From the case-law: When is severance pay really exempt from insurance premiums?

The Supreme Administrative Court (“SAC”) dealt in its judgment No. 10 Ads 67/2025 with a dispute between GRASO a.s. and the Czech Social Security Administration (“CSSA”) as to whether or not the amount of CZK 200,627 paid to an employee as an alleged “severance pay” was subject to social security contributions. The key legal issue was whether the benefit was a benefit within the meaning of Section 5(2)(b) of Act No. 589/1992 Coll., on Insurance Premiums (“the Insurance Premiums Act”), i.e., income exempt from levies.

Employment after notice period

The employee was dismissed in April 2018 for organisational reasons. However, after the end of the notice period, she continued to attend the workplace, receive her wages and the employer paid her insurance premiums. It was not until October 2018 that she was denied access to the workplace. She disagreed with this course of action and filed an action for a determination of the creation of a new employment relationship as of 1 July 2018, i.e. after the end of the original notice period, which the courts subsequently upheld. As late as October 2018, her employer paid her an amount labelled as “severance pay”, on which it did not pay the insurance premium.

However, after an audit, the CSSA decided that the payment was not a severance pay within the meaning of the Insurance Contributions Act and ordered the company to pay the premium and the penalty. The company filed a cassation complaint against the decision of the defendant and the Regional Court.

Arguments of the complainant and the defendant

GRASO argued that only the court deciding the civil proceedings (the District Court in Olomouc) is entitled to assess the nature of the amount paid. It criticised the Regional Court for exceeding its jurisdiction in finding that the amount was not in the nature of severance pay. It further argued that the employee was no longer working for the company at the time the amount was paid and that the entitlement to severance pay was based on the termination of employment then in force.

However, the SAC rejected this objection. According to the court, a distinction must be made between public law relationships (e.g. the obligation to pay insurance premiums) and private law relationships between employer and employee. The Regional Court was entitled to assess the nature of the amount paid in terms of its impact on the public obligation to pay insurance premiums – not in terms of a private claim.

In response, the ČSSZ rightly pointed out that the administrative authorities are not bound by the private-law qualification of the parties to the employment relationship and that only a benefit to which a claim has arisen under special legislation – typically under Section 67 of the Labour Code – can be considered to be severance pay in the sense of public law, if the grounds for termination under Section 52(a)-(d) are met.

Legal assessment of the SAC

The SAC sided with the interpretation of the Regional Court and the CSSA. It specifically referred to its case law (e.g. Judgment No. 6 Ads 90/2013-50), according to which the term “severance pay” within the meaning of Section 5(2)(b) of the Insurance Act is subject to a narrower interpretation than in labour law.

The SAC confirmed that the purpose of this exception is to protect income to compensate for the loss of employment in a hardship situation. In the present case, however, the employee continued to work and be compensated even after the notice was served. On the basis of the final decision of the Regional Court (No. 16 Co 178/2022-2422), a new employment relationship was established as of 1 July 2018. It was therefore not a situation where the employee had lost her job and where the severance pay was intended to bridge that loss. Therefore, the employer had no legal reason to classify the amount in question as exempt from insurance.

Conclusion and implications for practice

The Supreme Administrative Court upheld the decision of the CSSA and the Regional Court and dismissed the cassation complaint. Finally, it made it clear that only severance pay, to which an employee is entitled under the Labour Code and which is intended to alleviate the hardship of losing his job, is excluded from the basis of assessment for the payment of insurance premiums. Thus, referring to the consideration as “severance pay” in the employment contract or agreement is not sufficient in itself.