Collective agreement

What it means

A collective agreement is a written agreement between the employer and the trade union active at that employer. It sets pay and working conditions for all employees, not only for union members.

It can give employees more than the Labour Code provides, never less. That is what separates it from works rules, which create no new entitlements and only spell out how existing ones are applied; where employee representatives are in place, the employer may issue them only with their prior consent.

There is the company-level collective agreement and the higher-level collective agreement concluded by employers’ associations and trade union federations for a whole sector. A company agreement may not give employees less than a higher-level agreement binding on the employer, so entitlements build up in two layers.

How it works in practice

What gets negotiated in it is higher pay premiums, extra days of leave, severance above the statutory level or the rules for spending the social fund. It runs for an agreed term and has to be bargained again once that term ends.

The agreement has a direct tax effect: a cost the employee is entitled to under the collective agreement is a tax-deductible expense for the employer. The payroll accountant therefore needs the valid wording before running the first payroll under it.

When we take over payroll we ask for the company collective agreement and also check whether the firm falls under a higher-level agreement for its sector. Supplements, severance pay or the length of notice are then set in the payroll system by the higher of the entitlements, not just by the statute.

What to watch out for

A benefit paid with no written basis is the most expensive kind of generosity. If the entitlement follows neither from the collective agreement nor from the employment contract nor from an internal rule, the employee is still taxed on it as pay while the employer cannot deduct the cost.

A provision worse for employees than the law or the higher-level agreement is void, and employees are owed the higher entitlement retrospectively. A firm that for years calculated lower overtime supplements under such a provision pays the difference to everyone affected at once, contributions included.