At the end of last year, a law was passed without much fuss, which amended not only the Employment Act, the Act on the Protection of Employees in the Event of Employer Insolvency, the Labour Inspection Act, but also the Labour Code (the “Amendment”). The Amendment, with its effect in its majority from 1 January 2024, has brought several changes in the field of employment, labour inspection controls or conditions and rules of agency employment, which you can read more about in our overview article here.
In our previous articles, we have discussed in detail two major changes in the field of agency employment, namely the modification and extension of the conditions of activity of employment agencies (more here) and the change in the definition of illegal work (more here).
This last part of our series of articles brings you information introduced by the Amendment to Act No. 262/2006 Coll., the Labour Code, as amended (the “Labour Code”), consisting in the introduction of the institute of liability for wage claims of subcontractors in the construction industry. In this sector, a high number of cases of unpaid wage claims have been recorded in recent years, to which the Amendment responds.
Institute of liability
The institute of compulsory liability provided for in the provisions of Section 324a of the Labour Code applies exclusively to general contractors operating in the construction sector, who are thus newly liable for wages, salaries, and remuneration from agreements of their subcontractors’ employees[1] in the event that these wage claims are not paid to them within the specified period.
However, the guarantee is not unlimited and therefore contractors are only obliged to provide it to the extent that the employees have contributed to the contractual performance for them, up to a maximum of the minimum wage. For 2024, this amounts to CZK 18,900[2].
Obliged persons
For the purposes of this method of guarantee, only a construction entrepreneur within the meaning of Section 14(d) of the Construction Act[3], i.e. a person authorised to carry out construction or assembly work as the object of their activity under the Trade Licensing Act, shall be considered a contractor. In practice, this will be the case specifically for contractors who carry out construction activities through other subcontractors.
The scope of subcontractors is also specified by the Amendment, as it explicitly includes employment agencies that temporarily assign suitable employees to the contractor, as the user, to perform construction activities.
As the Amendment also responds to the frequent chaining of suppliers in practice, this may result in a situation where not only the supplier at the highest level of the contractual chain will be liable for wage claims, but also another subcontractor standing directly above the subcontractor in the resulting chain who is the employee’s employer in relation to the specific employee. These guarantors will thus be jointly and severally liable and will have recourse claim against the non-paying employer in the event that the guarantor’s obligation is fulfilled.
Establishment of liability and claim
The employee is entitled to assert his claim against the guarantor in the event that his employer has not paid him his wages, salary or remuneration under the agreement for the work he has performed for the contractor by the end of the payment period within the meaning of Section 141(1) in conjunction with Section 144 of the Labour Code, i.e. by the end of the calendar month following the month in which the employee’s right to payment arose. The employee may then ask the guarantor in writing to satisfy the relevant wage claims, but not later than 3 months after the expiry of that period, failing which such claim shall lapse.
The notice shall contain the statutory information required by law, which shall be (i) the name of the employee, (ii) the designation of the employer, (iii) the type of work performed, (iv) the period for which the wage claim is made and the extent of the work performed in the course of the performance for the contractor, (v) information on the expiration of the wage claim period, (vi) the method of payment required, including the information necessary to make the payment, and (vii) the information necessary for the calculation of the advance income tax and the designation of the health insurance company to which the relevant contributions are to be paid.
The guarantor is obliged to satisfy the wage claims within 10 days of receipt of the employee’s written demand. At the same time, the guarantor must inform the employer (subcontractor) of the amounts paid to each employee and the deductions made. In a contractual chain of multiple subcontractors, he shall also inform the other guarantor.
Employer’s information obligation
The amendment establishes an information obligation, which is regulated under new letter j) in the provisions of Section 279(1) of the Labour Code, under which the employer in the capacity of a subcontractor is obliged to inform its employees about the possible emergence of this liability, the persons of the guarantors and their changes, including the conditions, time limit and procedure for exercising the right against the guarantor, before the commencement of construction work on the contract.
Imminent sanctions
In connection with the institute of liability, the Amendment introduces new offences in the field of labour inspection, including (i) failure of the employer to comply with the employer’s information obligation, and (ii) failure of the guarantor to settle wage claims within the period after being requested to do so by the employee.
In both cases, the obliged entities are threatened with a fine of up to CZK 2,000,000 for these offences.
Exemption from liability
The Supplier may only be released from liability if the following conditions are met:
- the subcontractor shall provide, at the time of commencement of the contract performance, confirmation that the subcontractor is not in arrears with mandatory payments (insurance, social security penalties, state employment policy contributions and public health insurance), which must not be older than 3 months, and at the same time
- the subcontractor has not been fined more than CZK 100,000 in the preceding 12 months for violation of obligations arising from labour law regulations.
If the above conditions are met, the guarantor shall not be liable for the wage claims of employees of subcontractors lower down the contractual chain.
Context of European legislation
The implementation of this specific liability institute is based on Directive 2014/67/EU of the European Parliament and of the Council of 15 May 2014 on the enforcement of Directive 96/71/EC concerning the posting of workers in the framework of the provision of services and amending Regulation (EU) No 1024/2012 on administrative cooperation through the Internal Market Information System (the “Directive”).
According to Article 12 of the Directive, Member States are obliged to take measures to ensure that, in the context of a subcontracting chain, posted workers can also hold the recipient of the service (the supplier) responsible in addition to or even instead of their employer, who provides the service directly to such recipient. In this way, the Directive emphasises that liability for unpaid wages, salary, or remuneration under the agreement rests not only with the employer but also with the recipient of the service, particularly in the construction sector.
Although the above-mentioned article of the Directive has already been transposed into Czech law in the form of Section 319(3) of the Labour Code, the Amendment deleted this provision and extended it to the new Section 324a of the Labour Code not only to posted employees who may have problems with exercising their rights in the host state, but also to employees in the domestic state.
How to do it in practice?
In practice, we recommend focusing primarily on the period preceding the contractual performance itself, which is crucial in terms of whether there will be any possibility of claiming against the guarantor or the risk of possible sanction.
On the part of the suppliers, this includes the provision of a certificate certifying the subcontractor’s debt-free status in order to exclude legal liability, or the appropriate setting of contractual terms to limit this liability at least adequately.
At the same time, we would like to draw attention to the application pitfall of the moment of commencement of contractual performance, as this may in practice differ from the moment of conclusion of the contract by several weeks, sometimes even months, depending on the complexity of the construction project. In such cases, the contractor will therefore have to request the subcontractor’s certificate of debt-free status again, otherwise it will voluntarily expose itself to the risk that the conditions for the waiver of statutory liability will not be met at the date of commencement of performance. In this respect, we therefore recommend that the resubmission of the certificate of debt-free status be contractually regulated.
On the other hand, employers in the position of subcontractors should, above all, ensure that they fulfil their information obligations to their employees in a proper and timely manner to avoid any possible penalty for non-compliance. In this context, it is recommended to inform employees in an appropriate manner in order to provide evidence that can serve as proof in the future in case of a labour inspection.
Beyond the above, it is recommended that the selection of specific subcontractors should be carefully considered, as it also plays an important role in this respect.
Conclusion
The institute of compulsory liability for wage claims of subcontractors in the construction industry is an implementation of EU legislation aimed at better protecting the wage claims of posted employees. However, the Amendment also extends this protection to domestic workers in the construction sector, who are most at risk according to European statistics.
The so-called general contractor, or even the directly superior contractor of the subcontractor in the case of a contractual chain, is now liable for the subcontractor’s wage claims up to the minimum wage under the conditions set by law.
At the same time, this subcontractor liability is also enshrined in the Insolvency Protection Act and the Labour Inspection Act, which should contribute to better regulation as well as supervision of these relationships.
Should you have any questions regarding this specific type of liability or need assistance with the preparation of the contractual documentation, please do not hesitate to contact us.
[1] The Labour Code uses the term “poddodavatel” meaning subcontractor, which in the area of civil law terminology has replaced the existing, especially in practice commonly used term “subdodavatel”.
[2] According to Government Decree No. 396/2023 Coll., amending Government Decree No. 567/2006 Coll., on the minimum wage, on the lowest levels of guaranteed wages, on the definition of a difficult working environment and on the amount of wage supplement for work in a difficult working environment, as amended.
[3] Act No. 283/2021 Coll., Building Act, as amended.
Mgr. Kateřina Lansdorfová, junior lawyer – lansdorfova@plegal.cz
Rachel Kouklíková, legal assistant – kouklikova@plegal.cz
Mgr. Jakub Málek, managing partner – malek@plegal.cz
11. 4. 2024