An amendment to the Labor Code known as the “flexibility amendment” brings changes to the manner in which average earnings are calculated, with consequences in particular for the calculation of various forms of wage compensation. What should one prepare for?
The average earnings, or average income, are a fundamental legal concept within Czech labor law which serves in particular to calculate the amount of certain performances to which employees are entitled under the law other than the compensation for their work performance itself. The issue is addressed in Sec. 351 et seq. of the Czech Labor Code.
Average income must be determined e.g. in order to calculate wage compensation (or salary compensation), i.e., benefit payments which employees shall receive during idle periods that count toward their working hours (such as periods of work obstacles on the part of the employee or the employer), but also to establish various kinds of allowance payments or the compensatory payment for untaken vacation days at the time of termination, as per Sec. 222 (2) of the Labor Code.
The cornerstones for calculating average income are the gross salary or wage, the hours worked, and the reference period – which under current law is principally the calendar quarter preceding the event which necessitated the calculation of average income.
Pursuant to Sec. 354 (2) of the Labor Code, average income shall be determined as at the first day of the calendar month following the reference period.
A bill-in-progress, which is on the record as parliamentary press No. 775 and which is known as the flexibility amendment, will amend the Labor Code such that, according to the draft wording of the proposed new Section 360, the reference period shall newly be determined as follows: “If the average income is used after the employment relationship has been terminated, then the applicable average income shall be the one last determined during the existence of the employment relationship.”
The change compared to the current rule is this: the day as at which the average earnings are determined need not necessarily fall within the existence of the employment relationship. By contrast, the amendment introduces the new principle that the day as at which the average earnings are determined must fall within the period of existence of the employment relationship.
The situation is best illustrated using an example:
If the employee is terminated as at 31 December, they attain a claim for severance pay on 1 January. The average earnings (needed to calculate the severance pay) are to be determined based on the reference period, which under today’s rules contained in Sec. 354 (1) of the Labor Code is the preceding quarter, i.e., calendar quarter Q4.
Because of the new condition that the date as at which the average income is determined must fall within the existing employment, the average income shall newly be determined already on the day following the preceding quarter (and occurring during the employment relationship), i.e., in the case of termination as at 12/31, already on 1 October (and the reference period is thus Q3).
Since the average income is always being determined as at the day following the preceding calendar quarter (i.e., as at 1/1, 4/1, 7/1, or 10/1), the following applies:
- If the employment relationship ends during the period from 1 January to 31 March, the average income shall be determined as at 1 January, and the reference period is Q4;
- If the employment relationship ends during the period from 1 April to 30 June, the average income shall be determined as at 1 April for Q1,
- If the employment relationship ends during the period from 1 July to 30 September, the average income shall be determined as at 1 July for Q2, and
- If the employment relationship ends during the period from 1 October to 31 December, the average income shall be determined as at 1 October for Q3.
The new rules are in response to existing case law: a number of decisions has taken into account the income fluctuations associated with the end of the calendar year (caused e.g. by Christmas holidays or New Year’s Eve) and thus determined the reference period differently.
In closing, we should note that the bill for the amendment has yet to read for the first time in the house of deputies; it is generally anticipated that the bill will pass and that the amendment will come into force as at 1 January 2025.
Source:
Labor Code (Act No. 262/2006 Coll.)
Parliamentary press No. 775