Hire in Czech Republic with Confidence

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.

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

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.

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.

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.

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:

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

Unemployment Insurance

Unemployment Insurance is 0.60% of the contractor’s taxable income and is capped at CZK 1,438,992 annually.

Taxes on commercial transactions do not apply to payments made to independent contractors.