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News

May employees be paid a salary in foreign currency?

26.04.2019
Company: bnt attorneys-at-law s.r.o.

In these times of globalization and of the free movement of labor across the EU, more and more employees ask to receive their salary payments in foreign currency. The Czech law has only a few circumstantial things to say about this, but in practical terms, such requests pose a number of issues for employers...

With a view to unabated globalism, it is more and more common for Czech employers to hire foreign managers who are not tax residents in the Czech Republic, whose place of permanent residence, family, and real property are all located abroad, and who intend to return home after their stint in the Czech Republic. Especially if the Czech employer already covers all their living expenses associated with the stay in the Czech Republic, it can be inconvenient or even financially unfavorable for such employees to receive their salary in Czech crowns. Sadly, the provisions of Czech law leave little room for another arrangement.

More specifically, the Labor Code prescribes that employers must pay salaries in legal tender – which, according to the Act on the Czech National Bank, necessarily means Czech crowns. Employers must thus pay their employees in Czech crowns, no matter what the employee may wish or what kind of arrangement both parties might favor: the above-described rule is of mandatory character, and knows only one exemption – namely, employment relationships in which the employer performs their work abroad (outside of the Czech Republic). Only then, a salary payment in foreign currency is possible (provided the employee's consent, and provided that the Czech National Bank has stipulated a legal exchange rate for the relevant currency).

In practice, Czech employers have developed several workarounds to accommodate their employees' wish for a salary payment in foreign currency. Unfortunately, none of these workarounds is optimal – or fully legal.

In the most frequent case, the employment agreement stipulates the salary in a foreign currency (usually euros or U.S. dollars), but the actual payment is made in Czech crowns. There are several issues with this: each month, for the purpose of calculating legal levies, the employee's salary must be converted to Czech crowns, which means additional work in the payroll department and triggers the risk of fluctuating exchange rates. In fact, this is no solution at all, because the employee still receives Czech crowns.

Occasionally, we encounter cases in which the employer responded to the wish for remuneration in foreign currency by entering into a service agreement, or an obligation governed by civil law, with the employee instead of an employment agreement. However, these arrangements must be rejected out of hand, as they violate the rules of Czech law prohibiting fictitious self-employment.

Other employers respond to their employee's wish for salary payments in foreign currency by concluding an employment agreement that is governed by foreign (e.g. Slovak or German) law allowing for a payment in euros. However, this solution may prove problematic e.g. when terminating the employment: does the law at the place of performance (i.e., its non-negotiable provisions) apply, or the foreign law agreed between the parties?

In closing, we wish to highlight just how risk-fraught all these makeshift solutions are, by pointing out that employers who pay salaries in foreign currency (and thus violate the Labor Code) are exposed to sanctions by the State Labor Inspection. Under the Labor Inspection Law, the misdemeanor (administrative offense) of granting a salary in conflict with the law carries a fine of up to CZK 1,000,000.

As we can see, the strict requirement set out in the statutory provisions, whereby salaries must be paid in legal tender, is highly impractical. An amendment which grants the parties more autonomy (to the point that salary payments in foreign currency are possible) would be welcome.

 

Source: 
Labor Code (Act No. 262/2006)
Act on the Czech National Bank (Act No. 6/1993)
Labor Inspection Law (Act No. 251/2005)

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