SAC defines difference between contract and foreign employees

The Supreme Administrative Court (SAC) has clarified the definition of a contract employee and a foreign employee as set out in the Sickness Insurance Act. The distinction between these two categories of employees working in the Czech Republic is important for social security contributions.

In both foreign employee and contract employee cases, the employer is an entity established in a non-treaty state (meaning all states except for EU and EEA member states, Switzerland and states with which the Czech Republic has concluded a social security agreement). Yet, only contract employees are subject to compulsory social security contributions in the Czech Republic pursuant to sickness insurance legislation; the contributions have to be paid by the Czech company (the contract employer) to which the contract employees have been posted. Foreign employees, i.e. those who are active in our territory for the benefit of a foreign employer from a non-treaty state, are excluded from compulsory sickness insurance in the Czech Republic.

In the case in question (9 Ads 104/2018 of 21 October 2020) the SAC dealt with the obligation to pay social security contributions for the employees of a foreign employer established in Jersey (a non-treaty state); the employees provided management services to a Czech company in the territory of the Czech Republic on the basis of contracts for the provision of services.

The employees had originally worked in managerial positions at the Czech company on the basis of employment relationships concluded under the Czech Labour Code. Their employment contracts with the Czech company were then terminated, only to be formally re-concluded with a company having its registered office in a non-treaty state (Jersey). In this way, the employees could be considered foreign employees. As a result, they ceased to be subject to compulsory social security contributions. However, their job positions and actual job descriptions remained unchanged: they continued to work for the Czech company as they did before the termination of their original employment contracts.

Following an inspection at the Czech company, the District Social Security Administration (DSSA) decided in an administrative procedure that these employees did not meet the definition of foreign employees but were in fact contract employees, as they worked for the benefit of the Czech company and were therefore subject to compulsory social security contributions in the Czech Republic. The contributions were to be paid by the Czech company, which, in DSSA’s assessment, met the definition of a contract employer. Coming to the same conclusions as both the administrative authority and the regional court, the SAC dismissed the cassation complaint filed by the Czech company. 

The SAC stated that although for both categories of employees the employment relationship is with a foreign employer from a non-treaty state, the difference is that for a foreign employee there is no Czech entity (besides the foreign employer) to which the employee would have a close inner link (economic, organisational). 

In contrast, a contract employee has a certain link with a Czech entity, although there is no formal employment relationship. This entity is then a contract employer.

In the light of the above SAC conclusions, if employees whose legal employer is in a non-treaty country are working at your company, we recommend checking the factual nature of the respective arrangement from the perspective of the obligation to pay social security contributions in the Czech Republic.

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