Riding out the wave

By Bill Finney and Michal Smejkal

The economic crisis is unique in that it has affected a broad range of businesses and economies worldwide and, until early last year, was unexpected in the Czech Republic. Fortuitiously, during a period of near full employment, the country passed reform legislation in employment law as well as insolvency and restructuring that now provides some cushion to the economic blow.

In the Czech Republic, and throughout Europe, companies, employees and even governments have absorbed much of the shock of the recession through schemes like short-time working or irregular hours, unpaid leave, training leave or by using production workers in other positions. Just last week, The Prague Post reported on another government proposal to create a four-day work week, with government subsides to help make up some of the lost salaries from that fifth day. These job-saving schemes depend in part on a short-term recession. Employers may find redundancies if the world economy continues to lag.

Flexible work arrangements range from part-time and part-year work to telecommuting and individually negotiated schedules. In recent years, many educated workers in Europe and the United States have placed a premium on flexibility to balance work and family obligations. But the new openness to flexible work arrangements is now converging with a growing trend of cutting work hours to meet a slowing demand for goods and services, as well as to reduce costs in the current economic climate. Germans call it Kurzarbeit, literally "short work," and Americans sometimes refer to it as "Europe's Solution." But one critical difference exists:  A reliable social safety net to support such arrangements is much stronger in many European countries than in the United States. Some 17 U.S. states have programs to provide funds for workers whose work time has been decreased, but it is not clear to what extent these funds are currently being utilized. As flexible work possibilities are put into greater practice in the Czech Republic, the social system as a whole may be stretched.

In choosing flexible work arrangements, companies often cite both the desire to prevent economic harm to their workers, and the desire to avoid the high cost of finding replacements for former workers when demand returns to the market. Once firms have found and trained new workers, their investment is lost if the worker becomes redundant, and, in the end, must be let go anyway. From a macro-economic point of view, workers who continue to receive wages and work in a flexible system also continue to spend and prevent further economic slowdown.

Some of the most popular flex-work arrangements in the Czech Republic include irregularly scheduled working hours, work pattern accounts, work from home and possibly unpaid leave or partially paid leave.

Irregularly scheduled working hours require that a weekly schedule of working hours is conveyed to employees at least two weeks prior to the start of the irregular working period, if not agreed otherwise. In any individual week, working hours may be much shorter than the hours stipulated by law; however, there is a maximum 12-hour shift. Such plans may only remain in place for 26 weeks. If collective agreements are reached with labor groups, then a 52-week period is allowed. Irregularly scheduled working hours may also be based on a "work-pattern account" -- an entirely new type of irregularly scheduled hours.

The work-pattern-account option requires no individual employee consent, but the conditions governing the work-pattern account must be provided for in a collective agreement or in the internal directives of the employer. Employees must receive at least 80 percent of their average earnings. This solution is commonly used to reduce salary costs if insufficient work is available for employees. Businesses may use such accounts to react to fluctuating demand in specific product markets. If demand for certain goods or services increases or decreases seasonally, for example, the work-pattern account often proves useful. An added benefit is that the average weekly working hours do not need to be reached (usually 40 hours per week, and, in the case of shift workers, 37.5 hours per week).

Some Czech firms are also embracing "work-from-home" solutions to reduce costs. It is generally advised to specify the conditions in the employment agreement or in another written agreement between the employee and the employer. A range of issues should be addressed in the agreement from negotiating overhead costs to agreeing on how working hours will be recorded. Safety issues and supervision of work from home can also prove difficult to solve. The fact that the employee works from home does not exempt the employer from their legal duty to ensure safety at work and a suitable working environment.

Finally, unpaid leave or partially paid leave requires voluntary agreement with the employee. While unpaid leave or partially paid leave is not addressed in the Czech Labor Code, it is not prohibited either. In this case, it is best if the employee offers the possibility of unpaid or partially paid leave for a few weeks per calendar year. If the employer agrees, the parties conclude an agreement specifying conditions. While such offers usually originate from the employer's side, employers cannot legally coerce employees into unpaid or partially paid leave. If the employee is pressured to conclude an agreement on unpaid leave, the validity of such an agreement can be challenged and could lead to the involvement of the the Department of Work. In short, it is illegal for employers to force employees into taking unpaid leave.

Currently, 79 percent of Czech firms use at least one form of flexible work. However, flexible work accounts for only 5 percent of employment arrangements. Given the market conditions, these numbers should rise.

Details of the latest Labor and Social Affairs Ministry proposal for a four-day work week, with government funds helping pay for worker training on the fifth work day, are still being negotiated, and it is unlikely to be implemented before mid-2010. Late implementation could jeopardize the whole strategy, and October's elections could influence the passage of such measures. Like all public expenditures, this change must be financed by taxes, which, if excessive, could suppress business and development in the long term.

An important and related legal development was the adoption of a new insolvency and restructuring code. The new Insolvency Act has been in force in the Czech Republic for more than a year, and allows a quicker start to proceedings, a new "reorganization" class of proceedings and the increased power of creditors. Generally, the Insolvency Act brought insolvency law up to speed with modern commercial realities. In terms of employment, the change may eventually mark the most significant development. Rather than liquidate a business, larger companies are allowed to operate while a restructuring plan is created and supervised by the trustee and creditors. Creditors' claims are satisfied from the continuing operation of the business, based on restructuring plan requirements. Once the creditors' claims are fulfilled, reorganization is terminated, and the business can continue with its activities as it did prior to insolvency. Reorganization is only available to debtors whose total turnover exceeds 100 million Kč ($5.6 million) or to companies with more than 100 full-time employees. It is worth noting that, according to available statistics, only seven reorganizations were allowed in the Czech Republic in 2008. Smaller companies can only enter insolvency if their creditors consent to the reorganization plan.

To make a long story short, the news is not all bad, and there are options to help companies stem the tide during tough economic times. While companies face difficult human resource choices, changes made to the Czech law during relatively prosperous times have provided tools to ease the pain of recession and to allow continued employment. The government should be given credit for having had many of these mechanisms in place before the economic crisis hit. Of course, all these programs are designed to be short-term solutions.

-- The authors are Prague-based attorneys with the firm Giese & Partner.