Soft evidence is also important

Not only the text of the contract, but also emails, task management, reporting, onboarding, business cards, internal directives, access to systems. Every detail can help (or hurt) how the relationship will look externally. At the same time, when checking in, it needs to be “played” for positive sentiment. We’ll be happy to show you how.

At Highgate Group, the topic of setting up B2B collaborations, shvarc systems and controls is covered in detail, legally, tax and procedurally. If you have a higher proportion of sole traders/contractors or are expecting increased scrutiny, we can do a quick risk-check and set up arrangements that make sense in practice.

The topic of the broader context of controls, the shvarc system and the practical impact on entrepreneurs is discussed in more detail by Peter Varga in the Forbes Money Podcast, where he draws on specific experiences from practice. You can listen to the full podcast here:

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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

Alternatively, you can address your specific questions in a consultation with our partner Peter Varga, who specialises in financial regulation and tax law. You can book a consultation here: