Shortly before the end of last year, the Ministry of Labour and Social Affairs of the Czech Republic (MLSA) introduced Act No. 408/2023 Coll., which amends the Employment Act, but as a result of amendments, part of the Act also affects the Labour Code. This amendment passed somewhat in the shadow of the major amendment to the Labour Code, which mainly concerned changes to agreements outside the employment relationship.
As the title suggests, construction entrepreneurs under the Construction Act (typically the trade of Construction, Alteration and Removal) from 1 January 2024 are liable for the payment of wages of their subcontractors' employees, to which they are entitled after that date, up to the minimum wage. In a multi-subcontractor contract chain, the contractor at the highest level of the contract chain (general contractor) shall also be jointly and severally liable with the contractor.
The Directive on which this regulation is based is primarily aimed at protecting posted workers. It is more difficult for them to assert their rights in the host country. However, the Ministry of Labour and Social Affairs has taken the opportunity to apply the "Act" across the board to domestic entities, referring to the European Commission's statistics, which indicate that the largest share of unpaid wages is in the construction sector. The aim is to motivate contractors to choose reputable subcontractors.
The explanatory memorandum demonstrates the new arrangement in the following diagram:
If the employer (Subcontractor C) fails to pay its employee (Employee Z) by the end of the pay period, the employee may apply to the entity for which the employer performs the subcontract (Subcontractor B) and that entity becomes the guarantor for payment of the wages, up to the minimum wage. At the same time, the Prime Contractor (Contractor) is also the guarantor. Employee Y may do likewise (Subcontractor A and the Prime Contractor are the guarantors). Should Subcontractor A fail to pay its employee (Employee X), the employee can only apply to the Main Contractor.
At the same time, the guarantor is obliged to pay the wage claims within 10 days of receipt of the notice, including deductions, and to inform the employer of the amount paid. If the employee concerned fails to make the demand within 3 months of the due date, the right to claim from the guarantor shall be extinguished. Thus, in practice, an employee of a subcontractor may call upon the contractor to pay unpaid wages even 4 months after the completion of the relevant subcontract.
The fine for failure to comply with the guarantor's obligation can reach up to CZK 200,000. If the guarantor fulfils its obligation, it is entitled to compensation from the employer. For these cases, we recommend that you also contractually address these obligations (e.g. by means of suspensions, contractual penalties or set-off).
However, the guarantor may be exempted from the obligation of liability if the subcontractor has provided the guarantor with a certificate of debt-free status from the Social Security and Health Insurance Institutions at the commencement of the contractual performance. At the same time, the subcontractor must provide confirmation that it has not been fined more than CZK 100 000 for breaches of labour law in the last 12 months.
If this condition is met, it is not liable for the wage claims of employees of subcontractors further down the contract chain. We recommend that the contractual documentation be modified along these lines and that confirmation from subcontractors be insisted upon. Confirmations from the Social Security and Health Insurance Institutions are well established in practice; the last confirmation will be issued by the State Labour Inspection Office.
This also applies to changes in the data communicated by the employer. If the information provided to the employee is incorrect (e.g., the name of the company to which claims can be submitted is incorrect), this constitutes a new offence under the Labour Inspection Act (fine of up to CZK 200,000).
One may then ask whether a law adopted without wider discussion as an amendment, which we could only prepare for 4 days after its publication in the Collection of Laws, will really be an effective instrument for enforcing the rights of those it is intended to protect. Or rather, it will bring new administration, costs and slow down processes in the construction industry.
Autor: Adam Hussein
As the title suggests, construction entrepreneurs under the Construction Act (typically the trade of Construction, Alteration and Removal) from 1 January 2024 are liable for the payment of wages of their subcontractors' employees, to which they are entitled after that date, up to the minimum wage. In a multi-subcontractor contract chain, the contractor at the highest level of the contract chain (general contractor) shall also be jointly and severally liable with the contractor.
The Directive on which this regulation is based is primarily aimed at protecting posted workers. It is more difficult for them to assert their rights in the host country. However, the Ministry of Labour and Social Affairs has taken the opportunity to apply the "Act" across the board to domestic entities, referring to the European Commission's statistics, which indicate that the largest share of unpaid wages is in the construction sector. The aim is to motivate contractors to choose reputable subcontractors.
The explanatory memorandum demonstrates the new arrangement in the following diagram:
If the employer (Subcontractor C) fails to pay its employee (Employee Z) by the end of the pay period, the employee may apply to the entity for which the employer performs the subcontract (Subcontractor B) and that entity becomes the guarantor for payment of the wages, up to the minimum wage. At the same time, the Prime Contractor (Contractor) is also the guarantor. Employee Y may do likewise (Subcontractor A and the Prime Contractor are the guarantors). Should Subcontractor A fail to pay its employee (Employee X), the employee can only apply to the Main Contractor.
Obligations of the guarantor
If the employer fails to pay the wages when due, the employee may request the guarantor in writing to pay the wages. The employee's demand to the guarantor must contain a specified list of particulars so that the guarantor's obligation can be fulfilled. These details include, for example, the identity of the employee and the employer, the type of work performed, the period for which the wage claim is made or even the details necessary for the calculation of the levy.At the same time, the guarantor is obliged to pay the wage claims within 10 days of receipt of the notice, including deductions, and to inform the employer of the amount paid. If the employee concerned fails to make the demand within 3 months of the due date, the right to claim from the guarantor shall be extinguished. Thus, in practice, an employee of a subcontractor may call upon the contractor to pay unpaid wages even 4 months after the completion of the relevant subcontract.
The fine for failure to comply with the guarantor's obligation can reach up to CZK 200,000. If the guarantor fulfils its obligation, it is entitled to compensation from the employer. For these cases, we recommend that you also contractually address these obligations (e.g. by means of suspensions, contractual penalties or set-off).
However, the guarantor may be exempted from the obligation of liability if the subcontractor has provided the guarantor with a certificate of debt-free status from the Social Security and Health Insurance Institutions at the commencement of the contractual performance. At the same time, the subcontractor must provide confirmation that it has not been fined more than CZK 100 000 for breaches of labour law in the last 12 months.
If this condition is met, it is not liable for the wage claims of employees of subcontractors further down the contract chain. We recommend that the contractual documentation be modified along these lines and that confirmation from subcontractors be insisted upon. Confirmations from the Social Security and Health Insurance Institutions are well established in practice; the last confirmation will be issued by the State Labour Inspection Office.
Specific obligations of subcontractors
If the employer is a subcontractor in a contractual chain of construction contractors, it is obliged to inform its employees of this fact before starting work and to inform them of their rights and obligations arising from the liability. The employer is also obliged to provide them with information about other entities in the contractual chain, in particular the contractor and upstream contractors who are liable for the payment of the employee's wages and to whom the employee may submit claims.This also applies to changes in the data communicated by the employer. If the information provided to the employee is incorrect (e.g., the name of the company to which claims can be submitted is incorrect), this constitutes a new offence under the Labour Inspection Act (fine of up to CZK 200,000).
Problem areas, consequences
Given the speed of the legislative process in which the amendment was adopted, it raises many application problems and uncertainties. Examples include the following:- The moment of commencement of the contractual performance. Especially for larger projects, this may differ from the date of conclusion of the contract by several months. Therefore, either the contractor will require a certificate of debt-free status twice or he will not be sure whether he meets the conditions laid down by law for the waiver of liability.
- Verification of the veracity of the information in the employee's challenge. The law does not give the surety any way to verify that the claim asserted is legitimate - whether the surety is even an employee of the subcontractor or to what extent the surety performed work on the contract. Under the language of the Act, the employee's challenge need not contain any supporting verification, only information. However, if the surety fails to pay wages within 10 days, it faces the threat of a fine.
- Scope of liability. The liability shall cover wage claims to the extent that the employees have participated in the contractual performance for the supplier. However, if the employees are only partially paid, it is not at all clear whether or to what extent the guarantor should be liable.
One may then ask whether a law adopted without wider discussion as an amendment, which we could only prepare for 4 days after its publication in the Collection of Laws, will really be an effective instrument for enforcing the rights of those it is intended to protect. Or rather, it will bring new administration, costs and slow down processes in the construction industry.
Autor: Adam Hussein