Employee vs. contractor: how to classify workers in the Czech Republic (quiz included)
Apr 20, 2023
When hiring workers in the Czech Republic (Czechia), it's crucial to classify them correctly—otherwise, you risk significant fines and penalties under Czech law.
Fines and penalties from the Czech Labor Inspection Authority can be as high as CZK 10,000,000 (approx. $471,000), in addition to penalties from income tax authorities and other government agencies for non-compliance.
Additionally, the Czech Ministry of Labour and Social Affairs has proposed major changes to Czech employment law. So, it’s important to always be on top of constantly changing rules and regulations.
Learn about how to classify your workers and employment relationship correctly—and stay compliant with Czech labor and employment laws—in this guide.
Table of Contents
- Classifying workers in the Czech Republic
- What is an employee in the Czech Republic?
- What is a contractor in the Czech Republic?
- What is an "economically dependent worker" in the Czech Republic?
- Worker classification overview: Employees vs contractors in the Czech Republic
- How to classify your global workers in 90 seconds
- Penalties for misclassifying workers in the Czech Republic
Classifying workers in the Czech Republic
As in many countries, the Czech Republic categorizes employees and contractors differently—and classifying them correctly can be the difference between smoothly running your global team and racking up huge fines and penalties (more on those below).
Misclassification is also damaging for workers: it cheats regular employees out of benefits and protections they're entitled to under the Czech labor code, which complies with EU law. These entitlements include minimum wage, overtime pay, vacation pay, health insurance, social security contributions, pension insurance severance payments, and unemployment insurance benefits. This has a negative impact on the company’s reputation, too.
Czech labor law distinguishes between two types of workers: employees (usually full-time employees) and self-employed individuals.
However, there is a third category of workers in the Czech labor market, known as "economically dependent workers" (read on to learn more).
What is an employee in the Czech Republic?
In the Czech Republic, an employee is defined as an individual who pursues activity according to the employer’s instructions at the time and in the place determined for that purpose by the employer for the remuneration agreed upon in advance. They usually have a contract of employment.
Employees are entitled to benefits including:
- Unemployment insurance
- Sickness insurance
- Holiday entitlements
- Statutory holidays
- Overtime pay
- Care leave (child or family member)
- Minimum wage
- Work week and hours
- Maternity leave
- Paternity leave
- Parental leave
- Severance pay
- Notice period
- Other types of social insurance
Note that the provisions in the Czech Labor Code apply to employees who either have an employment contract (an agreement to complete a job, which is for temporary and seasonal workers) or an agreement to perform work, which is mainly for long-term part-time workers. Independent contractors in the Czech Republic aren’t entitled to any benefits.
What is a contractor in the Czech Republic?
In the Czech Republic, a contractor is defined as an individual who provides services to a business or organization, but who is not an employee of that business or organization. Independent contractors are also known as self-employed individuals, consultants, or freelancers. Employees sign employment contracts whereas contractors enter into civil law agreements.
What is an "economically dependent worker" in the Czech Republic?
These workers are technically self-employed, but they only work for and receive income from a single employer. They typically work under a contract that is governed by the Czech Commercial Code, and the contract may even prohibit the worker from performing any work for any other entity that carries on a similar or equivalent business.
Individuals who fall into this category and carry out dependent work come from a variety of occupations. They include low-paid workers such as construction workers, retail staff, hairdressers, and waiters. However, the category also includes high-paid workers such as pharmaceutical sales representatives and real estate agents.
The status of economically dependent workers is controversial. Some argue that they should be treated as employees, as they are in reality dependent on their employer for their income. Others argue that they should be treated as a self-employed person, as they are technically self-employed and have more freedom than employees.
Worker classification overview: Employees vs contractors in the Czech Republic
- High level of worker control.
Contractors are generally given more autonomy to determine how to complete the work and when to do it.
- Equipment and tools are owned by the worker.
- Less integrated. Contractors tend to be independent, they’re more likely to work remotely, and they use their own tools and equipment.
- No entitlement to benefits. Contractors are not entitled to the same benefits and protections as employees, and they are responsible for paying their own taxes at the correct tax rate on their taxable income.
- Time-bound engagement. Contractors are typically engaged for a specific project or period of time.
- Risk of loss. Contractors may assume more risk and liability for the work they perform.
- Non-exclusive services. Contractors generally cannot be contractually bound to a single company; they can provide their services to more than one organization.
- More direction from the employer. Employees are generally subject to more control and direction from their employer, who will provide guidance on how to perform the work and may set specific hours of work.
- Equipment and tools are typically provided by the company.
- Highly integrated. Employees are typically more integrated into the employer's organization, for example, they may work at the employer's premises.
- Entitled to benefits. Employees are entitled to certain employment benefits and protections, such as minimum wage, overtime pay, and vacation pay. They may also be entitled to benefits like health insurance, retirement plans, and paid sick leave.
- Indefinite engagement. Employees are generally hired for an indefinite period of time.
- No risk of loss. Employees are generally protected from liability for work-related issues.
- Exclusive services. Employees can be contractually bound to provide services to just one company.
How to classify your global workers in 90 seconds
Are you classifying your workers correctly? Find out now.
Accurately classifying your employees and contractors is crucial for complying with employment regulations in the Czech Republic and around the world. With our free classification quiz, you can mitigate the potential business risks and ensure you’re correctly classifying employees and contractors—in just 90 seconds.
Manage contractors effortlessly under a single system with Rippling
Penalties for misclassifying workers in the Czech Republic
Businesses found to have misclassified employees as contractors in the Czech Republic face serious financial risk.
Recently, there has been an increase in sanctions imposed by Czech authorities for false self-employment. The State Labour Inspection Office oversees disguised employment, which is regulated by labor law. Those falsely self-employed face fines of up to CZK 100,000 (approximately $4,700), and firms that employ falsely self-employed individuals face fines ranging from CZK 250,000 (approx. $11,700) to CZK 10,000,000 (approximately $471,000).
Misclassification can result in the same fines and penalties when you hire employees as part of your global team.
There's more than just the financial risk. Companies found misclassifying workers can suffer other consequences, such as legal disputes, reputational damage, difficulty recruiting new workers, negative impact on employee morale, and increased scrutiny from government agencies. Misclassification, whether accidental or intentional, is risky and potentially very costly.
Hire and pay contractors in the Czech Republic with Rippling—quickly and compliantly
Running a global workforce is hard work—especially when it comes to understanding and complying with local labor laws.
But with Rippling, you can onboard and pay contractors in the Czech Republic in a single system with localized onboarding, flexible payments in local currency (CZK) or USD, and country-specific consulting agreement templates.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.