Employer, beware! Pitfalls of the new Labor Code

As an employer, you can probably live very well with almost all of the changes January 1, 2012 will bring for the Czech Labor Code. As an employer who plans some corporate restructuring, transfer of enterprise or simple outsourcing of some key activities, however, from next year on, things might get very complicated — so nasty that you might decide to abstain from such restructuring.  Why is this so?  Because  employees will have the right to leave before the  restructuring or transfer takes effect.

The basic principle in the event of transfer of an enterprise (převod podníku) or a corporate merger under the Commercial Code has existed for many years and reads as follows:  employees transfer to the new employer with the same rights and obligations they had before. Similar rules apply under Czech law for the transfer of the main activities of the employer. The principle is rooted in European law and the intention of protecting the employee is certainly justifiable.

Until the end of this year, if a corporate reorganization or outsourcing of key activities is intended, employees have to be informed 30 days in advance, either directly or — if a trade union existed — through such a body, then they were transferred and that was it. The main technical problem for HR responsible for the integration into the new employer was then to realign their working conditions with those of similar employees at the new employer — the principle of equal treatment. Now, this is something that is likely to create some insecurity for the new employer — what does the term ‘materially worse’ mean?

From next year on, the duty to inform remains. The employee, however, will have an additional right to a severance payment of one to three monthly salaries, should the employment conditions at his new employer be materially worse than before and he gives notice within two months after the transfer (the new § 339a Labor Code).

Now, this is something that is likely to create some insecurity for the new employer — what does the term “materially worse” mean? An additional workload, for instance? Sitting in an open space office instead of the one-person office as before? Commuting five additional kilometers within Prague? Legal insecurity increases and so will the court cases. In my estimate, it will take five to ten years until one will have some consistent and dependable  rulings by the Czech courts dealing with such matter. Nevertheless, the risks arising from this novelty can be estimated by the employer to be only the amount of the severance payment.

Arthur Braun

The new employer who counts on a certain number of staff going over with the enterprise, however, faces an even worse challenge. Whereas he can influence the work conditions of the transferred employees, he will not be able to know for instance, how many employees he will have on April 1 if that is the intended date of transfer. Up to March 31, any and all of the employees have the right to terminate without giving reason and without having to give  any notice period (new sect. 51a) Labor Code)!

In a worst case, a new employer who has taken over an entire factory, machines, orders to be worked processed, etc., could  find out on the day prior to the transfer — without any warning time — that no employees will come with the factory. And he cannot return the factory to the Seller because Seller won`t have any employees left either!

This is, of course, of no protection to employees but is simply adding up to insecurity. In practice, unless you have a real share deal, meaning that the shares in a company are being transferred, contracts on transfer of enterprise will probably include rights of the purchaser to reduce the purchase price in the event of a sale and at least key employees will be paid bonuses if they do not exercise such right. The employee might expect an additional bonus just for not handing in a notice at a wrong time.

And if it were only transfers between third parties ... In my experience, at least half of the thousands of similar transfers in the Czech Republic each year take place within the same company group.  An example could be that a company group decides to have the IT departments centralized in a new shared service center or to contribute a part of its business into its parent company. Even if the company group and possibly the desk and the laptop the employee works on will be the same, the employee might expect an additional bonus just for not handing in a notice at a wrong time. Or he might expect an additional bonus after two months as reward for having not turned in his notice relating to worsening of employment conditions.

Somehow, Czech lawmakers have overdone it in his wish to protect the employee in the case of transfers (by the way without being required to do so under European law). How to fix it? For instance as in the case of Germany employees, they have the right to oppose a transfer only within a short term after the employee learned of the change. If they refuse, then they stay with the former employer.

After the term elapsed, the new employer can count on a certain number of staff able to continue operations. And should the new employer really not respect the protection of the historic employee`s rights, he may be sued but not under threat that any change after the transfer date means many employees leaving and claiming severance payment.

The changes afflicted on the employees and the employer by corporate transformations and outsourcings are the most difficult disciplines for any HR department on the world. The revised Czech Labor Code makes it even more difficult for them.

Rechtsanwalt and advokát Arthur Braun is a partner at bpv Braun Partners