Automatic Transfer of Employees in Czech M&A and Restructuring Transactions

Are you planning an acquisition, a business sale, or a restructuring in the Czech Republic? Then you must be aware that your employees transfer to the new owner automatically by operation of law. In this article, you will find a clear overview of obligations under Section 338 of the Czech Labour Code, employee rights, and the risks you must manage to protect your transaction.

Do you need advice on this matter? Contact our law firm in Prague, ARROWS, via email at office@arws.cz or by phone at +420 245 007 740. Your inquiry will be handled by Mgr. Jan Pavlík, an expert on the Czech legal system.

Transfer of employees is not a choice, but a legal obligation

During key corporate transformations, such as the sale of a business, mergers, or leases, a significant event occurs in the field of employment law in the Czech Republic. 

This is the transfer of rights and obligations arising from employment relationships, regulated by Section 338 of the Czech Labor Code.

The essence of this mechanism is simple: employees "follow" their business or part thereof. It is not a matter of the new owner offering them a job. 

It is an automatic transfer of all existing employment relationships by operation of law. This happens regardless of the employees' consent and without the need to conclude new employment contracts.

The original employment contract, including the agreed salary, job position, and all benefits, remains valid in full. Our specialized Labour Law team can ensure that all existing contracts remain compliant during these transitions. Only the subject on the employer's side changes. If you are managing a larger reorganization, you might be interested in how ARROWS provides Corporate & Holding services in the Czech Republic to streamline the process.

Many entrepreneurs mistakenly believe they can dismiss employees before a sale, for example due to redundancy, to provide the acquirer with a "clean slate". However, such a procedure is extremely risky under Czech legislation.

If the only real reason for termination is the upcoming transfer, such termination is invalid.

In the event of a dispute, a Czech court would determine that the employment relationship continues. For foreign entities involved in such conflicts, we have prepared a guide on how to take a case to court in the Czech Republic as an American business which outlines the general litigation process. The employee would thus transfer to the acquirer anyway, including a claim for full back pay for the duration of the dispute. Find details in our article on employment & HR in the Czech Republic for Hungarian companies regarding similar cross-border risks.

Our Prague-based legal team at ARROWS performs comprehensive legal audits of transactions to assess whether and under what conditions the transfer of rights and obligations occurs. For an immediate solution to your situation, write to us at office@arws.cz.

Further information on this legal service is available HERE.

When does the transfer apply to you? The key concept of "economic entity"

The biggest legal trap of the entire operation is determining when a transfer actually takes place.

The Czech Labor Code was historically unclear in this definition, which is why its regulation was refined in response to the European Directive and binding case law of the Court of Justice of the EU (CJEU).

A transfer occurs during the transfer of a so-called economic entity. CJEU case law defines it as an "organized grouping of persons and assets, enabling the exercise of a specific economic activity."

It is therefore not enough just to transfer tasks; it must be a functional unit.

Assessing whether such a unit has been transferred is not just about Czech law. It is governed by complex criteria from CJEU rulings.

For example, it is assessed whether tangible assets were transferred, whether the majority of employees transferred, whether customers were transferred, and whether the activity retained its identity.

This is a critical point. An acquirer may believe they are only buying a set of individual assets – for example, machinery, inventory, and a domain – to avoid taking over liabilities.

However, if a court (even several years later) concludes that these assets actually formed an organized "economic entity", the acquirer automatically and often unknowingly inherited all employees and their claims. Learn more about maintaining regulatory standards in our checklist for holding structures and beneficial ownership in the Czech Republic.

Our attorneys in Prague, who handle cases with international elements daily, have detailed knowledge of CJEU case law. 

We will prepare a legal opinion that assesses your transaction and protects you from the risk of unknowingly assuming liabilities. Contact us at office@arws.cz.

Inform, inform, inform: Obligations towards employees and unions

The transfer itself is associated with extensive administrative obligations. According to Section 339 of the Czech Labor Code, both employers (the current and the transferee) must fulfill the information and consultation obligation.

This obligation must be fulfilled in a timely manner, at the latest 30 days before the effective date of the transfer. Information and subsequent consultation must be directed towards the trade union or the works council. 

If no such institutions are active at the employer, employers must inform and discuss the intent directly with all individual employees affected by the transfer.

The content of the communication is strictly defined under Czech law. It must include the scheduled date of the transfer, the reasons for the transfer, and, above all, a detailed description of the legal, economic, and social consequences for the employees, as well as information regarding proposed measures affecting them.

Failure to comply with this obligation is not merely a formality. It constitutes an administrative offense under the Czech Labour Inspection Act, which carries the risk of significant fines.

Furthermore, as discussed below, it provides employees with powerful tools to leave the company at a highly inconvenient time.

ARROWS regularly prepares complete documentation for clients to fulfill their information obligations and conducts strategic negotiations with unions on behalf of the client. Protect yourself from fines and contact our Prague-based attorneys at office@arws.cz.

Sanctions for errors in the transfer process

Risks and Sanctions	How ARROWS assists
Fine from the State Labour Inspection Office (SÚIP) (ranging from hundreds of thousands up to 1,000,000 CZK) for failure to meet information and consultation obligations under Section 339 of the Czech Labour Code.	Preparation of statutory documents: We ensure your information obligation is met on time, demonstrably, and in full. Want to be certain? Write to office@arws.cz.
Invalid termination of employment with an employee who should have transferred automatically. Consequence: obligation to pay back-pay for salary compensation.	Representation in court: We protect clients (both transferors and transferees) against claims for salary compensation in cases of invalidly terminated employment. Facing a dispute? Resolve it immediately at office@arws.cz.
Operational chaos and loss of control over personnel due to faulty communication (see Section 51a (2) of the Czech Labour Code).	Professional training for management and HR: Our Czech legal team will train your managers on how to correctly communicate and manage the process. Need team training? Contact us at office@arws.cz.
Incorrect determination that no transfer is occurring. Consequence: Retroactive registration of "inherited" employees, social and health insurance arrears, and wage claims.	Legal opinion (analysis): We assess whether the transaction meets the criteria of an "economic unit" under Czech law. Want to know your legal options? Write to office@arws.cz.

FAQ – Legal tips on employer obligations in the Czech Republic

1. What if we have no union or works council in the company?

Answer: The obligation to inform and consult passes directly to the individual affected employees. This is administratively more demanding, and you must be able to prove that everyone received the information on time. Our Prague-based attorneys can help you set up this process. Write to us at office@arws.cz.

2. Do employees have to sign their consent to the transfer or a new contract?

Answer: No. The transfer is automatic by operation of Czech law; their consent is not required. Signing a new contract is also not necessary – the old one continues. Forcing them to sign an amendment can even be risky. We provide training for your HR on how to communicate correctly. Contact us at office@arws.cz.

Who can you contact?

The employee does not want to transfer. What are their rights? (Three exit scenarios)

Employee reaction is a key operational risk in any transaction. 

Although they cannot "prevent" the transfer, the Czech Labour Code gives them three different options to terminate employment in connection with the transfer. Each has different consequences for the employer.

Scenario 1: Notice BEFORE the transfer (Section 51a (1) of the Labour Code)

If the employee was properly and timely informed (i.e., 30 days in advance), they may give notice.

In such a case, employment ends no later than the day preceding the effective date of the transfer.

For the transferee, this is a "clean" exit – the employee does not transfer to them at all, and in this scenario, no entitlement to severance pay arises.

Scenario 2: Notice AFTER the transfer due to missing information (Section 51a (2) of the Labour Code)

This serves as a penalty for failing to meet the information obligation.

If employers fail to inform employees properly and on time, the employee may terminate their employment even after the transfer, within a period of 2 months from the date the transfer takes effect under Czech law.

The notice period in this case is only 15 days.

For the acquirer, this is an operational disaster – they buy a company and even two months later, key personnel can leave with a 15-day notice period.

Scenario 3: Termination AFTER the transfer due to "substantial worsening" (Section 339a of the Czech Labour Code)

This is a financial bombshell for the acquirer. 

The employee transfers to them, but the acquirer attempts to change their conditions (e.g., reduces salary, removes benefits, changes the place of work, or fundamentally alters the job description).

If the employee terminates the relationship (by notice or agreement) within 2 months of the transfer, they can seek a court ruling in the Czech Republic stating that the reason was a substantial worsening of working conditions.

Although this term is not precisely defined in the legislation, Czech case law has already confirmed that, for example, a significant salary reduction (in the range of tens of thousands of CZK) is considered a substantial worsening.

If the court rules in favor of the employee, they are entitled to full statutory severance pay, as if they had been terminated for organizational reasons.

Our attorneys in Prague, who represent a portfolio of more than 150 joint-stock companies and 250 limited liability companies (s.r.o.), have extensive experience with litigation in Czech courts regarding the invalidity of terminations and severance pay claims. 

We will prepare an employee integration strategy for you that minimizes the risk of "substantial worsening." Do not hesitate to contact our Prague-based law firm – office@arws.cz.

Are you also taking over old contracts, benefits, and debts?

Yes. The basic rule under the Czech legal system is that everything transfers. The acquirer assumes all rights and obligations in their full scope. This includes areas that are often forgotten during a transaction.

Collective Agreements

If the original employer had a collective agreement in place, it transfers to the acquirer.

The acquirer is then bound by all above-standard benefits (e.g., 13th-month salaries, longer vacation, meal vouchers). However, Czech law provides some relief for the acquirer here. 

The effectiveness of these "inherited" collective agreements is limited in time: they apply at most until the end of the following calendar year after the year the transfer occurred.  

This gives the acquirer strategic time to negotiate a new collective agreement.

Managerial Contracts and Non-compete Clauses

These also transfer.  However, a significant risk is hidden here. 

While the contract transfers automatically, the enforceability of key provisions, such as a non-compete clause (Section 310 of the Czech Labour Code), is highly debatable for the new employer.

A non-compete clause is typically a personal commitment to the original employer.

Relying on a court to confirm its validity for the acquirer in the future is a gamble.

An acquirer could thus pay a high price for a company, only for key managers to leave immediately for a competitor.

Relying on the automatic transfer of clauses is a mistake. Our Czech legal team will prepare tripartite agreements or new managerial contracts for you to ensure the enforceability of non-compete clauses. 

Protect your know-how and investments; write to us at office@arws.cz.

Debts to Employees

Because all rights and obligations transfer, the acquirer also assumes liability for debts incurred before the transfer.

This may include unpaid wages, travel allowances, or unpaid overtime.

Although the European Directive allowed for the introduction of joint and several liability (shared responsibility) of the transferor and the acquirer, 

the Czech legislator did not fully utilize this option. The acquirer may thus become the sole entity from which employees can claim their entitlements.

The Solution? Precise Employment Law Due Diligence

Given all the risks – from hidden debts and disadvantageous collective agreements to unenforceable non-compete clauses – employment law due diligence (a detailed audit) before signing a transaction is absolutely crucial in the Czech Republic.

During due diligence for our clients, our Prague-based attorneys specifically verify:

• Audit of all employment contracts, agreements on work performed outside an employment relationship, and executive management agreements under Czech law.
• Analysis of valid collective agreements and internal regulations for hidden financial liabilities and future claims.
• Verification of the validity and conditions of all negotiated non-compete clauses.
• Review of payroll accounting (records of wage debts, overtime, and compensation).
• Identification of ongoing or imminent litigation with employees in Czech courts.

Based on this review, we prepare and revise the transaction documentation (Purchase Agreement). 

We ensure it contains sufficient warranties, representations, and indemnity mechanisms from the seller to cover all identified employment-related "skeletons in the closet." 

Our Prague-based attorneys are ready to assist you – write to office@arws.cz.

Hidden employment liabilities during acquisitions in the Czech Republic

Risks and Sanctions	How ARROWS Assists
Transfer of "dormant" collective agreements  with high benefits (13th-month salaries, 6 weeks of vacation) that were not reflected in the purchase price.	Legal Audit (Due Diligence): We identify all obligations in collective agreements and advise on how to unify them after the transfer. Want to know the real costs? Write to office@arws.cz.
Invalidity or unenforceability of non-compete clauses for key managers following the transfer.	Contract Preparation and Revision: We prepare new agreements or amendments (e.g., tripartite) ensuring the continuity of your know-how protection. Need to protect your know-how? Contact us at office@arws.cz.
Mass claims for severance pay from employees due to "substantial deterioration of working conditions" (Section 339a of the Czech Labour Code).	Legal Consultation and Strategy: We help set up the integration process (harmonization) to minimize the risk of litigation. Get a tailored legal solution at office@arws.cz.
Liability for wage debts of the original employer that were not in the accounts (e.g., unpaid overtime).	Transaction Documentation Preparation: We draft warranties and seller representations in the purchase agreement to protect you financially. Connect with us at office@arws.cz.

Cross-border mergers and international elements

If your transaction crosses borders – for example, you are buying a Czech company with employees in Poland, or a German parent company is transferring a division to the Czech Republic – you enter a new level of complexity.

The Czech Labour Code cannot be applied automatically. Employee protection and the determination of the governing law for their contracts are governed by European regulations, primarily the Rome I Regulation.

The Rome I Regulation comprehensively determines which law applies to the contract – typically the law of the country where the employee habitually carries out their work.

Your transaction thus legally "splits" into several jurisdictions. You must simultaneously address the transfer process according to Czech, Polish, and German law.

This is our specialty. Thanks to the ARROWS International network built over ten years, we handle cases with international elements on a daily basis.

We provide legal advice and compliance in all affected countries. Need legal assistance with an international reach? Contact us at office@arws.cz.

Don't let the transaction get complicated. Entrust the employment law agenda to experts.

As you can see, a process that may look like a simple administrative task is actually full of procedural deadlines (Section 339 of the Czech Labour Code), hidden financial liabilities (collective agreements, severance pay), and legal uncertainty (CJEU case law, non-compete clauses).

ARROWS handles this agenda daily. We minimize the risk of errors and save you time. 

We are regular partners for in-house counsel and HR directors who need specialized expertise for a specific transaction.

By assuming this risk, we protect your transaction. Our professional liability is insured for CZK 500,000,000, giving you the certainty that you are covered even in the worst-case scenario.

We are not just lawyers; we are business partners for our clients. We enjoy connecting interesting investment and business opportunities and are always happy to hear new entrepreneurial ideas.

If you don't want to risk fines from the Labour Inspection, litigation over severance pay, or the invalidity of non-compete clauses, leave the entire matter safely to us. For an immediate solution to your situation, write to us at office@arws.cz.

FAQ – Frequent legal questions regarding the transfer of employees during a business sale in the Czech Republic

1. Do I have to offer employees a new employment contract after the transfer?

Answer: No, this is neither necessary nor advisable under Czech law. Rights and obligations are transferred automatically and the employment relationship continues according to the original contract. However, issuing an information letter regarding the change of employer and, if applicable, a new salary assessment is appropriate. If you are dealing with a similar issue, contact our Prague-based attorneys at office@arws.cz.

2. As the new owner, I want to dismiss some employees. Can I do it immediately?

Answer: The transfer of rights and obligations itself is not a valid ground for dismissal under the Czech Labour Code. However, you may subsequently carry out standard organizational changes (e.g., for redundancy due to restructuring) if you have real, economically justifiable reasons. If you require legal assistance with post-acquisition restructuring in the Czech Republic, write to us at office@arws.cz.

3. What happens if I did not inform the employee about the transfer in time (30 days in advance)?

Answer: You expose yourself to the risk of a fine from the State Labour Inspection Authority (SÚIP). Furthermore, the employee may resign within a special 15-day period, up to 2 months after the transfer takes effect, which may disrupt your workforce planning. Do not hesitate to contact our law firm in Prague – office@arws.cz.

4. Exactly how long does the original employer's collective agreement remain valid?

Answer: It transfers to you and is effective until its agreed termination, but no later than the end of the calendar year following the year in which the transfer occurred.  Example: Transfer in February 2024, the agreement is valid until max. 31 December 2025. For an audit of your collective agreements under Czech legislation, contact us at office@arws.cz.

5. Who is liable for unpaid wages to employees prior to the transfer date?

Answer: Obligations arising from employment relationships transfer to the acquirer. Although Czech law does not establish joint and several liability in this case, in practice, the acquirer is almost always the one the employee turns to. Therefore, it is crucial to address this contractually within the transaction. To prepare secure transaction documentation under Czech commercial law, contact us at office@arws.cz.

Don't want to handle this issue alone? More than 2,000 clients trust ARROWS law firm, and we have been awarded Law Firm of the Year 2024 in the Czech Republic. View our references HERE; it would be our honor to assist you with your legal matters. Inquiries are free of charge.

Disclaimer: The information contained in this article is for general informational purposes only and serves as a basic guide to the issue. Although we ensure maximum accuracy of the content, legal regulations and their interpretation evolve over time. To verify the current wording of regulations and their application to your specific situation, it is essential to contact our Czech legal team at ARROWS law firm (office@arws.cz) directly. We bear no responsibility for any damages or complications arising from the independent use of information from this article without our prior individual legal consultation and professional assessment. Every case requires a tailored solution, so please do not hesitate to contact us.

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