Czech Republic

Contractor Classification in Czech Republic

Businesses hiring talent in Czechia should understand the legal distinction between independent contractors and employees. Misclassification of an employee as an independent contractor and vice versa may be considered an administrative offense punishable with a fine of up to CZK 50,000 (EUR 1,900). It’s crucial to work with a partner like Worksuite when engaging workers abroad, in order to establish a compliant and legal hiring framework.

The Czech Labor Code underlines a clear distinction between an employee (zaměstnanec) and an independent contractor (nezávislý dodavatel).

Czech labor laws follow the principles laid down in various international conventions, the country’s Labor and Civil codes. However, they are constantly subject to revision and policy changes. In 2021, 7% of the Czech labor force were independent contractors. Worksuite can help employers automatically navigate rapid changes to ensure compliance.

Employment Laws

Employment contracts are regulated by the Czech Labor Code (Zákoník práce).

There are three types of labor relations agreements in the Czech Republic:

Contract of employment (pracovní smlouva)
Agreement on the performance of work (dohoda o provedení práce)
Agreement on work activity (Dohoda o pracovní činnosti)

A contract of employment is a primary legal document that stipulates labor relationships. The other two types of agreements are supplemental and cannot be concluded in absence of a contract of employment. All three types of the agreement must be concluded in writing.

If an individual performs dependent work (závislá práce) under a contract of employment, he/she is considered an employee.

In the Czech Republic, employment contracts are permanent by default or are fixed-term for a period of up to 3 years.

There is no requirement to draw up written contracts in Czech.

Independent contractor agreements are regulated by the Czech Civil Code (Zákon občanský zákonik).

In Czechia, independent contractors work on the basis of a civil law contract (občanskoprávní smlouva).

Independent contractors are defined as “entrepreneurs” (podnikatelé) in the Czech Civil Code. Any individual who independently and consistently carries out a gainful activity in the form of providing services for profit is considered an entrepreneur.

There are two types of independent contractor agreements in the Czech Republic:

Contract of mandate (mandátní smlouva)
Innominate (anonymous or not named)contract (inominátní smlouva)

Hiring Practice

Candidates are recruited externally through job boards and advertising. An applicant must submit their CV to the employer and complete all applicable subsequent hiring stages.

Once a decision has been made, the employer must notify the candidate and create an employment contract. The following aspects must be collected and included:

Full name
ID number
Employee’s job title
Employment start date
Work location
Length of annual leave (stipulated by law, but must be indicated nevertheless)
Schedule of weekly work hours
Compensation, payment method, payday schedule, currency
Internal rules of the employer (if applicable)
Collective bargaining information (if applicable)

If the contract does not contain these details, the company must put them in writing within a month of the employment start date.

The Czech Labor Code permits probation periods of up to 3 months for regular positions, and 6 months for managerial positions.

Through professional employer organizations or directly through an established LLC (Společnost s ručením omezeným / s.r.o)

Contractors may be found via word-of-mouth, job boards, social networks, industry bodies, or other forums. Although hiring practices vary, the contractor may be asked to provide a CV, portfolio, and references, and possibly sign an NDA.

There is no limitation on the use of independent contractors.

Tax Documents

Employers are obliged to submit social and income tax reports (hlášení plátce daně o dani z příjmů vybírané srážkou).

Monthly:

Social insurance contribution
Health insurance contribution

Yearly:

Income tax deductions (by April 1st of each year)

Contractors file tax reports and pay income taxes, pension and health insurance contributions (if applicable), as well as mandatory unemployment insurance on their own.

Tax reports are filed online using an individual tax identification number (Daňové identifikační číslo (DIČ)). Income tax reports must be submitted by April 1st of each year.

Payer's Tax Withholding & Reporting Requirements

Employers must withhold:

15% personal income tax for employees whose annual salary does not exceed CZK 1,867,728 and 23% for those whose salary exceeds this threshold
13.5% health insurance (9% of which is paid by the employer and 4.5% by the employee)
6.5% pension insurance

Annual gross earnings are subject to the following deductions:

15% personal income tax for contractors whose annual gross
income earnings do not exceed CZK 1,867,728 (EUR 76,000) and 23% for those whose per annum earnings exceed this threshold
6.75% health insurance
14% pension insurance
0.60% unemployment insurance

No taxes on commercial transactions apply.

Remuneration

Salaries must be paid via wire transfer on a monthly basis on a consistent date stipulated in the employment contract. Payments in foreign currencies are allowed.

Independent contractors are paid:

On the basis of invoices issued directly by contractors by the end of the month. Payments become due after the contractor issues an invoice.
Through outsourced wage processing providers

The frequency of remuneration is to be agreed upon by an employer and a contractor.

Workers’ Rights

In Czechia, employees enjoy the following rights:

Annual leave – 4 weeks
Sick leave – 2 weeks
Maternity leave – 28 weeks, covers 70% of the mother’s average gross salary, beginning six to eight weeks before the due date
Paternity leave – 1 week, covers 70% of an average gross salary, must be used within the first six weeks of childbirth as a single block
Severance pay:

After one year of employment – one month’s salary
After two years of employment – two months’ salary
After three years of employment and beyond – 3 months’ salary

Overtime pay – according to the contract

Independent contractors are not entitled to any employer-granted benefits.

Benefits

All employees must have a pension and health insurance. Contributions are deducted from employees’ salaries and are paid by employers.

Employees may be granted additional internal benefits not otherwise governed by labor laws.

Third-party benefits granted by professional employer organizations may apply when an independent contractor is hired through such organizations (i.e. umbrella company) and is considered their employee.

Pension insurance grants the following governmental benefits to independent

contractors:

old-age pension
invalidity pension
widow’s and widower’s pension
orphan’s pension

No other benefits apply.

When Paid

Around the 10th day of a given month.

Typical contractor invoices are issued monthly on net 30-day terms. Each invoice usually includes the following details:

Invoice number and date
The client’s name and address
The contractor’s bank details
Agreed payment terms and due date

Employment Laws

Employment contracts are regulated by the Czech Labor Code (Zákoník práce).

There are three types of labor relations agreements in the Czech Republic:

Contract of employment (pracovní smlouva)
Agreement on the performance of work (dohoda o provedení práce)
Agreement on work activity (Dohoda o pracovní činnosti)

A contract of employment is a primary legal document that stipulates labor relationships. The other two types of agreements are supplemental and cannot be concluded in absence of a contract of employment. All three types of the agreement must be concluded in writing.

If an individual performs dependent work (závislá práce) under a contract of employment, he/she is considered an employee.

In the Czech Republic, employment contracts are permanent by default or are fixed-term for a period of up to 3 years.

There is no requirement to draw up written contracts in Czech.

Hiring Practice

Candidates are recruited externally through job boards and advertising. An applicant must submit their CV to the employer and complete all applicable subsequent hiring stages.

Once a decision has been made, the employer must notify the candidate and create an employment contract. The following aspects must be collected and included:

Full name
ID number
Employee’s job title
Employment start date
Work location
Length of annual leave (stipulated by law, but must be indicated nevertheless)
Schedule of weekly work hours
Compensation, payment method, payday schedule, currency
Internal rules of the employer (if applicable)
Collective bargaining information (if applicable)

If the contract does not contain these details, the company must put them in writing within a month of the employment start date.

The Czech Labor Code permits probation periods of up to 3 months for regular positions, and 6 months for managerial positions.

Tax Documents

Employers are obliged to submit social and income tax reports (hlášení plátce daně o dani z příjmů vybírané srážkou).

Monthly:

Social insurance contribution
Health insurance contribution

Yearly:

Income tax deductions (by April 1st of each year)

Payer's Tax Withholding & Reporting Requirements

Employers must withhold:

15% personal income tax for employees whose annual salary does not exceed CZK 1,867,728 and 23% for those whose salary exceeds this threshold
13.5% health insurance (9% of which is paid by the employer and 4.5% by the employee)
6.5% pension insurance

Remuneration

Salaries must be paid via wire transfer on a monthly basis on a consistent date stipulated in the employment contract. Payments in foreign currencies are allowed.

Workers’ Rights

In Czechia, employees enjoy the following rights:

Annual leave – 4 weeks
Sick leave – 2 weeks
Maternity leave – 28 weeks, covers 70% of the mother’s average gross salary, beginning six to eight weeks before the due date
Paternity leave – 1 week, covers 70% of an average gross salary, must be used within the first six weeks of childbirth as a single block
Severance pay:

After one year of employment – one month’s salary
After two years of employment – two months’ salary
After three years of employment and beyond – 3 months’ salary

Overtime pay – according to the contract

Benefits

All employees must have a pension and health insurance. Contributions are deducted from employees’ salaries and are paid by employers.

Employees may be granted additional internal benefits not otherwise governed by labor laws.

When Paid

Around the 10th day of a given month.

Employment Laws

Independent contractor agreements are regulated by the Czech Civil Code (Zákon občanský zákonik).

In Czechia, independent contractors work on the basis of a civil law contract (občanskoprávní smlouva).

Independent contractors are defined as “entrepreneurs” (podnikatelé) in the Czech Civil Code. Any individual who independently and consistently carries out a gainful activity in the form of providing services for profit is considered an entrepreneur.

There are two types of independent contractor agreements in the Czech Republic:

Contract of mandate (mandátní smlouva)
Innominate (anonymous or not named)contract (inominátní smlouva)

Hiring Practice

Through professional employer organizations or directly through an established LLC (Společnost s ručením omezeným / s.r.o)

Contractors may be found via word-of-mouth, job boards, social networks, industry bodies, or other forums. Although hiring practices vary, the contractor may be asked to provide a CV, portfolio, and references, and possibly sign an NDA.

There is no limitation on the use of independent contractors.

Tax Documents

Contractors file tax reports and pay income taxes, pension and health insurance contributions (if applicable), as well as mandatory unemployment insurance on their own.

Tax reports are filed online using an individual tax identification number (Daňové identifikační číslo (DIČ)). Income tax reports must be submitted by April 1st of each year.

Payer's Tax Withholding & Reporting Requirements

Annual gross earnings are subject to the following deductions:

15% personal income tax for contractors whose annual gross
income earnings do not exceed CZK 1,867,728 (EUR 76,000) and 23% for those whose per annum earnings exceed this threshold
6.75% health insurance
14% pension insurance
0.60% unemployment insurance

No taxes on commercial transactions apply.

Remuneration

Independent contractors are paid:

On the basis of invoices issued directly by contractors by the end of the month. Payments become due after the contractor issues an invoice.
Through outsourced wage processing providers

The frequency of remuneration is to be agreed upon by an employer and a contractor.

Workers’ Rights

Independent contractors are not entitled to any employer-granted benefits.

Benefits

Third-party benefits granted by professional employer organizations may apply when an independent contractor is hired through such organizations (i.e. umbrella company) and is considered their employee.

Pension insurance grants the following governmental benefits to independent

contractors:

old-age pension
invalidity pension
widow’s and widower’s pension
orphan’s pension

No other benefits apply.

When Paid

Typical contractor invoices are issued monthly on net 30-day terms. Each invoice usually includes the following details:

Invoice number and date
The client’s name and address
The contractor’s bank details
Agreed payment terms and due date

Who classifies as an Independent Contractor in Czech Republic?

Self-employment as an independent contractor is a popular income model for many individuals. The convenience of not being fully dependent on employers, combined with the government’s initiatives to protect independent contractors, has prompted many workers to choose this engagement model. Moreover, an increasing number of Czech professionals, especially those involved in the IT and consultancy sectors, prefer working as contractors for tech giants around the world. The affordable cost of outsourcing and the absence of bureaucracy are the two aspects that satisfy both companies and contractors.

In Czechia, independent contractors are protected by the country’s civil legislation. Services rendered by independent contractors are governed by civil law contracts that do not include benefits enjoyed by full-time employees.

Who is an Independent Contractor?

In the Czech Republic, independent contractors are defined as “entrepreneurs”, and their activities are regulated by the country’s Civil Code. The Law provides the following definition of an independent contractor: “A person who, on his own account and responsibility, independently carries out a gainful activity in the form of a trade or in a similar manner, with the intention to do so consistently for profit, is considered, with regard to this activity, to be an entrepreneur.”

According to the Czech Labor Code, an independent contractor:

Provides services to many companies and does not have an exclusive relationship with any of them;
May have an irregular working schedule and work location;
Is entitled to remuneration related to the factual provision of services;
Does not perform work which is commonly performed by a company’s employees;
Provides or may provide services through third parties;
Is not replaceable by a regular employee in case of a temporary absence

Contracting Models

Czech civil legislation defines two types of independent contractor agreements: contract of mandate and innominate contract. A contract of mandate stipulates an agreement in which the contractor undertakes to perform a specific service or legal action for the company. Innominate contracts constitute all other types of agreements that cannot be classified either as employment contracts or contracts of mandate, but nevertheless contain a description of the activity and mutual obligations.

Engagement Models

There are two primary engagement models for working with independent contractors in Czechia.

A. Direct engagement of the worker as self-employed. Under this model, a hiring company engages directly with an independent contractor and draws up an agreement for the provision of services. The hiring company then pays the independent contractor directly.

In the Czech Republic, foreign companies can establish a local subsidiary and hire independent contractors/employees directly. It is possible to establish an LLC by signing and adopting a Memorandum of Association (Memorandum o přidružení) through a Czech-based public notary. A Czech legal address and bank account are needed for this purpose. Companies registered in Czechia are subject to this country’s corporate taxation.

B. Umbrella company. Firms listed as Employers of Record (EOR) in the Czech Republic are often split into two categories but both are essentially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

Staffing agency: Some contractors may work under an umbrella company. In this case, the contractor is responsible for finding and performing their work, but they are an employee of the umbrella company, which manages payroll and applies an administration fee on the contractor’s earnings.
Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and make payments to them.

Contractor Payments

Independent contractors typically get paid upon issuing an invoice on net 30-day terms to the employer at the end of each month unless otherwise stipulated in the contract. Payments are made through direct deposits to their bank accounts or another preferred method stipulated in the contractor agreement.

Alternatively, companies may partner with wage processing providers. They can process wage calculations, prepare tax statements, and make deposits and withdrawals for contractors.

Terms, conditions, and frequency of payments can be settled between a contractor and an employer. Currencies other than the Czech koruna can be used in the Czech Republic, and they are subject to fluctuating exchange rates, which may have an impact on a contractor’s paycheck.

If you work with a hiring partner like Worksuite, it becomes significantly easier to streamline contractor payment processes. A dependable partner can help you hire contractors legally and pay them quickly, accurately, in euros, and in a way that complies with Czech regulations.

Contractor Taxes

Independent contractors in Czechia are responsible for reporting and paying gross income tax, pension contributions, health insurance premiums, and unemployment insurance contributions. Tax filing procedures are handled by the contractors themselves. Tax reports must be submitted online through the Czech Tax Administration (Finanční Správa) online portal using a unique tax identification number.

Gross Income Tax in the Czech Republic

A 15% tax on earnings that applies to self-employed people earning less than CZK 1,867,728 gross per annum is the gross income tax. In Czechia, the gross income tax rate is progressive, and it increases to 23% when an individual earns more than the amount specified above per year.

Health Insurance and Pension Contributions

In the Czech Republic both employees and independent contractors must have health insurance. A flat rate of 6.75% is deducted from a contractor’s monthly gross earnings, and the deduction must be at least 2,352 CZK per month.

Independent contractors in the Czech Republic are subject to compulsory pension contributions that constitute 14% of a contractor’s monthly gross earnings. Pension insurance grants the following governmental benefits to independent contractors: