Salary in­dex­a­tion. What are the risks?

Kyiv Post Legal Quarterly - - News -

Salary in­dex­a­tion is a state guar­an­tee pro­vided to each em­ployee un­der the leg­is­la­tion of Ukraine. How­ever, in re­cent years, not many em­ploy­ers in the pri­vate sec­tor have been con­cerned about this guar­an­tee. Un­til 2015, fail­ing to index salaries merely re­sulted in an ad­min­is­tra­tive fine be­ing im­posed on com­pa­nies’ of­fi­cials, and the fines them­selves were small — up to Hr 1,700 (or $63). Only un­der the worst case sce­nario, un­der very par­tic­u­lar cir­cum­stances, could vi­o­la­tions have re­sulted in crim­i­nal charges. There was also a risk of civil lit­i­ga­tion, with em­ploy­ees claim­ing the bal­ance of un­paid in­dexed salaries. How­ever, de­spite the fact that such civil law­suits have in­deed oc­curred, many em­ploy­ers still turn a blind eye to the mat­ter of salary in­dex­a­tion.

But at the be­gin­ning of 2015, the fi­nan­cial penal­ties against em­ploy­ers who fail to pro­vide their em­ploy­ees with the min­i­mum state guar­an­tees for re­mu­ner­a­tion of la­bor were in­tro­duced to the Labour Code of Ukraine. Salary in­dex­a­tion is con­sid­ered one of these state guar­an­tees.

The sanc­tion for the above vi­o­la­tion is a fine im­posed on an en­ter­prise at the level of 10 sub­sis­tence min­i­mum wages for able-bod­ied in­di­vid­u­als, which is now UAH 13,780 (or $510). Such a fine is to be im­posed for the vi­o­la­tion of salary in­dex­a­tion of each em­ployee. There­fore, in cal­cu­lat­ing the fine, the sum of $510 is mul­ti­plied by the num­ber of em­ploy­ees. For ex­am­ple, if there are 100 em­ploy­ees at the en­ter­prise, then the fine for fail­ing to index salaries would be $51,000. As can be seen, the sum of fine, de­pend­ing as it does on the num­ber of staff, could be quite sig­nif­i­cant. More­over, such fines can be im­posed with­out any time lim­i­ta­tions since it has been es­tab­lished.

But these fines re­mained off the radar for em­ploy­ers un­til Fe­bru­ary 2016, as no pro­ce­dure for im­pos­ing the fine was es­tab­lished un­til then. Ba­si­cally, em­ploy­ers could be found li­able for a fine, but there was no mech­a­nism for im­pos­ing it. That changed on Feb. 10, 2016, when a res­o­lu­tion is­sued by the Cab­i­net of Min­is­ters of Ukraine de­ter­min­ing the pro­ce­dure for im­pos­ing the fine came into ef­fect. The im­po­si­tion of such fines is now a real pos­si­bil­ity.

So con­sid­er­ing the above, the is­sue of salary in­dex­a­tion now re­quires the care­ful at­ten­tion of ev­ery em­ployer.

In view of this, let us con­sider in more de­tail the ba­sic rules of salary in­dex­a­tion.

Firstly, salary in­dex­a­tion is oblig­a­tory for all en­ter­prises from March 1, 2003 (when the Law of Ukraine ‘On In­dex­a­tion of the Pop­u­la­tion’s In­comes’ came into ef­fect). There­fore, start­ing from this pe­riod, the salary of each em­ployee should have been in­dexed. Tak­ing this into ac­count, the over­all amounts of in­dex­a­tion for the whole pe­riod of non-in­dex­a­tion might ap­pear sig­nif­i­cant. But be­fore jump­ing to any con­clu­sions and pic­tur­ing huge amounts of un­paid in­dex­a­tion, it is worth not­ing that if the em­ployer con­tin­u­ously in­creased salaries there might had been no need for in­dex­a­tion, or the sum could be in­signif­i­cant. In the first place, the re­spec­tive cal­cu­la­tions are re­quired.

Se­condly, we have to em­pha­size that salaries have to be in­dexed no mat­ter what size they are — Hr 1,500 or Hr 20,000 for ex­am­ple. An em­ployer might pay high salaries, which guar­an­tee a good stan­dard of liv­ing to an em­ployee, but still be obliged to index them.

How­ever, it’s worth not­ing that not all of the salary has to be in­dexed, but only within the sub­sis­tence min­i­mum wage for able-bod­ied in­di­vid­u­als. For ex­am­ple, if an em­ployee’s salary equals Hr 10,000, only Hr 1,378 (or $51) is li­able for in­dex­a­tion — this is the base sum for cal­cu­lat­ing the in­dexed sum.

Next, the base sum is mul­ti­plied by the index of price growth, which ba­si­cally re­flects the growth in con­sumer prices due to in­fla­tion. For em­ploy­ers, it is im­por­tant to re­mem­ber that the sum of in­dex­a­tion greatly de­pends on the length of time since the em­ployee’s last raise. The general rule: the more re­cent the salary in­crease, the smaller the sum of in­dex­a­tion. For ex­am­ple, if an em­ployee’s in­crease salary was in Jan­uary 2014, then the sum of in­dex­a­tion for March, 2016 will be Hr 1,064 (or $39), which has to be paid in ad­di­tion to em­ployee’s salary, re­gard­less of its size (i.e., if an em­ployee’s salary was Hr 20 000, then he/she, af­ter in­dex­a­tion, should be paid Hr 21,064). If the em­ployee’s salary was last in­creased in Jan­uary 2015, then the sum of in­dex­a­tion would be Hr 523 (or $19), which is half the amount. How­ever, in this case the size of the salary in­crease also has to be taken into ac­count.

There are many other fac­tors that in­flu­ence salary in­dex­a­tion. For ex­am­ple, many em­ploy­ers in times of high in­fla­tion de­cided to pay ex­tra bonuses to sup­port their em­ploy­ees stan­dards of liv­ing. Thus, em­ploy­ees’ in­come in­creased, and in this case em­ploy­ers fairly ex­pect that the pay­ment of such bonuses would af­fect their obli­ga­tions with re­spect to in­dex­a­tion. How­ever, there are doubts over whether such bonuses can be in­cluded when cal­cu­lat­ing the sum of in­dex­a­tion. So, it ap­pears that even if the sum of the bonus cov­ers the sum of in­dex­a­tion, the em­ployer is nev­er­the­less still obliged to pay the sum of in­dex­a­tion.

To sum up, em­ploy­ers should ex­pect a re­vival of ac­tiv­ity by the state au­thor­i­ties con­cern­ing the is­sue of salary in­dex­a­tion. There­fore, it is ad­vis­able to an­a­lyse all pe­ri­ods of salary ac­crual and pay­ment, with a view to meet­ing salary in­dex­a­tion obli­ga­tions, as well as re­view­ing the struc­tur­ing of em­ploy­ees’ salaries in general.

Part­ner, At­tor­ney at Law


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