Illustrative stock photo (source: TASR)
The Finance Ministry released a study on falsely self-employed earlier this month, they estimated their total number in Slovakia at 100,000 and pointed out that the share of self-employed persons with one dominant client is the highest among EU countries.
The ministerial Value for Money Unit considers the biggest problems to be circumvention of the Labour Code, distortion of the competitive environment and shortening of public finance ranging from €177 million to €251 million a year.
Nevertheless, businesses and employers face completely different challenges - in particular, a shortage of employees and a disproportionately high tax and social security burden. The study titled Looking for a Reliable Employee. Condition: Self-employment (in Slovak: Hľadáme Spoľahlivého Zamestnanca. Podmienka: Na Živnosť) also illustrates the issue by specific examples from published job advertisements. It does not focus on the relevant legislation and case law, even though these challenges may be crucial in practice. But let’s take it one step at a time.
The beginnings called “švarc system”
The most famous employer of falsely self-employed in our region was the Czech construction entrepreneur Miroslav Švarc, who prospered in 1990s also thanks to tax and social security savings through “innovative employment” of persons as self-employed.
Soon after, the “inventor” of false self-employment had a dispute with authorities, after which he became infamous, and was also sentenced to imprisonment. As a result, the Czech government was forced to make several legislative changes, perform intensive inspections and, compared to Slovakia, imposes several times higher fines.
How does the law see dependent work
With respect to false self-employment, the provisions of the Labour Code describing what constitutes an employment relationship or dependent work, as opposed to independent “doing business” can be decisive:
Dependent work is performed in a relationship of superiority of the employer and subordination of the employee, personally by the employee for the employer, according to the instructions of the employer, on behalf of the employer, and during working hours specified by the employer.
Dependent work may be carried out exclusively within employment, a similar employment relationship or, exceptionally, another labour-law relationship. Dependent work may not be carried out within a contractual civil law relationship or a contractual commercial law relationship.
The above features distinguish dependent work from the concept of “doing business”. The latter is defined in the Commercial Code as well as in the Trade License Act, according to which it is a gainful activity carried out independently in one's own name and on one's own responsibility with the aim of making a profit.
Distinguishing between dependent work and doing business therefore depends on a number of details that need to be assessed on a case-by-case basis. The formal side of the contract does not determine whether a job is self-employment or false self-employment. The actual content of the legal relationship must always be examined, and this is what has been done for many years by inspectors in countries where the problem of falsely self-employed is less acute than in Slovakia.
This is also necessary from the point of view of our Income Tax Act, which does not rely on the concept of dependent work, but defines income from dependent work regardless of the formal relationship in relation to the obligation to comply with the instructions of the payer of the income, thus relying on the concept of the economic employer, which is also important from the point of view of cross-border employment – a brief summary can be found e.g. in Taxand Economic Employer Survey 2024.
Selected case law and how the authorities came up against the contractual freedom
The aim of inspection bodies is to impose taxes and social security contributions primarily through the reclassification of specific relationships as dependent activity, which is a broader concept than dependent work under the Labour Code explained above. I will give just two illustrative examples.
1. Managing director (konateľ), customs declarant and management services
In the first case, the tax office wanted to reclassify three contractual relationships as dependent activities. There was a mandate contract between a company and its managing director, through which the managing director invoiced the company for “extra services”. The other two contracts concerned the services of a customs declarant and the provision of “management services”.
The opinion of the tax authority was clear in all three cases, relying on the fact that the designation of the contractual relationship was not decisive and that the nature of all three activities implied that they were dependent activities, regularly recurring and for a fixed agreed remuneration.
However, the Supreme Court’s 2010 judgement confirmed the opinion of tax inspectors only in the case of the managing director. The court confirmed that his contract should be reclassified as a dependent activity. In the case of the other two persons, however, the Supreme Court disagreed, basing its final decision on the principle of contractual freedom, according to which the manifested will of the contracting parties must be decisive. The court found that the tax administration had insufficiently and incompletely evaluated the manifestation of the will of the other contracting party, i.e. the self-employed person in the contract for work, and assessed as decisive whether the person has, in the specific case, the intention to enter into a commercial or employment relationship with the company.
It was one of the landmark decisions, and the principle of freedom of contract has been applied in many other court judgements. It appears that this is one of the reasons why the financial administration has stepped back from its control activities in this area.
2. Organisational change to transform employment contracts into self-employment
This is a case when an employee sued a company for firing her. The employer made an organisational change, whereby it pressured employees to become self-employed persons under threat of dismissal. In this case, not surprisingly, the court ruled against the company. The crucial point was that the employer had feigned organisational change in order to transform employment contracts into self-employment. The job description remained the same, as did the hierarchy of supervisors and subordinates. This is one of the most recent cases, the judgment dates from 2022. Again, the principle of freedom of contract was not challenged and the fact that the employee did not express a wish to become self-employed was crucial.
The case law in the Czech Republic and neighbouring countries is, of course, more extensive, the features of dependent activity are assessed in relation to each other and the nature of the work and all the circumstances, which are always assessed individually, are very important, too. Individual cases vary and present many shades of grey in respect to potential breach of law.
What analysts don’t see, but businesses and employers do
It should be appreciated that the ministry is trying to stabilise public finances and protect honest entrepreneurs from unfair competition and practices such as those committed by the second company mentioned above. Fortunately, however, businesses of this type no longer have a significant impact on our economy. False self-employment in other professions will be much more difficult to prove.
The case law in neighbouring countries is, as I have stated, extensive, the elements of dependent activity are assessed in relation to each other and also depend very much on the nature of the work. Jobs such as lawyers or journalists, but also IT consultants or programmers, whose profession is inherently independent, would not be at a hi risk of reclassification as a dependent activity even in countries such as Germany, even if they worked for only one client and were bound by that client’s timetable or other practical organisational circumstances, because specific circumstances and argumentation during litigation would be considered. Independent professions and selected sectors including IT, should therefore not fall automatically into a dark grey area.
The biggest challenges as seen by businesses and employers are the shortage of employees and the disproportionately high tax and social security burden. With the increase in health insurance contributions since January 1, 2024, Slovakia is at the top in the region, beaten only by France within the EU. While the average burden on labour from an employer’s perspective is around 20 percent in the EU, in Slovakia it has exceeded 36 percent since January 1, 2024.
The Finance Ministry’s study rightly points out that false self-employed creates a stowaway in the pension and healthcare systems. However, the users of both systems see, first and foremost, an unstable pension system and a collapsing healthcare system, into which, this year alone, employers will pour some €400 million more than last year through health insurance contributions. Nevertheless, if their employee wants to make an appointment to see a doctor in Bratislava, they have to pay, in addition to the increased health insurance contributions, illegally levied fees in hundreds of euros a year.
However, the health insurance companies are calling for even more money to be poured in and no one is talking about reforming the public health insurance system. The privatised public health insurance system, which has been unique in the EU for 20 years as well as the collection of illegal fees, are very dark shades of grey. The fact that we have the highest number of false self-employed persons in Slovakia is directly related to this.
What should entrepreneurs and employers do to avoid risks
Employers in various sectors are currently competing for workforce, which has become scarce, also by offering self-employment as a benefit in the case of interest. Thus, advertisements of this type on the Profesia.sk jobs website are understandable.
I won’t forget the ski mountaineering trip in Iceland two years ago, where, after a few days, we met the first ski mountaineer in the beautiful hills straight above the sea. He turned out to be a Pole who works for an unnamed IT company as a java developer, and his main condition is not to be in an employment relationship; he wants a fixed salary, but not fixed working hours. He spends most of his time working and living by the sea in an Arab country, which is a tax haven, and skiing in Iceland or Norway for a few weeks a year. If an employer won’t allow him to do that, he’ll find another one that will. This is an expression of will of rare workforce and I believe that sensibly set guidelines fighting false self-employment will also find understanding for this in line with the contractual freedom.
Once the ministries launch debates, it is certainly advisable to participate in it. Entrepreneurs and employers should have an important say in the discussion; a large part of them will certainly support professionally prepared changes in the approach and guidelines taking into account the specifics of sectors and professions as demonstrated in a constructive example set by the Slovak German Chamber of Commerce last week.
For those who do not have the time to engage in discussions, I recommend that they at least contact their lawyers and tax advisors – after more than 10 years of less intensive state inspections it is probably time for a due diligence of internal processes. Prevention is surely less painful than healing injuries after state inspections that may soon be launched.
Renáta Bláhová is founding partner BMB Partners TAXAND and expert on international tax law
