Concurrence of an employment contract and an agreement to perform work for the same employer: beware of illegal cost optimization
In practice, we sometimes come across situations where an employee has both an employment contract and an agreement to perform work (abbreviated in Czech as “DPP”) with the same employer. The Labour Code does not exclude this possibility, but certain conditions and restrictions must be observed.
Not for the same activity
First, it is important to note that it is possible to work for the same employer under one or more DPPs for a maximum of 300 hours per calendar year and if the employee has an employment contract, they cannot perform the same activity under the DPP with the same employer as they do under the employment contract (see the Supreme Court’s decision 21 Cdo 1573/2012). The purpose of this condition is to avoid circumventing the provisions of the Labour Code on working hours, rest periods and overtime.
The job position and the nature of the work performed must be sufficiently distinct and the DPP cannot impose duties on the employee that already fall or could fall within the employee’s job classification under the employment contract. In the case law mentioned above, the delivery driver was to collect money from customers for goods delivered as an additional activity. The Supreme Court held that, although the activities were of a different nature, they were merely an addition to the driver’s job description, as they were directly related to the driver’s performance of his job of delivering goods. This is something to be aware of if an employer is considering a similar set-up. The boundaries of which activities still fall within the scope of the job under the employment contract and which do not may not be entirely clear.
Not without adequate remuneration
The Supreme Administrative Court (decision 4 Ads 175/2011) confirmed that an employment relationship cannot be established without remuneration, i.e. that dependent work cannot be performed without the right to remuneration. The remuneration must be determined with sufficient certainty and its award cannot be linked to facts beyond the employee’s control. It is therefore not possible for an employer to agree with an employee to conclude a contract of employment for other work activities and not to grant them appropriate remuneration for those activities. The remuneration does not have to be set out directly in the DPP, but, for example, may be agreed in another separate contract with the employee or set unilaterally by the employer.
The rights and obligations arising from parallel employment relationships are treated separately. Therefore, when concluding a DPP in addition to an employment contract, all legal requirements and entitlements of the employee must be complied with in relation to the DPP, i.e. not only must the appropriate remuneration be determined as mentioned above, but also the provisions on minimum wages, etc. These obligations will be further extended following the transposition into the Labour Code of Directive (EU) 2019/1152 of the European Parliament and of the Council of 20 June 2019 on transparent and predictable working conditions in the European Union.
Not without the work being done
A counterpart to the above situation would be the conclusion of a fictitious DPP to the employment relationship, under which the employee would receive a fixed extra remuneration but would not perform the work in question. The remuneration under the DPP is intended to be remuneration for the performance of work, not remuneration for the mere existence of an employment relationship. The reason for doing so may be the employer’s intention to avoid obvious wage discrimination in the absence of an increase in wages of other employees with comparable work, or to provide the employee with an extra payment on top of their wage, but with more favourable tax conditions. Namely, income of up to CZK 10,000 per month from a DPP is not subject to social security and health insurance contributions and is only subject to withholding tax, meaning that the employee’s tax obligation in respect of the DPP can be regarded as fulfilled without the need to include this income in the tax return or annual tax reconciliation.
The Supreme Administrative Court recently dealt with a similar case (decision 10 Afs 7/2021-38) in which the employer had concluded DPPs with “fictitious” employees (persons other than the employees who worked for the employer based on concluded employment contracts). These DPPs included remuneration, but there was no evidence that these employees worked for the employer or received the agreed remuneration. On the contrary, the employees working under the employment contract (referred to in the judgment as indisputable employees) received more income in their bank accounts than shown on the payslips, and performed work for the employer beyond the scope of the income shown on the payslips. Consequently, these additional incomes were attributed to the indisputable employees, the difference on payroll tax was assessed and the tax was levied.
If you would like further information or assistance, please contact your contact person in our office or Michal Zahradník or Dana Provázková.
This document is a general communication and should not be regarded as legal advice on any specific matter.