HPP or IČO? Employee or freelancer? Pros and cons for IT specialists.
As a self-employed person, however, you need to change the way you think and feel about work. You also need to plan more financially and take on a lot of responsibility. After all, you're building a reputation for yourself and your name.
Not only beginners, but also experienced IT professionals can choose at any time during their career whether they want to work for a company as a main employee or go freelance as a self-employed person. Both approaches offer more than enough job positions. And it's no problem to alternate them depending on your life situation and what suits you at the moment. Let's take a closer look at these two types of cooperation, maybe we can help you decide.
Let's be clear to start with.
- HPP - main employment relationship. The contractual relationship between you and your employer is governed by the Labor Code.
- Self-employed - (but also commonly referred to as "working under an I.T.O."), working under a trade license or through your own LLC. In practice, this is a contractual relationship between two companies governed by the Civil Code.
Let's take a look at what the law says. The biggest differences are defined by the legislation itself.
The Labor Code, which governs the relationship between an employee on an HPP and the employer, defines what the relationship should look like, what the employee must follow, what he or she must "put up with" and basically does not allow much freedom to set up the cooperation. However, it also goes to great lengths to protect the rights of the employee.
For example, it includes protection against:
- unilateral extension or reduction of working time,
- sudden termination of the contract (it provides for a two-month notice period),
- termination of employment after parental leave,
- bankruptcy of the employer who ceases to pay its obligations (these can be claimed from the Labour Office up to approximately CZK 150,000)
The Civil Code, which regulates cooperation between companies and self-employed persons, allows it to be set up more freely. As long as it does not conflict with the Civil Code, the parties can agree on anything that suits them. For example, any invoice due date, the possibility to set a penalty for late payment or to suspend cooperation without having to report it to the authorities.
On the downside, there are obligations in the form of a competition clause or fines for failure to meet deadlines, claims for correction of errors, even after the end of the cooperation.
The competition clause is often added by companies to work contracts for IT specialists - freelancers working as self-employed. This is so that they do not go straight to the client for whom they are currently developing the product, or to a competing company that could deliver the same software to the same client. The competition clause is usually valid for several months and there is a penalty if it is violated. However, there is no need to fear it in any significant way. Companies in the IT sector are growing like mushrooms after rain and as an IT specialist you will have no shortage of interesting offers. Just make sure that for companies with a large ownership structure, the clause only covers a specific one and not, for example, the whole group or other companies belonging to it.
HPP and self-employed: advantages and disadvantages
What does this look like in practice?
Advantages of HPP
- More security: see the two-month notice period mentioned above, including payment for untaken leave
- Paid holidays, sick leave, overtime and public holidays
- benefits: e.g. meal vouchers, 13th salary, pension contribution, company car, etc.
- Easier mortgage and loan processing after probationary period
Disadvantages of HPP
- higher levies according to the employee's salary
- leave is approved by the employer and can be arranged on days when it may not suit the employee
- probationary period on commencement of employment
Advantages of working on an IČO
- Lower taxation: with a turnover of up to CZK 2 million, it is possible to use a tax lump sum, which allows you to deduct up to 60 per cent of all income from the tax liability. However, taxation is still lower compared to HPP.
- lower compulsory minimum social and health insurance contributions, for 2021 this is approximately CZK 5,500 per month
- more freedom in terms of cooperation
- more flexibility in working hours (you can work even on weekends/holidays and thus earn more in a given month)
- possibility to change projects and customers more frequently and easily
- master of your time - no fixed working hours, you can make more flexible decisions and freely allocate your time. Many self-employed people in the IT industry have digital nomadism as a lifestyle
- more money: freelancing allows a freelancer to earn virtually unlimited money. As a freelancer, you usually have more clients and can influence your income depending on how much work you can do.
- A freelancer cannot be fired: he works alone for as long as he sees fit. However, it is standard practice for contracts to be handled contractually. So while a self-employed person cannot be dismissed, it is in his best interest to meet the agreed terms and conditions, as he has only one reputation. If he does not present himself in the best light to a client, he may not be able to win another contract for a long time. People like to share their experiences - especially the negative ones.
Disadvantages of working on an IČO
- Higher level of risk: cooperation is always limited in time
- administrative burden: the need to file tax returns, keep accounts, process invoices, deal with contracts...
- more difficult to arrange a mortgage or loan
- need for supplementary insurance in case of loss of income due to illness, accident...
- need for supplementary pension insurance if you expect to have at least an average pension in old age
- unpaid leave
- income is not fixed - it is always a good idea to build up a financial reserve and not to take on more work than you can manage
- isolation - working from home can make you feel lonely. Fortunately, there are various coworking centers today that provide a stylish working environment and you can meet other professionals from different IT industries. People who work freelance also like working from coffee shops.
So is there one type of collaboration you can recommend?
From what we've written above, it's probably obvious that it's impossible to pinpoint a winner. Everyone may be comfortable with something different. Someone prefers certainty and needs a smooth mortgage approval process, while another specialist prefers autonomy and has no problem with a certain level of risk.
Whether you prefer one or the other, there are plenty of offers on the market for both forms of cooperation. So look first and foremost at whether you enjoy and find the work fulfilling. Fingers crossed, and if you're looking for a change, let us know, we'd love to meet you.
* HPP - main employment
** IČO - self employed