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Retention of employees – what is allowed, what is tax efficient and what makes sense

Many sectors in the booming economy that we now enjoy, and in particular in regions such as Prague, are not so much faced with issues of reducing their staff but rather how to keep their employees happy. Money is not the only decisive factor as it used to be in the 1990s and likewise neither are complicated bonus systems. For Czech employees, the participation in a US stock option program, for example, usually still is not a real deal changer. A bonus or gift paid from a company social fund as a reward for loyal service is nice, still not valuable enough to make somebody stay.

So employers think need to think about benefits as a means to increase staff satisfaction, and so help with staff retention.  Not all benefits however, are really advisable from a tax-point of view or allowed under labor law.  And not everything that was standard some 10 years ago still works as motivation tool.  This might of course have to do with a certain generational change and change of priorities in life but I will leave this social aspect to the specialists.

To start with the favorite benefit, at least by usage, for decades has been lunch vouchers.  These vouchers are so common, however, that they have lost their differentiating effect on the market. Nevertheless, at the most efficient amount of CZK 100, it gives the employer the possibility to hand over 55 CZK tax and social-insurance-free to his employees (at a relatively small administrative cost).

Another very popular benefit is the private use of a company car.  Taking into consideration all the paper work that is needed to distinguish between private and company use and tax effects, more and more employees prefer using their private cars.  To some extent the profile of private car ownership has changed the landscape in this area.

And do you think that i-Pads and smartphones are still great motivators?  The provision of such devices has less impact than would have been the case some years ago.  Indeed there may be a counter-productive effect in that employees are now available 24/7 such is the ubiquitous nature of communication today.

Other non-monetary benefits (paid directly to suppliers), such as additional contributions to pension or life insurance, contributions to language or other educational courses which relate to employer’s business activity are tax deductible for the employer and tax exempt for the employee (i.e. they are also not subject to social and health insurance). Vouchers for gym classes or for various healthcare services are tax exempt for the employee, however they must be paid from the employer’s social fund or, generally, from profit after tax, and they are not tax non-deductible for the employer.

Contributions to kindergarten might also come in handy.  They are also tax exempt for the employee and tax non-deductible for the employer, unless the kindergarten is run by the employer or by a third party for the children of employers own employees.  Such kindergartens are at present, however, very rare in the country.

Should the employer decide to invest more into the education of his employee, such as sending him into an MBA program or financing courses as a tax adviser or some finance certificate, this might give the employer the opportunity to bind him contractually to his employer for a maximum of five years.  As to tax and social security:  if these courses relate to employer’s business activity, the employer’s related expenses are tax deductible and related income on the side of employee is tax (and social  insurance) exempt.  The details are outside the scope of this article - just have a look into sections 234, 235 Labor Code.  An employee may still decide to hand in his notice whereupon the only question is whether he has to reimburse the (proportionate according to the time actually spent in the firm) cost for the training. But beware: there is one issue in particular which many employers are not aware of: if one sends his employee on such training and the employee does not use the new qualifications for at least 6 months in the last 12 calendar months, the employee is not obliged to reimburse his former employer in case of leaving the firm.

And there are of course practices that are both motivating and tax efficient. One is the practice of sick days: even though it is not completely in accordance with the law, many employers allow their employees to claim sick days, meaning that they will not have to go to the doctor on the first day of the illness (both reducing the risk of real infection in the waiting room as well of the doctor automatically issuing a sick note for the entire week). Their payroll accountant will simply register this day as either normal working day so entitling the employee to a normal average salary.

Another motivating tool commonly used, both for blue-collar as well as white-collar employees, are additional holidays granted, for instance starting with the second year in the firm one additional day of vacation up to an entire week after five years.

The benefits described above are of course only a toolbox and any reasonable boss/Head of HR will apply them as he needs them. One must always be aware that non-discrimination rules apply and that tax aspects should be considered. The benefits should be covered in a policy which should be clear as to whether they are voluntary benefits by the employer or otherwise. The new Civil Code supports employees who claim past practices much stronger than the Labor Code or the prior laws.

One tip for retaining key employees: longer notice periods. In an environment where almost everybody has a two-month notice period, a notice period by an employee who takes his accumulated vacation and overtime hours often means that despite a nominal two-month notice period, that employee actually in reality only works for his employer for a few weeks, by far not enough time for a good handover and training of a successor. Unless it is the employer`s policy to give immediate garden leave, one should think about agreeing a mutual (that is required by the law) notice period of 4 or 6 months for at least key positions.

Nevertheless, the reader will agree: that retention of an employee is not only a matter of the wording of company policies or of the employment contract but rather of everyday work, good personal and personnel management, strong work culture within the firm, motivation, the fair treatment of staff and of course soft factors such as the brand name of the company.

Finally, as this article relates to employment matters, any and all references to him or her apply equally to the opposite sex :-).

Author: Arthur Braun, Managing Partner, bpv Braun Partners s.r.o., advokátní kancelář, Praha