Even if your main focus is on developing your business and you think that the keys to HR are solid wages and an interesting benefits package, there are still some important issues in Czech employment law you should be aware of.
Criminal Liability of Your Business
According to the Act on Criminal Liability of Legal Entities, a legal person – a limited liability company – can itself be directly subject to criminal prosecution and convicted of a crime. Naturally, as a legal fiction, the company cannot act itself, but acts of the persons who represent the company, including its employees, are attributed to it.
One of the conditions is that the crime is committed in the interest of the company or within its business activities. The second is that the crime is committed by a person that controls it or has significant influence over it (this may even be its employees).
Employees could trigger the criminal liability of their employer if they acted either based on the instruction of a person controlling the company (e.g., the owner, director, etc.) or independently of any of their superiors because those superiors did not take reasonable preventive measures or failed to sufficiently monitor employees. In other words, if you as a company owner or director fail to monitor your subordinates, your company will bear the consequences and may end up facing a criminal conviction together with your employees.
Therefore, you should protect your company by implementing and enforcing reasonable measures, such as employee monitoring, strict rules on budgeting and gifts, a whistleblowing system, internal regulations such as a code of ethics, etc.
Transfer of IP Rights Only with Employees’ Consent
The Czech Copyright Act regulates products created by employees within employment as so-called “employee work.” As a rule, all proprietary rights pertaining to the work remain with the employer. However, the employer may not assign these rights without the employee’s consent – the only exception being the sale of the enterprise.
Therefore, if your employees created a computer program for your company you may not be able to sell it if those employees refuse to grant consent. In such a case, the employer may only grant a license to the work, but this might not be sufficient for the buyer. This opens a unique opportunity for the employees to negotiate employment terms or additional compensation.
We advise entering into a reasonably extensive IP arrangement with employees. Although discussions are ongoing about whether an employee’s advance consent is valid, it is still highly advisable to secure it.
Pseudo Self-Employment: Tax Optimization or Tax Fraud?
Pseudo self-employment has a long history in the Czech Republic. This is where an individual acts based on the contract of a self-employed contractor while actually working as a regular employee. Generally, this practice is not permissible under Czech law and is regarded as illegal work.
The main reasons why businesses tend to engage freelancers are the rigid employment regulations and high mandatory costs of labor.
When assessing whether someone is acting as a freelancer or as an employee it is not the documentation but the factual cooperation that counts. The key element is the level of independence of the freelancer from the company. Paying fixed monthly remuneration, giving clear instructions, or having the freelancer work full-time at the workplace would usually be assessed as indicating that the freelancer should be requalified as an employee.
Requalification may have various consequences, from Labor Inspectorate fines (up to EUR 400,000) to due payments towards tax authorities. The tax authorities interpreted the amounts invoiced by freelancers as net wages, and all mandatory surcharges were added to those amounts.
We have also been seeing increased pressure in tax matters to swap to criminal proceedings. Saving costs on mandatory payments may be understood as a criminal offense. As a result, a company engaging many freelancers on a long-term basis may also be risking criminal prosecution.
A proper assessment of whether an individual may act as a freelancer or should instead be engaged as an employee has gained increased practical significance.
By Helena Hangler, Head of Employment, Schoenherr Czech Republic
This Article was originally published in Issue 9.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
