Employment Issues in the Czech Republic: What Foreign Employers Need to Know

Czech Republic

Prague

The Czech Republic, like many other CEE countries, is endeavouring to enhance its economic potential. As a former Communist country, the Czech Republic has gone through the process of privatisation and industrial and agricultural restructuring. Going through such a process does, of course, take a long time and can have severe repercussions. The Czech Government is aware of the importance of developing new industrial and business sectors as well as of the importance of retaining more traditional ones.

INVESTMENT INCENTIVES SCHEME

With the purpose of attracting foreign investors and promoting Czech business, the Government has designed an investment incentives scheme. Initially, the investment incentives applied to the manufacturing sector only. However, as of 2002, these incentives have also applied to investments in strategic services and technology centres based on programmes sponsored by the Ministry of Industry and Trade. In order to help foreign investors understand Czech business conditions, demographic characteristics, competitive advantage and the legal environment, the agency CzechInvest has been established, whose main objectives are to provide information about the country and to assist foreign investors to obtain investment incentives. These incentives may take the form of:

  • income tax relief,
  • job-creation and training and retraining grants, and
  • industrial property (infrastructure) at a discounted price or the transfer of land owned by the Czech Republic at a discounted price.

I will now look at each of these in turn.

Income tax relief. Income tax relief takes the form of five years' relief or 10 years' relief for existing expanding enterprises and newly established enterprises respectively. The investor may apply the tax relief as soon as the conditions for granting the investment incentives have been met, but no later than three years from the date the incentives were granted. Once the three years have elapsed, tax relief will begin to apply automatically, regardless of whether the enterprise makes a profit or a loss.

Job-creation and training and retraining grants. The Czech investment incentives package contains two employment-related benefits: job-creation grants ranging from CKr 80,000 to CKr 200,000 per employee and training and retraining grants covering 25-35% of the training costs of an employee. The amount of the incentive depends on the district in which the investment is made. All districts in the Czech Republic are categorized according to their unemployment rates into one of four groups (A-D). The most generous level of support is CKr 200,000 per employee, which is available in Group A districts, where the unemployment rate is at least 50%6 above the national average. Districts with below-average unemployment (Group D) do not qualify for job-creation grants at all. The average unemployment rate in the Czech Republic as at 30 November 2003 was 9.996. The employment-related incentives are granted once an agreement has been made with the Ministry of Labour and Social Affairs. Such agreements set out the specific undertakings of the investor and the conditions under which the incentives are granted.

Industrial property and land transfers. Incentives associated with the purchase of industrial property and the transfer of land are based on assisting the municipalities and developers to construct industrial zones by subsidizing the building of technical infrastructure. The purpose of these incentives is to allow the investor to obtain land (with a basic infrastructure in place) in an industrial zone. A preferential transfer of land owned by the State, a State-controlled organization (usually the Czech Land Fund) or municipalities may also be made.

Eligibility

The eligibility conditions, which are set out in the Act on Investment Incentives, consist of two groups of criteria: general criteria and specific criteria.

The general criteria are as follows:

  • The investment must be in a manufacturing sector and use advanced technology.
  • The investment must be in the acquisition or construction of a new production plant or in the expansion or modernization of existing production facilities to launch a new production activity.
  • The investor must invest a minimum of CKr 350 million in tangible and intangible assets. This limit is reduced to CKr 100 million in districts with high unemployment.
  • The investment of at least CKr 145 million (or CKr 50 million in areas with high unemployment) must be covered by the equity of the investor.
  • Investment in machinery must account for no less than 4010 of the total investment.

These conditions must be fulfilled within three years of the date on which the incentives were granted.

The specific criteria are as follows:

  • The recipient of incentives may not start working on the project before having submitted the incentives application to CzechInvest, i.e. may not acquire long-term assets or employ people for the supported projects; the recipient may enter into a contractual relationship even if the terms of the contract may not yet be fulfilled.
  • The incentives recipient must sustain the investment for at least five years (from the date the assets are put to use).
  • The recipient must sustain the number of newly created jobs for at least five years.
  • The recipient must be the first owner of the tangible investment assets, e.g. machinery, in the Czech Republic, with the exception of real estate and cases where such assets were received from an insolvent Czech company in connection with the capitalization of its assets.
  • Costs for rent of tangible or intangible assets may not be included in the minimum required investment.
  • The proposed production must be environmentally friendly.

Investment incentives are deemed to be a form of State aid and the granting of these incentives is in compliance with EU State aid legislation.

Applying for Investment Incentives

The process starts with the submission of an application for investment incentives to Czechlnvest, which evaluates the application within 30 days and then submits to the Ministry of Industry and Trade a proposal for the granting of investment incentives. The Ministry of Industry and Trade passes on the proposal to the relevant authorities to gain their consent and requests that the Office for the Protection of Economic Competition grant an exemption to the ban on State aid for the given project. On evaluation of the comments from the various ministries, the Ministry of Industry and Trade prepares an Offer to Grant Investment Incentives that states the type and amount of proposed aid. Where the investor's acceptance of the offer is made within six months of the offer date, the Ministry of Industry and Trade issues an official Decision to Grant Investment Incentives.

OTHER FORMS OF STATE SUPPORT

The Czech Republic supports business in non-manufacturing areas. In order to promote business development, it targets the business support services and technology centres. Czech State aid is provided for these centres, as follows:

Customer contact centres. These comprise both out-bound and in-bound call centres, all types of multi-media contact centre based on telephone, fax, e-mail and Internet and other types of contact centre focused on technical support and problem solving.

Shared services centres. These concentrate on company subsidiaries' back-office activities such as finance, accounting, marketing, HR and IT and on the outsourcing of those services for multinational companies.

Information and communication Technology (ICT) expert solution centres. These centres implement IT systems in corporate subsidiaries and the outsourcing of information management and telecom-network operation centres.

Software development and high-tech repair centres. These cover radio sets, television sets and connecting equipment and devices; health-care, precision, optical and time-measuring devices; and the repair of computers, electrical machines and devices, and aircraft.

In addition, the Czech Republic has designed a support scheme for the innovative activities of technology centres linked closely to the mass production of high-tech products and technologies.

Technology centres are particularly involved in products, production systems, manufacturing processes and technology development in order for outcomes to be transferred and used in mass production, especially in such sectors as aerospace, computers and office machines, electronics and microelectronics, telecommunications and pharmaceuticals. Technology centres do not carry out production.

State support may take the form of subsidies for business activities and subsidies for training and retraining. The process of applying for State support is similar to the application for investment incentives.

Subsidies for business activities

The purpose of the subsidy for business activities is to cover related expenses, namely for the payment of payroll costs and purchasing services from Czech business entities. This subsidy may be granted for up to 50% of eligible costs, i.e. expenses on actually purchased tangible and intangible fixed assets and costs for financial leasing or gross wages actually paid to employees in the newly created jobs, including compulsory contributions for social security, public health insurance and state employment policy for up to 10 consecutive calendar years.

Subsidies for training and retraining

A subsidy for training or retraining may be granted for up to 35% of eligible costs on special training and retraining and for up to 60% of eligible costs on general training. Special training is the acquiring of knowledge and skills that are not generally transferable between companies and can be used only within the company or a company branch.

TRADE UNIONS AND WORKS COUNCILS

Trade Unions

The right to establish and belong to associations, unions and societies is one of the fundamental rights under Czech law and is included in Article 27 of the Charter of Fundamental Rights and Freedoms. The conditions for and the process of establishing a trade union are governed by the Association Act. A minimum of three people are required to establish a trade union. It is illegal for an employer to limit the number of trade unions recognized in the workplace or to have a preference for any of them. There is no minimum as to how representative of the workforce a trade union needs to be. Approximately 33% of employees are members of a trade union. Trade unions are the only body representing all employees in labour matters, collective bargaining included, and they can also represent employees who are not trade union members. Unions have the right to decide, co-determine, consult with employers and be informed by employers on matters relating to employees. In addition, they oversee compliance with the employment aspects of labour law and supervise the health-and-safety protection of employees. The Labour Code entitles the trade union leadership to participate in the creation of new labour legislation. Furthermore, unions are entitled to negotiate collective agreements on behalf of all employees. The largest trade union confederation in the Czech Republic - with almost 29 professional trade unions and about one million members - is eskomoravskà konfederace odborových svaz.

Works Councils

A works council serves as an intermediary between an employer and employees in respect of the right to be informed by the employer about matters affecting the employees and to consult according to appropriate EU directives. The works council does not constitute a legal entity and cannot therefore act with legal effect. It is a new institution within the social dialogue of the Czech Republic that is not a substitute for the trade unions. According to Czech law, a works council and a trade union cannot co-exist with one employer. A works council cannot be established with an employer where a trade union already exists and, if a trade union becomes established where a works council exists, the employees' council ceases to exist at the moment of such establishment. The works council is an option where there is no trade union with the employer and, where the employer has over 25 employees, members can be elected by the employees. Each works council has between three and 15 members, with the number of members being determined by the employer after consulting the election committee. The employees' council is not entitled to participate in collective bargaining, be a signatory of the collective agreement or declare strikes.

In addition, the Labour Code sets out the role and conditions of the European works councils, based on Directive 94/45/EC. The stipulations in respect of the European works council will become law on the Czech Republic's accession to the European Union.

REDUNDANCIES AND LABOUR LAW

Redundancy is one of the legal reasons for an employer to dismiss an employee. As soon as an employee becomes redundant, an employer may terminate the employment by written notice of termination delivered to the employee. The employer may only give notice of termination if (i) it is not possible for the employer to employ the employee further in the agreed place of work, even after a prior period of retraining or (ii) the employee is not willing to be transferred to other work that is suitable for him/her and which the employer has offered to him/her at the place agreed as the place of work. The employer may not give notice of termination to the employee during a protective period, namely:

  • during a period of illness or injury of the employee which makes him/her unfit for work,
  • during a period where the employee is called up for military service,
  • during a period where the employee has been given long-term unpaid leave to perform public duties,
  • during a period when a female employee is pregnant or on maternity leave or during a period when a single female or male employee is bringing up a child under three years of age, or
  • during a period when a night worker is temporarily recognized as unfit for night work by a medical expert.

There is a three-month notice period in the event of redundancy. In addition, the employee is entitled to two extra payments equal to his/her average monthly salary or wage. Furthermore, the employer must actively help the employee in finding another suitable job. Should the redundant employee be a single woman or man bringing up a child under 15 years of age or a disabled person without a disability pension, the employer is obliged to ensure that the employee obtains other suitable work. The notice period cannot elapse until other suitable work is found. The employer must discuss the dismissal with the relevant trade union organization in advance. If notice of termination is given to an employee who is a member of the trade union authorized to co-decide with the employer during his term of office and for the period of one year after such office terminates, the employer must ask the trade union for its prior consent to such termination. If the trade union refuses to give consent to the employer the notice is rendered void. An employer may only give notice to a disabled employee with prior consent from the Labour Office.

Collective Redundancies

Until the year 2000 there were no specific conditions in respect of collective redundancies. However, as the Czech Republic is preparing for accession to the European Union, Czech law has had to be changed in order to comply with EU legislation. In order to harmonize Czech law with EU legislation a new section has been added to the Labour Code, which deals with collective redundancies. The term 'collective redundancies' is defined in accordance with Directive 75/129/EEC as termination of employments by an employer on the grounds of organizational changes and redundancies during a period of 30 days. For a dismissal to qualify as a collective redundancy a particular number of employees must be dismissed by a single employer. The number of employees required is based on the total number employed, namely 10 employees dismissed by an employer with between 20 and 100 employees, 10 by an employer with between 101 and 300 employees and 30 employees by an employer with more than 300 employees.

If the employer dismisses via collective redundancies, he has a specific obligation to the trade unions or the works council and the Labour Office. Before the notice of termination is given to the employees, the employer must inform the trade unions or the works council in writing at least 30 days in advance and consult them on any arrangements to obviate or limit the collective redundancies and to mitigate their negative impact. Similarly, the employer is obliged to inform the Labour Office in writing and to provide reasons for the collective redundancies and the total number and category of employees to be dismissed.

The purpose of the employer consulting the trade unions or the works council is to reach agreement on the dismissal conditions acceptable to both parties. Nevertheless, if agreement on such conditions cannot be reached, this has no legal effect on the validity of notices of termination, i.e. on the dismissal, neither does the fact that the employer has not informed the Labour Office and the trade unions or the works council in time. However, the breach of this obligation may result in the Labour Office imposing a fine. Once the employer has made the decision on the dismissal and the outcome of the consultations with the trade unions or the works council is known, lie must submit a written report on these matters to the Labour Office. If there is neither a trade union nor a works council, the employer must inform each employee who is to be dismissed. The employments shall terminate no sooner than 30 days from the submission of the report to the Labour Office by the employer.

CONCLUSION

Czech law has developed rapidly since the 1990s. The legal environment must confront the changing reality - the transition from planned economy to market economy. Great emphasis is also placed on compliance with EU legislation. The Czech investment incentives scheme is an outcome of, and reaction to, the development of the global economic and business situation. The Czech Republic - partly as a result of this scheme - has become one of the most attractive destinations for foreign investment.

Legal treatment of redundancies under Czech law is quite similar to that of other CEE countries and comparable to that of EU countries. Czech labour law is generally, however, still very protective of employees. Labour law pays much attention to the rights of employees and also, therefore, to the subject of redundancies. There is discussion in the Czech Republic as to whether employer-employee relations should be less tight and less employee-friendly.

There has been a significant shift in the role of trade unions since the Communist era, when the unions were in some cases a substitute for a State power. Nowadays, the trade unions are more akin to partners in social dealings. It should be noted, however, that the trade unions still have certain rights, e.g. the right to approve certain employers' internal directives, which employers have to take into account when taking action against their employees. It is relatively easy to establish a trade union organization in the Czech Republic. In addition, Czech labour law addresses works council and European works council issues, and ensures compatibility with relevant areas of EU law.

For further information please contact Patrik Przyhoda at patrik.przyhoda@cms-cmck.com.