Czech Republic: Employers Can Seek Damages from Employees Responsible for Illegal Contracting Practices

Author: Klára Sleglova

The Czech Supreme Court has confirmed that employers can hold employees accountable for damages caused by implementing or maintaining illegal employment practices, such as illegal dependent work performed as freelancer. This landmark decision sets a precedent for addressing financial losses stemming from managerial and legal negligence in labour law compliance.

 

Background

The case (21 Cdo 2057/2023) involved Czech National Theatre, which compensated its performing artists for additional work via freelancer contracts rather than standard employment. This approach bypassed limits on overtime and other labour protections, while also avoiding social security and health insurance contributions. After the subsequent payment of insurance premiums and related penalties, the National Theatre filed a lawsuit seeking damages from two former employees: its Head of Legal Department and General Director, alleging that their negligence in implementing this system caused financial losses.

 

Supreme Court’s Findings

The Supreme Court reversed the decision of the appellate court and ruled that both employees were partially liable due to negligence in their respective roles:

• The Head of Legal Department was found to have failed in her duty to identify and address legal risks associated with the compensation system, despite her expertise as a lawyer.
• The General Director, though not a legal expert, was also held accountable for approving and perpetuating a system that bypassed labour law protections. While his liability was deemed less severe, the court noted that he should have exercised greater caution.

 

The court emphasised that the long-standing nature of the system and the absence of objections from regulators (including the Ministry of Labour and Social Affairs) during earlier audits did not absolve the defendants of their duty to assess compliance proactively. Importantly, the damages sought were capped in accordance with Czech Labour Code, which limits liability for negligent actions to 4.5 times the employee’s average monthly earnings. This cap does not apply to damages caused intentionally, where liability is unlimited.

 

Key takeaways

Managers and in-house legal counsel must exercise heightened caution, as ignorance of legal risks can constitute negligence, potentially leading to personal liability. Providing regular legal training for decision-makers, maintaining clear documentation of policies, and fostering collaboration between management and legal teams are essential to minimise risks and prevent disputes.

Key Action Points for Human Resources and In-House Counsel

• Employers can claim damages from responsible employees for illegal contracting practices.
• Liability for negligence is capped at 4.5 times the employee’s average monthly earnings.
• Negligence includes failing to address legal risks.