Protection of the employee in case of financial insolvency of the employer

One of the basic obligations of the employer according to the Labour Code is to pay the employee a wage or salary for the work performed. However, if the employer gets into an unfavourable financial situation, the payment can become a problem. Act No. 118/2000 Coll., On the protection of employees in the event of the employer's insolvency (hereinafter as the “Employee Protection Act”) provides for situations where a moratorium was imposed on the employer before the commencement of insolvency proceedings or an insolvency petition was filed with the insolvency court. Employee Protection Act should now be amended in connection with the Covid-19 epidemic, or with extraordinary government measures and related new laws, by a special law, which is now in phase of the approval process of the Parliament of the Czech Republic.

When will the protection take effect?

The Employee Protection Act allows for an employee, in a situation where the employer is clearly not, and probably will not be any time soon, able to pay the wage, salary or remuneration due to the employee under the contract for work or work performance agreement (the “Wages”) to collect his/her money.

The employer becomes insolvent, if he has not satisfied the due Wage claims of the employees, as at the day following the day on which the insolvency petition was filed before the competent court of the Czech Republic or after the day on which the moratorium was declared before the commencement of insolvency proceedings. (for a multinational employer, also the day on which the employer was declared insolvent by a competent authority in another Member State of the European Union).

Due to the complexity of insolvency proceedings, a special and relatively quick way is created for the employee to take to satisfy his Wage claims. The employee has to submit an application for compensation of his/her Wage claims to the Labour Office through its regional branch in whose district the employer has its registered office, place of business or, if applicable, residence. The employee may demand Wages, their compensation and severance pay if they arose in the so-called decisive period.

The decisive period is the calendar month in which the insolvency petition was filed (or a moratorium was declared before the insolvency proceedings were started), as well as the three calendar months preceding that month and the three calendar months following that month. Information about the employer whose employees claim their Wages will be posted by the Labour Office on its official notice board at the same time as information on the period within which employees can assert these rights. The deadline for making a claim is five months and fifteen calendar days following the date on which this information is published on the official notice board of the Labour Office. The official board is available on the web at https://www.uradprace.cz/web/cz/uredni-deska.

In addition to the Employee Protection Act, an employee has the opportunity to apply to the Labour Office for compensation for unpaid severance pay pursuant to Section 44b of Act No. 435/2004 Coll., On Employment, after termination of employment, if he became entitled to unemployment benefits, even if the employer is not insolvent. However, this specific situation is not the subject of this article.

What must the application contain?

The employee's application must contain at least the identification data of the employee and the employer, the amount of the Wage claims applied, the data required for the calculation of income tax, the calendar months of the relevant period and the required method of payment of Wage claims. Together with the application, the employee is obliged to prove the occurrence of Wage claims, especially the duration of the employment relationship. The Labour Office will then ask the employer to submit a written list of the outstanding Wage claims of all its employees for the relevant period. If the amount of Wage claims and the period for which the employee makes claims coincides with the employer's report, the Labour Office will satisfy the employee's Wage claim in the required amount. If the amount of Wage claims does not match, the Labour Office will decide on granting the employee's Wage claim only in the proven amount providing that if it is not possible to prove the amount of claims at all, the employee will be granted a Wage claim in the amount of the minimum wage.

Wage entitlements may be claimed by the employee to the extent corresponding to the payroll entitlements due for the three calendar months of the decisive period, while the total amount of wage entitlements that may be paid to the employee shall not exceed one and a half times the average wage in the national economy in one month, i.e. for the period from 1 May 2020 to 30 April 2021, the amount of CZK 51,188. This amount is assessed as of the date of filing the insolvency petition (or the announcement of a moratorium before the commencement of insolvency proceedings). The amounts awarded are gross amounts and from these amounts the Labour Office will pay mandatory deductions and levies on behalf of the employees.

Special Situation - Lex Covid

In the current situation of the coronavirus crisis it was necessary to take into account that the possibility of the employer going into insolvency unfortunately increased and Act No. 191/2020 Coll., On certain measures to mitigate the effects of the SARS CoV-2 coronavirus epidemic on parties to the proceedings, the injured party, the victims of crime and legal persons and amending the Insolvency Act and the Code of Civil Procedure ("Lex Covid") was issued. Lex Covid provides for special measures regarding the insolvency petition filed by the creditor. The petitions filed from 24 April to 31 August 2020 shall not be taken into account. The suspension of the creditor's ability to trigger insolvency proceedings with his insolvency petition leads to the exclusion of the effects of the creditor's insolvency petition, which, however, does not necessarily mean that the employer is not insolvent. In addition, these insolvency petitions are often filed by the employees themselves in order to be able to obtain benefits under the Employee Protection Act. In order to prevent situations where, due to the impossibility of filing an insolvency petition, it will not be possible to meet the condition for the application of the Employee Protection Act, the Chamber of Deputies approved a bill on certain measures to mitigate the effects of the SARS CoV-2 coronavirus epidemic in the area of protection of employees in case of insolvency of the employer (the “Proposed Act”). According to the Proposed Act an employer should be considered to be insolvent under the Employee Protection Act if he has not satisfied the due wage claims of employees, as of the day the Labour Office first receives an insolvency court resolution stating that the creditor's insolvency petition shall not be taken into account under Lex Covid (the "Resolution"). The calendar month in which the insolvency petition was filed by the creditor, for which the court issued a Resolution, will be essential for determining the decisive period.

What is the procedure under the Proposed Act?

If an employee finds himself in a situation where his/her employer has not paid him the due Wage and it is probable that the employer will not be able to pay it in the near future due to insolvency, the employer should follow the following procedure:

1. file an insolvency petition against the employer;
2. wait for the Resolution to be issued;
3. deliver the resolution to the Labour Office together with the request for satisfaction of wage claims.

As the creditor's petition for insolvency does not produce the effects of the initiated insolvency proceedings for a limited period of time, the Labour Office, after paying the employee for his/her wage claims, subsequently request the employer to return these provided financial funds together with the amount corresponding to deductions and levies paid by the Labour Office within 15 days after the delivery of a written request to the employer. According to the Proposed Act, the regional branch of the Labour Office should ask the employer to pay these amounts no earlier than 1 December 2020.

Conclusion

The adoption of the Proposed Act should remedy the current status, which significantly complicated the situation for employees of insolvent employers, who sought the compensation of wages through the Labour Office using the Employee Protection Act. The Proposed Act should at the same time respect the current emergency situation in connection with the coronavirus epidemic and also alleviate the situation for insolvent employers as well, as the Labour Office will not immediately demand the paid compensation to be refunded. From a practical point of view, however, we do not quite understand the requirement to file an insolvency petition, which will not be taken into account, and the need to wait for a Resolution to be issued. We believe that a better solution would be to omit this step and, during this extraordinary situation, allow employees to request the satisfaction of Wage claims directly. The Employee Protection Act allows the Labour Office to verify whether the employee's claim is justified. Should the unjustified payment of Wage claims occur, the employee is obliged to return the full amount.