We would like to inform you about the most important changes relating to the Labour Code, the performance of dependent work, including new penalties for the švarcsystém as well as changes allowing for the parallel existence of the performance of a statutory body function and employment.

  1. Amendment to the Labour Code

On 1 January 2011 an extensive so called “conceptual” amendment to the Labour Code Act no. 365/2011 Coll., will come into force. During its brief existence the Labour Code no. 262/2006 Coll. (LC) was repeatedly amended and substantially affected by the repealing judgment of the Constitutional Court from March 2008.

This last and so far most extensive amendment (over 300 changes) was caused by the current unsatisfactory wording of the LC and also the effort to reflect the governmental policy statement regarding enhancing flexibility and liberalization of Czech employment law.

Please note that we have only provided an overview of the fundamental changes of the LC, which must be taken into account (or can be used) in everyday practice of each employer. For clarity, we have organized the fundamental changes in the chart below including the current regulation and characteristic of the change which has just come into force at the start of 2012.

It should also be noted that the amendment brings substantial modification to general institutes (new basic principles of employment law, subsidiary of the Civil Code, or the concept of the invalidity of legal acts), the characteristics of which go beyond the scope of this informational material:

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  1. The new definition for dependent work and penalties for the so called švarcsystém:

The new amendment to the Labour Code also introduced a modified definition of dependent work. Dependent work may be performed only in basic employment relationships according to the Labour Code, ie based on an employment contract or agreements on work performed outside an employment relationship.

The new definition distinguishes the characteristics of dependent work and the conditions under which it is to be performed. The basic characteristics of dependent work are the following: (i.) performance in the relationship of employer’s superiority and employee’s subordination, (ii.) in the employer’s name, (iii.) according to employer’s instructions and (iv.) personal performance of work by the employee. Dependent work must be performed for a wage, salary or other remuneration paid for work done, at the employer’s instruction and liability, within working hours at the employer’s workplace or at some other agreed place.

In connection with this new regulation of dependent work we need to highlight the related amendment to the Employment Act governing the definition of illegal work, which came into force at the start of 2012, as well. The new refined definition included “the performance of work by a natural person outside the employment relationship” according to the Labour Code.

Up until 1 January 2012, within the performance of dependent work by natural persons as entrepreneurs outside employment relationships (the so called Švarcsystém) was also banned, but apparently lacked the tools as well as motivation for enforcement. According to the new regulation the Labour Inspection Authorities will be entitled to impose a fine of up to CZK 10 million (but at least CZK 250,000!) on companies using the “Švarcsystém” and fine the employee up to CZK 100,000. Further to these direct sanctions, other significant penalties may be imposed on companies for non-payment of deductions in the income tax area as well as insurance connected with using the “Švarcsystém”.

In the case services of self-employed persons are used, where there are doubts about the “independence” of their work (in particular personal and long-term work performance only for one company, according its to instructions and in such company’s name), we recommend reviewing the contractual relationships with such persons and taking corrective measures to eliminate or at least reduce possible risks. The fact that the above may not be only idle fears, has been confirmed by non-official information from Ministry of Labour, according to which the Ministry is calculating on an exponential increase in the number of inspections aimed directly at potential violations of the “Švarcsystém” ban.

  1. Enabling the parallel performance of functions and related changes:

From 1 January 2012 the period of uncertainty regarding the admissibility of the parallel performance of the function of statutory body (member) while a managerial employee ended. The parallel existence is expressly allowed by an amendment to the Commercial Code Act no. 351/2011 Coll., which was prepared specifically in response to the parallel existence “panic” generated by a year old decision of the Supreme Administrative Court.

The new regulation not only allows the statutory body to appoint another person to provide the business management of the company wholly or partly, but expressly provides that “these activities may also be performed in an employment relationship according to the Labour Code by a company employee, while such employee may concurrently perform the function of a statutory body or act as its member.” In this context, there is a statutory requirement that the wage of the employee performing parallel functions was negotiated or determined in the same manner as in the case of a statutory body, ie mostly by the company’s general meeting.

The amendment has no retroactive effect and therefore does not solve the possible negative consequences of inadmissible parallel existence up to 2012. In the area of tax and social insurance it may be reasonable to assume a “general pardon” from the state and regulatory bodies, which does not have to apply in the case of potential private claims between companies and s statutory body because of the questionable validity of parallel employment contracts. In such situation we recommend some form of contractual settlement for all questionable relationships from the past.

Another legislative response to the parallel existence are the changes in the tax area as well as in the area of deductions of social and health insurance from the statutory body’s or its member’s remuneration, which took effect at the start of this year and subject to essentially the same procedure as an employees’ wages. This change has negatively affected in particular the remuneration of board members. In contrast, there is a very positive change for companies, as the expenses concerning board members’ remuneration will now be tax deductible.