Czech Republic: Health and social insurance premiums, income tax payments, and the claim for unemployment benefits
Employees are entitled to severance pay if they were terminated by the employer, citing „organizational reasons” (as enumerated in Sec. 52 (a) through (c) of the Labor Code), or in the case of termination by way of a mutual understanding on the same grounds. The minimum amount of severance pay to which they are entitled is set out in Sec. 67 (1) of the Labor Code, i.e., three times their average earnings if their employment lasted at least two years, or two times their average earnings if their employment lasted at least one year (but less than two years), and one time their average earnings in all other cases. The claim for severance pay also extends to those employees whose employment is being terminated by the employer under Sec. 52 (d) of the Labor Code on grounds of an industrial accident or an occupational disease (or by way of a mutual understanding on the same grounds), and then amounts to at least twelve times the average earnings (Sec. 67 (2) of the Labor Code).
Social and health insurance deductions
Severance pay which is granted based on the above-mentioned statutory grounds (i.e., in line with the arrangement set out in Sec. 67 of the Labor Code) does not enter the assessment base for social and health insurance contributions, no matter how large its absolute amount. In other words, even if the actual payout of severance money is higher than the minimum, no social or health insurance must be paid on it.
Aside from the statutory severance pay, employers may also grant a contractual severance pay – a cash benefit made available by the employer to the employee on grounds of the termination of employment, without any underlying direct claim being enshrined in the law. For instance, the employer may have decided to grant such a payment in the termination agreement itself, or an internal policy or the collective bargaining agreement may contain rules which govern the payout of contractual severance money. However, the payout of such contractual severance money does increase the assessment base for health and social insurance contributions.
In both above-mentioned cases, the severance pay that has been granted represents taxable income and as such enters the wage-tax assessment base.
Severance pay and the claim for unemployment benefits
If an employee becomes entitled to statutory severance pay upon the termination of their employment, then this has impact on the payout of unemployment benefits. Specifically, job seekers who received statutory severance pay will not immediately be paid such benefits. Rather, the payout will be deferred by a number of months corresponding to the multiple of average earnings from which the severance pay is being derived. For instance, if the employee is entitled to severance pay under the law in the amount of three times their average earnings, then the payout of unemployment benefits will only start after three months. If the given employee received a more generous severance package, however – e.g. based upon a relevant clause in the collective bargaining agreement – then this has no bearing on the delayed payout of unemployment benefits, i.e., the relevant figure is the amount of statutory severance pay.