Czech Republic | How to: Collective Redundancies

Such a situation often meets the parameters for collective redundancy, and it is necessary to comply with the special provisions of the Labour Code regulating this issue. Below we present a few points which can help you navigate the process and make it significantly easier.

1. The correct dismissal reason

In order to terminate the employment relationship with the employee, the employer must have a statutory reason. In other words, the employer cannot terminate the employment relationship without a reason; the termination by dismissal must always be based on a specific statutory provision. In the case of collective redundancies, two of those reasons are used in practice:

1. dissolution of the employer or a part thereof; and
2. redundancy of the employee due to an organisational change.

The choice of the correct dismissal reason is crucial. If the employer chooses an incorrect one, then regardless of the situation the notice may be invalid and the employee can successfully invoke the invalidity of the notice before the court. This applies even if the restriction on production is real and the employee truly has no need to further employ the employee.

How to distinguish both dismissal reasons?

When dismissing an employee due to the dissolution of the employer or a part thereof, the number of employees is limited precisely because of the dissolution of the employer, i.e. the employer leaves the business or generally ceases to perform the activities for which it employed the employees either fully or in relation to a specific part thereof. Part of the employer is to be understood as a relatively independent division (e.g. a subsidiary or branch), which usually has its own production facilities and premises, is defined in internal regulations and led by a managerial employee. The dismissal reason of dissolution of part of the employer applies, for example, if the employer ceases the production of one of its products. Then the employees assigned to the production of this product will be dismissed due to the dissolution of part of the employer.

On the other hand, the dismissal reason of redundancy applies when the employer has made a decision causing the work of some of its employees to no longer be necessary, even though the employer can objectively continue to further employ the employee and its business activity is not limited. This is the case, for example, when the employer does not have enough work for all its employees due to a lack of customers and therefore dismisses some of its employees and continues its (unchanged) business activities with a reduced number of employees.

Tip: In some cases, a combination of both of these dismissal reasons can occur. For instance, if an employer ceases production of one of its products and dismisses the employees working on that production line due to dissolution of part of the employer, the dissolution of part of the employer and the related restriction of its business activities will affect some of the employer's other departments, typically HR and accounting. Some of these employees therefore may be dismissed due to redundancy. Thus, a combination of dismissal reasons occurs as one group of employees is dismissed due to dissolution of the employer and the second group (in other departments) is dismissed due to redundancy.

Risks: As stated above, it is essential to correctly determine the dismissal reason. There is a wide choice of case law on collective redundancies, which distinguishes individual dismissal reasons case-by-case. If the correct dismissal reason is not chosen, the employee can invoke invalidity before the court. If successful, the employer is obliged to re-employ the employee, reimburse the costs of the proceedings and pay the employee salary for the entire duration of the court proceedings. Unlike other neighbouring states, Czech law does not regulate the capping of salary compensation and therefore, depending on the length of the court proceedings, this can reach significant amounts.

In relation to dismissals it is necessary to draw attention to another danger associated with the transfer of rights and obligations (sometimes in practice referred to as a TUPE transfer). If the employer terminates part of its production and this part will continue to be provided by another entity (typically as its supplier), statutory conditions for the transfer of rights and obligations from employment may apply and the employer is not entitled to terminate the employees concerned. On the contrary, the employer must ensure the proper transfer of these employees to the new employer (its new supplier), and especially comply with its duty of information. If the employer fails to comply with these obligations, apart from lawsuits from the dismissed employees, it may face sanctions by the labour inspectorate.

Protection period

When applying individual dismissal reasons, a so-called protection period must be taken into account. It is a regulation under which an employee cannot be dismissed in certain situations, even if the preconditions for termination of employment by dismissal are objectively given. Typically, this may be a case of prohibition of dismissal due to redundancy if the employee is on sick leave.

2. When will the rules on collective redundancies apply?

The rules on collective redundancies apply only if, within 30 consecutive days, the employment relationship is terminated by dismissal with a certain number of employees stipulated by law. The Labour Code stipulates the following parameters:

a) for an employer with 20 to 100 employees, at least 10 employees must be redundant;
b) for an employer with between 101 and 300 employees, at least 10 % of the employees must be dismissed; and
c) for an employer with more than 300 employees, the decisive number is 30 employees.

Only employees whose employment was terminated by dismissal are taken into account. However, if five notices had been given, employees whose employment has been terminated by agreement for the same reasons are also included.

Tip: The employer can prevent the application of the statutory regime of collective redundancies if it concludes agreements on termination of employment with all employees (or with a substantial majority). In such a case, the employer does not have to comply with its duty of information towards the state authorities; however, out of consideration for good relationships, previous notification is advisable. Even in this case the employer is obliged to comply with its duty of information towards the employees or their representatives. However, the main advantage of this procedure is speed. The employer may proceed to termination of employment immediately and agree on an earlier date of termination than in the case of dismissal (e.g. the date of signing of the agreement). Another significant advantage is legal certainty: the possibility of successfully invoking the invalidity of an agreement of termination of employment before the court is significantly lower compared to dismissal.

3.How to proceed with collective redundancies

a. Preparation

The basic precondition for the implementation of collective redundancies is thorough preparation of the whole process. It is necessary to check if there are any documents which could cause a deviation from the statutory regime and prolong the redundancy process or lead to higher costs for the employer.

Tip: As a part of the preparation for the collective redundancy, it is appropriate to become acquainted with the content of collective agreements. These often contain agreements on longer deadlines for negotiations or on increase of the statutory severance payments.

It should also be borne in mind that the employer may be employing employees who, for various reasons, have other than standard individual agreements. Key employees or senior managers often have special agreements for a non-compete clause or a different length of notice period.

It is also a good idea to check among the employees if there is no one who performs the function of a so-called responsible representative according to special law (applies to quite many trade licences) or is otherwise difficult for the employer to replace.

b. Implementation

Negotiation

The collective redundancy procedure differs depending on whether employee representatives operate at the employer or not. If yes, before proceeding to collective redundancy, the employer must discuss its intention with the trade union and the employee council, and provide them with written information about the basic parameters of the collective redundancy, particularly the dismissal reasons, the number and professional composition of the employees to be dismissed as well as the time at which the redundancy is set to take place.

This negotiation must occur at least 30 days before the employer proceeds with the dismissal. The purpose is to consider options for decrease of negative effects of collective redundancies on employees, such as the possibility of employment at other workplaces of the employer or the possibility of limiting the collective redundancies (e.g. by an agreement on salary reductions).

If no employee representatives operate at the employer, the employer is obliged to comply with the negotiation obligation within the meaning of the previous provisions towards each employee concerned.

Information obligations towards the state

The employer is obliged to inform the branch of the Labour Office twice in the regime of collective redundancies. The purpose of this information obligation is to enable the competent authorities to prepare for the influx of unemployed persons and to find a suitable job according to their professional composition.

The first written information should be provided right at the start as soon as the employer intends to proceed with collective redundancies (at least 30 day before dismissal). It contains basically identical information that the employer should also discuss with the employee representatives (i.e. the reason for the dismissal, the number of employees affected, their positions, etc.).

The employer will submit the second written notification to the Labour Office after the end of negotiations with the employee representatives containing information about the result of these negotiations (i.e. whether the number of dismissed employees was reduced while salaries were reduced, etc.). This information contains the final figures on the released persons.

Risk: Compliance with the information obligation towards the Labour Office is crucial. In case of non-compliance the employer may be fined up to CZK 200,000. More importantly, however, is that if this information obligation is not met, the employment of collectively dismissed employees will not end (regardless of whether the notice period would otherwise expire). The Labour Code contains a special provision according to which the employment relationship ends no earlier than 30 days after the delivery of the second information notification to the Labour Office. Without this second notification, the employment relationship will never end and the employee can claim compensation from the employer.

Delivery of notices

The last stage of collective redundancies is the delivery of notice. The notice must be given to the employee in writing in the original copy and delivered in person. The employer should primarily deliver it to the employee at the workplace. If this is not possible, it can be delivered wherever the employee is reached. If the notice is delivered by post, it must be delivered to the address communicated in writing by the employee.

Tip: For the purposes of delivery of documents, it is appropriate to have a form prepared for each employee as a part of the admission package where the employee confirms their address for delivery in writing.

4. Costs

Upon termination of employment due to dissolution of the employer or a part thereof, as well as termination due to redundancy, the employee is entitled by law to severance pay, the amount of which is graduated according to the duration of the employment as follows:

1. if the employment lasted less than one year, the employee is entitled to one times the average monthly earnings;
2. if the employment lasted from one year to less than two years, the employee is entitled to two times the average monthly earnings; and
3. if the employment lasted two years or more, the employee is entitled to three monthly average earnings.

In order to determine the amount of severance pay the length of the employment relationship must be calculated, including the notice period. Therefore, the decisive factor is not the moment of the delivery of the notice, but the date of the actual termination of employment.

Tip: The severance pay provided to employees due to the above-mentioned dismissal reasons is taxed more favourably, as it is a subject only to income tax and no longer to social and health insurance contributions. This also applies if the employer voluntarily provides a higher severance pay than stipulated by law.

In practice, the employer often provides the employee with increased severance pay if the employee concludes an agreement with the employer on termination of employment and at the same time agrees to terminate the employment on a certain (usually earlier) date. Such a procedure is beneficial to both parties, reduces the risk of litigation for the employer (as mentioned above, disputing the agreement is disproportionately more difficult for employees than challenging dismissal), while allowing the employer to tailor the whole process to its needs (e.g. termination of key employees at a later date to help the employer cease its operations). In general, this regime is also more advantageous for the employees. The increased severance pay paid by the employer is not subject to all levies and therefore the employee will usually receive a higher net amount than if they had continued to work during the notice period. At the same time, when agreeing to an earlier termination date the employee may start another job earlier without affecting the severance pay already paid.

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Collective redundancies bring a number of dangers that should be prepared for in advance. Should you need any support in this difficult process, the experienced team at Schoenherr is at your disposal.

author: Helena Hangler