Legal Risks and Compliance in Czech Agency Employment and Labor Outsourcing

Utilizing external labor through agencies is an essential component of managing a modern company. However, if you do not have correctly configured documentation and control mechanisms, you expose yourself to the risk of multi-million CZK fines. This article clearly demonstrates where the biggest legal traps lie, what the limits of temporary secondment are under Czech law, and how the Prague-based law firm ARROWS protects you from financial and reputational damage.

Do you need advice on this topic? Contact the law firm ARROWS at the e-mail address office@arws.cz or by phone at +420 245 007 740. Your inquiry will be gladly answered by "Mgr. Jan Pavlík", an expert on the subject within the Czech legal system.

Agency Employment: Flexibility with a High Legal Price 

Agency employment, often referred to as personnel leasing or staff leasing, is a specific yet highly regulated form of employment mediation in the Czech Republic. In this model, an Employment Agency acts as the employer, temporarily assigning its employees to perform work for another entity – the so-called user. The goal is to provide the business with flexibility and a rapid response to sudden increases in demand, such as peak periods, large projects, or replacing missing specialists.

The only legal way to utilize external workers in this manner is through the institute of Temporary Assignment (Section 308 of the Czech Labour Code). For an Employment Agency, it is absolutely critical to hold a valid employment mediation permit issued by the Czech Ministry of Labour and Social Affairs (MPSV). Conducting this activity without a valid license constitutes an illegal practice with serious consequences.

Legitimate agency employment is based on a tripartite relationship where competencies are divided between the agency and the user. The Employment Agency is the legal employer, handling administration and payroll matters. In contrast, the user is the entity that factually manages the performance of the work. 

The user assigns work tasks to the temporarily assigned employee, organizes, manages, and supervises their work, gives instructions, creates favorable working conditions, and ensures health and safety at work (OSH) under Czech legislation.

This duality of authority is the greatest risk factor. If the division of powers is not strictly observed in practice, the tripartite relationship is breached. Although the user manages the work, they must not perform legal acts toward the agency employee on behalf of the employment agency. If the user's managers exceed their authority, they expose the corporation to the risk of sanctions for the illegal leasing of labor. It is therefore essential that the convenience and speed of management do not lead to legal negligence.

Why Legal Issues Are More Complex in Practice Than They Seem

For managers, managing temporary assignments may appear to be a routine HR matter. However, the legal issues involved are far more complex in practice than they seem at first glance, hiding dozens of procedural details and links to other Czech regulations.

Risks lie in invisible details: inappropriate wording in a contract, a poorly set OSH management process for external workers, or unintentionally exceeding the temporary duration limit. Individual steps that look simple have hidden exceptions in the real world, procedural details, connections to other regulations, and risks that a layperson often does not see. Any such error can trigger fines ranging from hundreds of thousands to millions of Czech koruna. The aim is to demonstrate that this area is so complex and time-consuming that it is safer to entrust it to experts.

Our attorneys in Prague handle this agenda practically every day, allowing them to significantly shorten the time required for compliance analysis and implementation for the client while minimizing the risk of errors. Our experience ensures that your company will be protected from legal pitfalls. As part of our guarantee of your safety, the ARROWS law firm is insured for damages up to CZK 500,000,000. It is therefore safer and more certain for the client to have the entire matter professionally secured. Do not hesitate to contact our office at office@arws.cz.

For a full overview of this service, visit our page HERE.

The Greatest Financial Risk: Disguised Employment Agency Services

The greatest financial and legal threat to corporations is the practice of attempting to bypass strict agency employment regulations by entering into contracts for work or other subcontracting agreements with companies that do not hold an Employment Agency license. This illegal activity is defined in the Czech Employment Act as Disguised Employment Agency Services.

The risk is extremely high because the law penalizes not only the pseudo-agency but also the customer (user) who enables the performance of disguised employment agency services. This means that customers must not utilize leased labor without complying with the established conditions for employment mediation in the Czech Republic.

During an inspection, the State Labour Inspection Office (SÚIP) does not rely solely on the title of the contract but on the factual state of affairs. To detect disguised mediation, the SÚIP monitors the following key indicators:

1. Lack of contractor independence: The client (user) directs, organizes, and controls the work of employees who are formally employed by the contractor (subcontractor).

2. Absence of responsibility for results: The contractor does not perform the work at its own expense and risk and does not act as an expert in the given field.

The State Labour Inspection Office (SÚIP) is very active in detecting illegal work and disguised employment mediation in the Czech Republic. In the past year, Czech labor inspection authorities carried out nearly 20,000 inspections. Out of a total of 5,595 fines issued, the total amount of sanctions in 2022 reached almost 470 million CZK. The inspection priorities of the SÚIP continue to focus on uncovering illegal employment.

From the perspective of mergers and acquisitions (M&A), the use of disguised mediation represents a massive hidden liability. During legal due diligence, all potential financial and legal impacts arising from this gray zone must be identified. ARROWS can perform specialized legal due diligence focusing on HR compliance, protecting investors and companies from inherited liabilities. Our Czech legal team is ready to assist you with an audit of supplier contracts – contact us at office@arws.cz.

FAQ – Legal tips on disguised mediation in the Czech Republic

1. How do I know if an agency has a valid license?

It is simple – all agencies must have a permit from the Ministry of Labour and Social Affairs (MPSV). You can easily verify their list on the website of the MPSV or the Labour Office of the Czech Republic. 

2. When does a fictitious employment relationship arise?

A fiction of an employment relationship with the user may arise if the employment agency did not have the appropriate license, if it expired, or if the requirement for temporariness is breached and the employee continues to work without a valid legal basis. Do you need legal assistance with setting up contracts to avoid such fiction? Contact us at office@arws.cz.

3. Who is responsible for the fine, the agency or the user?

Both entities bear responsibility. The user is liable for enabling illegal mediation. 

Financial and legal penalties for illegal employment (Disguised Mediation)

Risks and Sanctions	How ARROWS assists
Fine for the user (client) for enabling disguised mediation under the Czech Employment Act.	Legal audit of existing subcontracting agreements and the supply chain. Need legal help? Contact us at office@arws.cz.
Detection of illegal work (including foreign nationals) and high fines from the SÚIP (total sanctions in this area reached nearly 470 million CZK).	Representation in administrative proceedings (SÚIP inspections) and preparation of documents required by law for regulators. Our Prague-based attorneys are ready to help – write to office@arws.cz.
Creation of a fictitious employment relationship with the user with all consequences (claims for wages, severance pay, vacation).	Expert training in the field including certification for HR and company management on proper management. For an immediate solution to your situation, write to us at office@arws.cz.
Reputational damage and loss of trust with business partners and Czech state authorities.	Expert legal opinions and advice that minimize the risk of negative publicity. Connect with us at office@arws.cz for a tailored legal solution.

Obligation to ensure comparable conditions (Comparable Employee): What does this mean for you?

The principle of equal treatment is a key limit of agency employment, based directly on Directive 2008/104/EC of the European Parliament and of the Council. The goal is to ensure that agency employees are not discriminated against compared to the user's core employees.

A key requirement is the obligation of the employment agency and the user to ensure that the working and wage conditions of the temporarily assigned employee are no worse than the conditions of a Comparable Employee are or would be. An agency employee has the right to seek satisfaction of their rights to comparable remuneration directly from the employment agency.

The principle of equal treatment applies to all basic working and employment conditions, including working hours, overtime, breaks, holidays, public holidays, and fundamentally to remuneration. It also includes protection against discrimination based on gender, age, or ethnic origin.

Determining who is a Comparable Employee is highly legally demanding in practice. If a core employee does not exist in a given position within the company, a complex legal analysis must be performed to establish a reference standard. Our Prague-based attorneys have years of experience in this area and will be happy to help you set up your processes.

Corporations employing hundreds of agency workers face a cumulative financial threat. Although the fine from the Czech Labor Inspection for violating comparable working conditions is high (up to 1 million CZK), the real financial danger lies in the agency employee's claim for back-payment of wages and compensation for damages incurred throughout the entire assignment period. In large companies, such disputes can lead to claims in the tens of millions of crowns.

Why remuneration reviews are essential and how to avoid paying hundreds of thousands in back-pay

CFOs and HR departments must focus on internal audits of wage scales. It is crucial to realize that your company's internal wage scales and benefits automatically become the legal reference for external workers under Czech law.

Prevention is based on careful and regular review of contracts and transparent communication with the agency. We recommend the preparation or review of contracts that clearly define how comparability is ensured and what mechanisms are used for monitoring, thereby protecting your corporation from litigation and back-payments in the hundreds of thousands.

ARROWS law firm in Prague provides legal consultations that protect against fines and inspections, and assists with setting up wage directives and comprehensive documentation. Do not hesitate to contact our office – office@arws.cz.

Requirements of the Temporary Assignment Agreement: A checklist for users

In addition to choosing the right, licensed agency, flawless formal documentation is key. The Czech Labor Code strictly requires that the Temporary Assignment Agreement between the agency and the user must always be in writing; otherwise, it is automatically void.

The invalidity of an Agreement due to a missing written form or mandatory requirements can be interpreted by the State Labor Inspection Office (SÚIP) as illegal labor leasing, leading to the highest possible sanctions. This triggers the risk of legal uncertainty and the potential creation of a fictitious employment relationship.

The Agreement must contain the requirements set out in Section 308(1) of the Czech Labor Code. What to watch out for:

• Type of work and place of work performance.
• The period for which the employee is assigned, emphasizing its temporary nature.
• Information on wage and working conditions of a comparable employee.
• Clear identification of the user's manager authorized to assign and supervise the work.

Duration limits and the fiction of employment: When must you act?

The law defines agency employment as a temporary assignment. Although Czech law does not have a fixed uniform maximum duration for all cases, compliance with the condition of temporariness is key. Violation of this condition can lead to a fiction of employment with the user.

Court practice often suggests that in the case of long-term assignments (e.g., 18 months or more, unless a collective agreement states otherwise), there is a risk that Czech courts will find an evasion of the law and the creation of an indefinite employment relationship directly with the user. This creates claims for the employee that you, as the user, must subsequently resolve.

However, there are clear legal exceptions that allow for the extension of an assignment without duration limits:

• Replacement for a user's employee who is on maternity or parental leave (similarly for paternity leave).
• The temporarily assigned employee requests the extension themselves.

If you use agency employees long-term, a legal analysis is essential to assess whether your situation falls under legal exceptions. Our Prague-based attorneys are ready to help you set up processes so that the condition of temporariness is met – write to office@arws.cz.

Risks arising from documentation errors and how ARROWS can help

Risks and Sanctions	How ARROWS helps
Invalidity of the Temporary Assignment Agreement due to missing written form or mandatory requirements.	Review or preparation of contracts and negotiation of terms to ensure maximum legal validity under Czech legislation.
Creation of a fictitious employment relationship with the user due to violation of the temporariness obligation.	Legal analysis and expert legal opinions to assess the duration of the assignment and the validity of exceptions. Need legal assistance? Contact us at office@arws.cz.
Incorrect definition of authority of the user's manager, leading to a breach of the tripartite relationship.	Professional training for managers on how to correctly manage agency employees without violating Czech law. Connect with us at office@arws.cz for a tailored legal solution.

The complexity of posting workers to the EU and third countries

For owners and top executives of corporations operating abroad, it is essential to understand the complexity of cross-border agency employment, known as the Posting of Workers. This situation occurs when an employee of an employment agency performs work within the framework of the transnational provision of services in the territory of another EU Member State.

This area is regulated by European directives on the posting of workers. The user of the labor has specific obligations to inform the sending employment agency about the location, tasks, start date, and anticipated duration of the posting. Failure to comply with these notification obligations is a serious risk and leads to sanctions in the host country.

The 12-month time limit (or 18 months following proper notification to the Labour Office) is critical. If the duration of the posting exceeds this limit, all legal regulations of the host state begin to apply to the posted worker, with the exception of rules regarding the commencement and termination of employment. Corporations therefore face a double risk: sanctions in the Czech Republic for incorrect documentation and fines from foreign regulatory authorities for non-compliance with local posting rules.

Furthermore, there are often specific requirements abroad; for example, in Germany, a "Stammhausbindungsvertrag" agreement is necessary to ensure the employee's return to the home employer after the termination of the local contract. In specific sectors such as construction, obligations for payments into so-called holiday funds may apply. You can obtain an expert legal opinion on international posting at office@arws.cz.

Your secure solution for international cases: ARROWS International

The law firm ARROWS provides legal services outside the Czech Republic thanks to the ARROWS International network, built over ten years, and we handle cases with an international element on a practically daily basis.

We provide comprehensive legal advice on obtaining permits and licenses, including their amendments, and representation before registries, regulators, and supervisory authorities, including those abroad. Our services cover the preparation of documentation required by law in the context of the cross-border provision of services.

As a partner to capital groups and high-net-worth individuals, we can connect our clients with each other when they have interesting investment or business opportunities. If a client is looking for financing or a business partner for a purchase or sale (e.g., of foreign branches) in a given area, our network is a valuable resource. We are also happy to hear interesting entrepreneurial or business ideas – office@arws.cz.

Risks in international agency employment and assistance from ARROWS

Risks and Sanctions	How ARROWS Assists
Breach of notification duty when posting an employee to another EU Member State before the expiry of 12 months.	Preparation and management of all documentation and fulfillment of obligations for the cross-border posting of workers. Contact us at office@arws.cz to obtain a tailored legal solution.
Non-compliance with local labor laws (e.g., wages, holidays) after exceeding the 12/18 month limit in the host country.	Legal consultations that protect against fines and inspections in an international context, in cooperation with ARROWS International.
Necessity of obtaining specific permits and complying with local requirements (e.g., in the construction sector).	Legal advice on obtaining permits and licenses, including their amendments, provided through ARROWS International. For an immediate solution to your situation, write to us at office@arws.cz.

Summary: Why entrust your agenda to ARROWS – Your secure compliance partner

The risks arising from agency employment – from multi-million fines for disguised mediation to cumulative claims for back pay – are real and can fundamentally threaten a corporation's financial stability.

Our experience in providing long-term services to our clients is your guarantee of expertise and reliability. Our portfolio includes more than 150 joint-stock companies, 250 limited liability companies, and 50 municipalities and regions. We pride ourselves on the speed and high quality of our legal service.

ARROWS handles this agenda daily, which allows us to significantly shorten the time required for analysis and compliance implementation for the client and minimize the risk of errors. We are regular partners to in-house counsel for resolving special matters where external expertise is required, such as representation in litigation in Czech courts and administrative proceedings.

Security of your capital: Insurance and partnership

The law firm ARROWS is insured for damages up to CZK 500,000,000. It is therefore safer for the client to have the entire matter professionally secured and thus protect their own capital.

If you do not want to risk errors, damages, or fines in the tens of millions, the safest and most effective solution is to entrust the entire agenda to the hands of experts from ARROWS. We will ensure the preparation of all documentation, directives, and expert legal opinions. Simply contact our Prague-based office at office@arws.cz to secure a tailored legal solution.

Frequently asked legal questions regarding agency employment and its limits

1. Can an agency employee demand the same corporate benefits as a core employee?

Yes. Under Czech law, the principle of equal treatment applies to all basic working and employment conditions, including remuneration, which encompasses wages, salaries, wage compensation, and all monetary and non-monetary benefits. If core employees receive certain benefits, agency workers must receive comparable treatment. If you are dealing with a similar issue, contact our Prague-based attorneys at office@arws.cz.

2. Who actually manages the work process for an assigned employee, and where is the limit of my authority?

The work process is managed exclusively by the user (the client company) – providing instructions, organizing and supervising work, and ensuring occupational health and safety (OSH) in the Czech Republic. The limit of your authority is strict: you must not perform any legal acts towards the agency employee on behalf of the employment agency, such as signing contract amendments or immediate termination of employment. If you are dealing with a similar issue, contact our Czech legal team at office@arws.cz.

3. How can I defend against allegations of disguised employment mediation?

Defense relies on thorough documentation proving that the supplier performed the work at its own risk and under its own management, rather than under your direct control. It is essential to have internal guidelines and conduct regular training for managers to ensure they do not interfere with the management of the supplier's employees under Czech commercial law. If you are dealing with a similar issue, contact us at office@arws.cz.

4. Which legal disputes are most common in the field of agency employment?

The most frequent disputes in Czech courts involve retroactive claims by agency workers for back pay due to violations of the equal treatment principle, or disputes regarding the existence of a fictitious employment relationship with the user after the temporary assignment ends. These disputes often stem from an unclear definition of a "Comparable Employee." If you are dealing with a similar issue, contact our attorneys in Prague at office@arws.cz.

5. What should I do if I am considering hiring workers for a branch abroad?

In the case of international assignments, it is necessary to ensure compliance with EU directives on the posting of workers and fulfill notification obligations before the 12-month period expires. Once the limit is exceeded, all working conditions of the host state apply. ARROWS law firm in Prague provides these services through the ARROWS International network. If you are dealing with a similar issue, contact us at office@arws.cz.

6. Can ARROWS help with optimizing labor costs for agency employees?

Yes, ARROWS provides detailed legal analyses under Czech legislation. By reviewing documentation and correctly setting up internal processes and criteria for determining a Comparable Employee, we help minimize the risk of back pay and damage claims, thereby protecting your capital. Our services include legal consultations that protect against fines and inspections by Czech authorities. If you are dealing with a similar issue, contact us at office@arws.cz.

Don't want to handle this problem alone? More than 2,000 clients trust ARROWS law firm, and we have been awarded Law Firm of the Year 2024 in the Czech Republic. See our references HERE and it would be our honor to assist you with your case. Inquiries are free of charge.

Disclaimer: The information contained in this article is for general informative purposes only and serves as a basic orientation in the subject matter. Although we ensure maximum accuracy of the content, legal regulations and their interpretation in the Czech Republic evolve over time. To verify the current wording of regulations and their application to your specific situation, it is essential to contact ARROWS law firm in Prague directly (office@arws.cz). We bear no responsibility for any damages or complications arising from the independent use of information from this article without our prior individual legal consultation and professional assessment. Every case requires a tailored solution; therefore, do not hesitate to contact us.

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