Working from home: practical information for employers

Employees have grown to like working from home, but employers are struggling with the lack of regulation, particularly in terms of employment law. This could hopefully change soon. The forthcoming amendment to the Labour Code should bring with it several changes in the way we work from home. Employers will need to prepare for these in good time. If employers allow their employees to work from home from abroad, they should bear in mind the tax, insurance, and immigration aspects in addition to the labour law context. All of this can often be voluminous and give rise to a range of obligations for employers, and penalties if they fail to comply. Gabriela Lavrenčíková and Barbora Cvinerová provide details.

Which special rules apply to working from home under the Czech Labour Code – are they different from those for working at the employer's workplace?

Barbora: The current concept, where the home office is perceived more as a benefit, is not envisaged by the Labour Code, and no special rules apply. The amendment to the Labour Code, which is currently being prepared, will most likely significantly affect this. The amendment has been much anticipated, but employers will not be happy about all new developments, as they will not see positive changes in areas where they expected relief. On the contrary, for them, the amendment will introduce new obligations. It may also have a negative impact on employees and lead to a reduction in working from home, although the most problematic changes, such as the introduction of a mandatory lump sum for expense reimbursements or the entitlement of certain groups of employees to home office, are likely to be dropped by the Ministry of Labour in the end.

Cost reimbursement is a controversial issue. What rules should companies with home office employees in the Czech Republic prepare for?

Barbora: The original version of the amendment introduced an explicit entitlement of the employee to the reimbursement of home office expenses. Regarding increased energy costs, there was to be a mandatory lump sum compensation of CZK 2.80 per hour. This proposal caused a great storm. The ministry is thus likely to drop it. The final wording of the amendment is not yet known, but the proposed lump sum payment is likely to be voluntary. In addition, employers will probably have the same options in terms of reimbursement as exist today. Thus, they will be able to reimburse actual proven costs against a receipt, or, which is much more common in practice, to provide a lump sum based on an estimate of costs. Both options have negatives - proving all costs with a receipt is not possible. On the other hand, tax regulations do not provide for a lump sum - they consider it the employee's income, which means the obligation to tax the lump sum and pay insurance premiums. The amendment addresses the link between tax and labour law, but only partially - only for the energy lump sum of CZK 2.80 per hour. For a lump sum covering costs other than energy or a lump sum of a different amount, the valid regime will remain ill-equipped.

If the employer already provides lump-sum compensation for working from home, does this compensation constitute taxable income for the employee?

Gabriela: Companies often ask this question. From a tax perspective, the issue is whether they can provide compensation and what the tax and insurance implications are. As the Labour Code is currently regulated, it is possible to provide compensation, but for it not to be taxable, the employee has to submit an expense report. If they have receipts for, e.g., electricity or internet, it may be problematic to prove how much was consumed in the course of work for the home office and how much for private purposes. A slightly more benevolent situation is that of reimbursement for wear and tear on the employee's own equipment in the home office, e.g., employees sitting in their own chairs at their desks.  Here it is possible to provide lump sum compensation without it being taxable. But it must be based on an actual expense calculation and not just an estimate. Which can be complicated in practice. Again, there is the question of splitting work and private use. The forthcoming amendment to the Labour Code, as we have already pointed out, should also bring about the lump-sum reimbursement of utilities. According to it, a fixed lump sum will no longer be subject to tax. However, e.g., the internet is not included in the lump sum and therefore the possibility of reimbursement without tax implications will still be possible based on actual billing.

Barbora Cvinerová and Gabriela Lavrenčíková

Home office abroad can be even more problematic

Does the legal regime change when an employee works in HO from abroad?

Barbora: From a legal perspective, it is important for the employer to know where the employee is working, because the place of work is a mandatory part of the employment contract and has a significant impact. The moment an employee is working from abroad for a longer period of time, the law of the place of work takes over from the legal regime of the employment contract if it is more advantageous for the employee. And this is automatic, without anybody having to do anything actively. This creates a confusing situation and makes it very difficult to navigate.

Does a Czech employee in HO abroad need any local permit or visa?

Barbora: We cannot give a clear answer here. It depends on the legislation of the destination country. The regulation may be similar to ours, i.e., the local legal system may determine that an employee working remotely for a foreign employer does not affect the market and thus does not need a work permit. But the rules can be much stricter. That is also why the employer should know in which country the employee is working, so that they do not commit an offence.

What about social security and health insurance contributions when an employee works from home instead of the Czech Republic? Is working from a foreign home office subject to the Czech or the foreign insurance system?

Gabriela: The key role is played by the country in which the employee decides or agrees with the employer to spend their home office, and how long they will be there. These are the two basic aspects from an insurance point of view. If it's a stay within the EU, the EU regulation on the coordination of social security systems applies. In this case, at the very least, we know that premiums are only paid into one scheme. The answer to whether it is the Czech or a foreign system depends on the situation. Most countries look at a foreign home office which is for a limited period of time as a secondment. This means that as long as the time limits are met, and the employee performs work for the employer, they will likely remain insured in the Czech insurance system.  For this purpose, it is necessary to apply for an A1 Certificate, which confirms that even if the employee is working in another EU country, they belong to the Czech insurance system.

Can you give us an example of how this works in practice?

Gabriela: So, if an employee agrees with their employer to work from Spain, they can remain insured in the Czech system. An A1 certificate will have to be obtained and the insurance premiums paid in the Czech Republic. For the employee, this also means that they have full health care coverage in the Czech Republic, but that they are only entitled to emergency care abroad. This could be taken care of by applying for an S1 Certificate so that they would be fully covered in Spain, assuming that their permanent residence is still in the Czech Republic. An S1 Certificate is issued when the country of activity is different from the country of residence.

What rules apply if the employee chooses a more remote destination outside the EU for their home office?

Gabriela: If the employee is working from home in a more exotic country where EU regulations do not apply, we need to check whether we have a social security agreement with that country. If not, the employee may be in a double taxation situation and the employer may be obliged to register for taxation in that country. It is therefore advisable to check whether such obligations may arise before the employer allows a home-office abroad.

Workers with a foreign employer in the CR

If the employee of a foreign employer works from a home office in the Czech Republic, what does this mean in terms of tax obligations or social and health insurance?

Gabriela: During the pandemic, employees started working for their employers from home in different countries. At first, everyone was paralysed and putting out fires rather than conceptually solving the situation. But now employers want to organise the setup so that they are not in violation of their duties. If a foreign employer employs an employee in the Czech Republic for an extended period of time, the magic threshold being 183 days, they should pay advance income tax here on behalf of the employee according to Czech legislation. This can be complicated for foreign companies as they are often unfamiliar with Czech legislation and the different levies. It is necessary to ensure registration with the tax office here and then to calculate and pay the advance payments monthly in the Czech Republic, even though we’re talking about a foreign employer.

How does tax legislation address this, does such an employee remain obliged to make advance payments in their home country?

Gabriela: It depends on the local tax legislation of the country in question, whether it allows for an exemption or relief from having to pay advances in two countries. It also depends on whether we have a double tax treaty with the country. In principle, this ensures that income is effectively taxed in only one country.

The term permanent establishment is often used in connection with working from home abroad. Can you briefly explain what it means and under what circumstances it can arise?

Gabriela: A permanent establishment is a kind of fictitious entity for tax purposes.  For a company, it means that in addition to being taxed on the income of its employees in a given country, it is also obliged to tax part of its profits there. The logic behind this is that if a company, through an employee, carries on economic activity in a given state and thus generates profits, that state has the right to claim taxes on part of those profits. The approaches of the states vary. Therefore, if a Czech company allows a home office abroad, it should check whether this does not risk creating a permanent establishment. Some countries, e.g., Germany and Spain, have stated that under certain conditions a home office would not give rise to a permanent establishment. The Czech Republic has not made any such statement and has taken the opposite position.

What about immigration?

Many employers also have to deal with immigration aspects. Is it necessary to arrange any permits or visas for foreigners who decide to work for their foreign employers from their home office in the Czech Republic?

Barbora: Generally, a non-EU foreigner needs a residence and work permit to work in the Czech Republic. This applies to situations when working for a Czech employer. Czech legislation does not foresee the situation of a remote worker who works for a foreign employer from a home office in the Czech Republic.

The practice of the authorities is that when the employee does not affect the Czech market while working for their foreign employer, a work permit is not required. Moreover, it would be very difficult to obtain one because the procedure for applying for a Czech work permit assumes that there is a Czech employer for whom the foreigner works. However, the foreigner will probably need a residence permit or a visa, but it will be very difficult to find the type that is suitable for this purpose of stay. Moreover, the process of issuing a permit can take months. For EU citizens, the situation is much simpler.

How to proceed in such situations?

Barbora: There are residual categories of residence permits and visas intended for foreigners who do not fit into any box. However, the procedure for processing such permits is quite challenging.

Do these rules also apply to Slovaks and Ukrainians?

Barbora: From an immigration perspective, it is important to distinguish between EU citizens and third-country nationals. For Slovaks, the conditions are very simple because there is free labour migration within the EU, so they do not need a residence or work permit. However, employers do have some obligations if they employ Slovaks or other EU citizens: they must at least report them to the Labour Office, and any changes in their data or terminations of employment must also be reported.

In contrast, citizens of Ukraine are a category of third-country nationals for whom stricter rules normally apply - they need residence and work permits. However, a different regime is currently in place, and they may benefit from the specific advantages of temporary protection. However, its validity now needs to be properly extended.

What other issues are employers addressing in this context?

Barbora: Clients often contact us with the issue of digital nomads. They are typically foreign companies whose employees want to travel and work from the Czech Republic for short periods of time. The companies want to follow the correct procedure, i.e., to obtain the appropriate permits for this type of work. It is unfortunate that some foreign websites serving digital nomads state that we have special visas for them in the Czech Republic. Many foreign countries do indeed have such a regulation, but Czech legislation does not provide for such a set-up at all. Certain residence permits could be used for this situation, but they are difficult to obtain, which goes against the flexibility of nomads. This is a tricky issue that we often encounter. Finding the right solution requires a great deal of time and administration.