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Czech Republic

2. Re-Characterisation of Independent Contractors as Employees

a. Laws and Guiding Principles

Regardless of the title of the contract or other formal efforts of the contracting parties to avoid the contract being subsumed within the Labour Code, factual dependent work may be performed only within an employment law relationship regulated by the Labour Code.

If a civil law contract is intended to obscure a factual employment contract, the former is assessed according to its true nature. Therefore, the replacement of the contract of employment by any civil law contract, while factually meeting the usual criteria of labour employment, represents an administrative offence. If such an offence is committed the factual employer may be fined between CZK 50,000 (EUR 1,900) and CZK 10,000,000 (about EUR 370,000). Moreover, the factual employer would also take responsibility for consequences in the area of health insurance and social security contributions, including its duty of payment of overhead surcharges, related interests and sanctions.

b. The Legal Consequences of a Re-Characterisation

Reclassification risk is typically when governmental authorities determine that an
independent contractor is actually an employee; although this may stem from the contractor him/herself. If the contractor is reclassified as a Hays (global specialist recruitment group) employee, the following consequences shall be considered:

Unpaid taxes
According to Czech law, contractors can only be self-employed individuals, if the self-employed individual´s turnover exceeds CZK 1,000,000 in the past 12 or less calendar months. The self-employed individual is obliged to register as a VAT payer and will be automatically subject to VAT. In the case of self-employed individuals, the client (factual employer) pays the fees gross and the independent contractor will be responsible for payment of their own taxes, including, premiums for social security and general health insurance. If self-employed workers/independent individuals are reclassified as employees, then their “factual employer”, becomes responsible for the additional payment of employment-related taxes. The tax authorities will consider the Contractor´s fee (which was until then paid to him by factual employer) as “net salary” (no matter the fact the contractor himself had already paid all taxes incl. social/health insurance from such a fee); therefore the tax authority will first re-calculate the “net salary” up to “gross salary” (plus another 34%); and only from this new tax base (i.e. original fee + 34%) the tax authority will assess the new tax duty.

The above practice in fact represents double taxation, but in this specific situation double taxation is allowed by law and even by court practice. Moreover the factual employer would pay taxes and social/health insurance from tax base, which is 34% higher than the original fee. In other words, in cases of re-classification the factual employer would be obliged to pay more than double the original fee paid to the “contractor” (now employee). On top of that, the tax authority would impose a penalty (another 20% of the new tax duty) and an interest of late payment (another 14.5 % annually).

Reclassifying the contractor as an employee could result in additional (up to 25%) overti-me being payable; given that the contractor would not have been eligible for overtime as well as liability for employment related claims, such as damages for unlawful dismissal, etc. If the contractor is reclassified as an employee, she/he could sue the factual em-ployer for any damages incurred as the result of such re-classification.

c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status

Even though the authority’s judicial decision may be challenged by either party, it is usually the individual (“independent contractor”/employee) who initiates the legal proceedings. The independent contractor/employee often feels somehow aggrieved by the fact that his/her civil law contract was concluded to intentionally obscure a factual employment contract. Such an individual may submit an action to the civil court and sue straight away for performance arising from regular employment law relations (e.g. the performance arising from invalid termination, failure to provide for the salary, travel allowances, holiday etc.). If the plaintiff´s argument prevails, the court will determine that an employment relationship is in place, and/or has been concluded sometime in the past between the employee and the employer. At the same time, the court may grant a successful plaintiff money or other remedies which are actionable at court proceedings. If it is a dispute about termination, the court may even determine that the termination of the contract is invalid.

Besides civil courts, there may also be judicial remedies at administrative courts. These take place when either an "independent contractor"/employee or administrative bodies (social security6, health insurance companies7) doubt an “independent contractor's” social status (e.g. with regard to the entitlement to the provision of any form of pension, sickness/maternity benefit, attendance allowance, compensatory benefit in pregnancy and maternity etc.).

The decisions made by the courts are not easy to predict since accurate differentiating of employees from self-employed workers/independent contractors represents a legally difficult task, even for courts. There are often only subtle differences, which speak either for a contract of employment or a civil law contract. Therefore, the cases at civil and administrative courts differ from one another. The courts make their decisions depending on the circumstances of individual cases and it will be a few more years before the Czech judiciary stabilise and enable unifying conclusions in the area to be made.

d. Legal or Administrative Penalties or Damages for the Employers in the Event of Re-Characterisation

As already mentioned above, replacing a contract of employment with any civil law contract, (while meeting the usual criteria of labour employment), actually represents an administrative offence, for which the bodies responsible for inspection of work may impose on the factual employer a fine up to CZK 10,000,000 (about EUR 370,000), but not less than CZK 50,000 (EUR 1,900).

Any questions

Ask our member firm Havel & Partners in Czech Republic