Are you a construction company and do you use subcontractors to complete your contracts?

From January, you are responsible for the wages of their employees.

From 1 January 2024, contractors are legally liable for the wage claims of their subcontractors' employees (including "contractors") when performing construction contracts. The legislator has thus strengthened the position of employees in the construction industry.

The change affects all construction entrepreneurs (entrepreneurs with a trade licence to carry out construction or assembly work) that work on a contract involving construction, alteration of construction, maintenance of construction or demolition, and use subcontractors (including employment agencies that has temporarily assigned employees to them).

Each contractor, in its capacity as a contractor, is liable for the payment of the wages of the employees of its closest subcontractor (or employment agency). However, the general contractor at the highest level of the contractual chain, usually the contractor that has a direct contractual relationship with the end customer, is jointly and severally liable for the wage claims of employees throughout the contractual chain with specific contractors. This means that employees of individual subcontractors who are in arrears in the payment of wages can choose whether to file their wage claim with the nearest superior contractor or with the general contractor. The new rules will only apply to wages for work performed from 1 January 2024 onwards.

Limits of liability

The liability is limited to the amount corresponding to the extent to which the employee of the subcontractor has participated in the contractual performance for the supplier. The contractor will therefore not be liable for the full amount of the employee's wages, but up to the amount corresponding to the number of hours worked on the contract. If this pro-rata amount is also higher than the minimum wage, the liability is limited to the minimum wage, which for 2024 is CZK 18,900 per month. In addition, the contractor must make mandatory deductions and contributions to health insurance, social security and income tax from the wages. Although the liability is limited and the financial risk arising from this obligation may not appear significant, if the guarantor fails to satisfy the employee's wage claims in accordance with the law, the liable contractor may be fined up to CZK 2,000,000 by the Labour Inspectorate.

Establishment of liability

A contractor's (general contractor's) liability arises by operation of law if its subcontractor defaults on the payment of wages to its employees. The wages are always due at the end of the month following the performance of the work. If the subcontractor fails to pay the wages to the employee by that date, the employee may immediately after the due date call on the guarantor in writing to pay the wages. The guarantor is then obliged to satisfy the wage claim within ten days of receipt of the demand. However, the employee's demand is subject to strict content requirements and must be delivered withing three months after the due date. Therefore, not every demand by a subcontractor's employee will give rise to a liability.

Information obligation

In this context, employers in the construction industry have also been given a new information obligation and must inform their employees of the identities of the guarantors, any changes to them and all the conditions and procedures for exercising their right against the guarantors, including the time limit for a call. A failure to comply with the information obligation is punishable by a fine of up to CZK 200,000. For evidentiary purposes, it is therefore advisable to fulfil the information obligation in writing.

A guarantor that has satisfied the wage claims of its subcontractor's employees must inform the relevant subcontractor of the amounts paid to each employee and the deductions made. The guarantor has the right to recover the amounts paid from the subcontractor concerned. In a contractual chain of multiple subcontractors, it must also inform the other guarantor. Employers in the construction industry should therefore have subcontracting relationships properly mapped out for all individual contracts, be aware of their position within those relationships, and carefully consider whether to participate in contracts with unreliable or financially unstable subcontractors.

When do you avoid liability and how do you reflect this new obligation in the contractual documentation?

The liability will not arise if the subcontractor provides the supplier with a certificate up to three months old on the commencement of the execution of the contract (not necessarily at the conclusion of the contract) that it has no arrears of health insurance and social security contributions, including contributions to the state employment policy, and has not been fined more than CZK 100,000 for a breach of obligations under labour law in the 12 months before the commencement of the execution.

Each contractor should therefore require its subcontractors to submit written confirmations from the relevant Social Security and Health Insurance Institutions that they are not in arrears with social security and health insurance, and confirmation that they have not been fined, which can be obtained from the State Labour Inspection Office, before commencing the construction contract. If the contractor is discharged from the guarantee obligation by this procedure, the general contractor will not be liable as well.

As there may be a delay between the conclusion of the contract and the start of its implementation, it is advisable to make the start of the implementation conditional on the subcontractor providing confirmation in the contract documentation.

The guarantor has a right to compensation against an employer that does not initially pay the wage claims of its employees. To this end, we recommend that a claim for such reimbursement be appropriately provided for in the contract if the liability arises for certain reasons, e.g. the subcontractor is unable to deliver the certificates before the commencement of implementation due to time constraints. A 'standstill', i.e. an agreement to defer payment of part of the price of the work, may serve this purpose.

If you would like more information or are interested in modifying contract documentation, please do not hesitate to contact our experts at CMS Prague.