Sources of rules and practiceOverview
Provide an overview of the primary sources of law, regulation and practice that govern or affect executive compensation arrangements or employee benefits.
In general, executive and employee compensation in Italy are mainly governed by the following sources of law (in order of priority):
- the Constitution;
- the Civil Code;
- law; and
- collective bargaining agreements.
Remuneration constitutes the principal obligation that the law imposes on the employer with respect to the employment relationship (articles 2094 and 2099 of the Civil Code).
The Constitution (article 36) provides that ‘a worker is entitled to remuneration commensurate with the quantity and quality of their work and in any case sufficient to ensure them and their family a free and dignified life’.
This constitutional provision is based on two principles:
- proportionality or fairness (in relation to the quantity and quality of the work); and
The Constituent Assembly sought to assign to remuneration a ‘social’ and ‘sustenance’ value, since this allows the employee to participate actively in the political, economic and social organisation of the country (cf article 3(2) of the Constitution) and represents a means of livelihood for the employee and their family.
It would be difficult to determine what ‘fair’ pay is, since no legal definition exists. In this regard, the courts intervene, if, on the basis of the provisions of article 2099 of the Civil Code (supported by article 36 of the Constitution), they believe the remuneration envisaged under collective labour agreements is equitable because it responds to the constitutional requirement of ‘sufficient remuneration’. The reference for considering the remuneration owed for work on the basis of the constitutional provision is thus remuneration established for each sector (eg, trade or industry) and type of worker (eg, executives, middle management, clerical staff or blue collar) under collective agreements at a national level (cf. Supreme Court No. 5394, 3 September 1986 and Supreme Court No. 5139 of 9 March 2005).
It is to this parameter that we refer when we talk of ‘minimum remuneration’. This does not include other payments established under collective agreements - such as an extra month’s bonus (cf Supreme Court No. 5598 of 15 March 2005), or on the basis of individual agreements - such as, especially for executives, individual bonuses, fringe benefits, profit sharing, stock grants and stock options.
The main collective bargaining agreements for executives are those for:
- the industrial sector;
- the trade sector;
- the finance and insurance sectors; and
- the chemical sector.
What are the primary government agencies or other entities responsible for enforcing these rules?
The regulatory and supervisory authorities responsible for the employment relationship are the same as those responsible for enforcing the remuneration rules:
- the Ministry of Employment and Social Security (the Department).
- the INPS: the public body issuing the following services:
- temporary benefits (illness, maternity, family allowances, severance pay fund, unemployment, mobility, social security - NASPI service, in other words the new form of social security, redundancy pay);
- INAIL: the public body which provides for obligatory insurance against accidents at work and occupational diseases;
- the tax authorities (the employer acts as a withholding agent in the employment relationship - the Revenue Department); and
- the INL: the public body that governs inspections and penalties in the employment sector.
GovernanceGovernance requirements and shareholder approval
Are any types of compensation or benefits generally subject to specific corporate governance requirements or approval by shareholders or government agencies? What is the general process for obtaining approval?
Some types of compensation and benefits are subject to specific regulation approved by the company:
- Profit sharing, like stock grants and stock options plans that may be open to employees and external collaborators of the company. The amount of sharing of the profits owed to the employee is determined on the basis of the business’s net profits, and for those businesses subject to the publication of financial statements, on the basis of the net profits as resulting from the approved and published financial statements (article 2102 of the Civil Code). In any case, workers who are remunerated in this way must also be ensured in addition remuneration that responds to the requirements of article 36 of the Constitution.
- Individual and collective extra allowance over minimum pay: accessory element of remuneration exceeding the minimum levels of pay envisaged under the collective labour agreement. The amount and payment of the collective extra allowance are the result of the ‘weight’ of the contractual power of individual workers or the merits achieved by them during the performance of their working activity.
- Fringe benefits that are not part of a minimum remuneration, but in recent years have assumed growing importance. They consist in the issue of ‘benefits’ which may have significant economic value for the employee. The assignment of fringe benefits falls within the wider concept of incentives (company car, granting of mortgages at favourable rates, housing, membership of sports or recreational clubs, assignment of mobile phones, personal computers, tablets and credit cards, etc). The economic value of the use of the asset or service - apart from the effective use made of it by the employee - assumes a remunerative nature when this is envisaged in the employment contract signed with the employee.
Under what circumstances does the establishment or change of an executive compensation or benefit arrangement generally require consultation with a union, works council or similar body?
It is up to collective parties at a national level to agree changes to the minimum level of executive compensation, by the terms of article 36 of the Constitution, every three years.
Other changes to executive compensation may be referred to the payments additional to the minimum salary provided by the collective bargaining agreements for executives (profit sharing, individual extra allowances or benefits).
If changes (or termination) refer to the said additional payments agreed with the collective parties at a company level, they are subject to a new consultation with the unions at a company level.
On the other hand, if the changes (or termination) refer to the additional payments agreed by the parties in the employment contract (profit sharing, individual extra allowances or benefits), consultation with unions or other similar body at a company level is not necessary.
There is no principle in the Italian legal system that imposes on the employer, in the sphere of private law relationships, a requirement to ensure equal remuneration or status (or both) to all workers performing the same duties, since article 36 of the Constitution merely establishes the principle of sufficiency and adequacy of remuneration, regardless of any intersubjective comparison, and since article 3 of the Constitution requires the equality of citizens before the law but not also in relations between private persons (Supreme Court No. 20845 of 29 September 2009).
In any case, an employer may not unilaterally reduce the employee’s remuneration during the employment relationship.
According to prevalent case law, it is considered that the guarantee on not reducing remuneration covers only those types of remuneration that are permanently linked to specific subjective professional qualities (eg, individual extra allowances). In other words, those payments or additional allowances that remunerate professional skills intrinsic to the relevant duties (cf Supreme Court No. 2950 of 11 May 1982; Supreme Court No. 619 of 4 March 1983). The guarantee on not reducing remuneration does not apply to indemnities or benefits (eg, a car) issued to compensate for specific problems or difficulties of workers when the special situations that caused them cease to exist with a change in duties (cf. Supreme Court No. 10449 of 8 May 2006 and No. 11538 of 2 May 2019).Prohibited arrangements
Are any types of compensation or benefit arrangements prohibited either generally or with respect to senior management?
Compensation and benefits of public sector companies are determined by the collective bargaining agreements applied in the public sector. The general rules concerning remuneration, payments and allowances for the managers of the public company or of the publicly traded company do not differ from the above-mentioned ones applicable in the private sector.
As a general rule, which applies also for the remuneration of employees, the law provides that the duties of loyalty and non-competition envisaged under article 2105 of the Civil Code are obligations ‘not to do’ something, imposed by law in order to protect the competitiveness of the enterprise. The said obligations express in addition the general principles of fairness and good faith laid down by the Civil Code in respect of contractual obligations (articles 1175 and 1375 of the Civil Code), and these rules are applicable to all types of employees (eg, executives, middle management, clerical staff or blue collar) in both the private and public sectors.Rules for non-executives
What rules apply to compensation and benefits of non-executive directors?
Regarding compensation for non-executive directors it is possible to refer to the rules governing so called quasi-subordinate workers who perform their duties on the basis of an independent collaboration in which the performance of work takes place in close coordination with the organisation of the principal.
What characterises these working relationships is the presence of the following requirements:
- collaboration between the employee and the customer (this differs from the constraint of subordination to the employer and the consequent integration of workers in the company organisation that characterises subordinate employment);
- coordination: understood as a functional connection with the organisational structure of the principal or, more generally, with the aims pursued by the latter. Coordination assumes decisive importance for the purposes of classifying the working relationship in terms of the interaction between the parties (and in particular the intervention of the principal) in order to achieve the agreed outcome;
- continuity of the provision of work, which occurs when the performance is expected to continue over an appreciably long time and implies recurring, not merely occasional, performance; and
- personal nature of the performance, or at least the prevalence of the personal contribution of the worker itself.
These requirements usually apply for the regulation of the relationship of the members of the company’s board of directors and auditors, and for the performance of work carried out for institutional purposes for associations and sports clubs affiliated to national associations.
Compensation and fees are freely negotiated and are determined by the parties in connection with the relevant duties and the importance of the role that the non-executive director is due to play. In some cases, the parties could apply the corresponding rules applicable for self-employed workers (article 2225 of the Civil Code). Only in the case of a party’s silence in the matter may the judge be asked to equitably quantify the due fee ‘according to professional rates and customs’, or in the lack of the latter ‘according to the results achieved and to the work normally required to carry out the relevant tasks’.
DisclosureMandatory disclosure of executive compensation
Must any aspects of an executive’s compensation be publicly disclosed or disclosed to the government? How?
Not applicable (see questions 5 and 10).
There is no mandatory disclosure of executive compensation in the Italian legal system. Such information may be acquired only through the analysis of public tax returns that companies are obliged to complete and file annually (by the end of October). The tax returns also include the total amount of compensation applied in terms of annual fees including salaries, stock premiums, stock options and other incentives payed to the employees (Form 770/Ordinary).
Employment agreementsCommon provisions
Are employment agreements required or prevalent? If so, what provisions are common? Are any terms prohibited or unenforceable?
Employment agreements are prevalent in the Italian labour system.
Essential elements of the agreement between the parties, due to the economic function played by the employment contract, are the exchange between the work put in by the worker and the wages paid by the employer in relation to the work performed (reason for the contract).
The subject matter of the contract, namely the manual or intellectual activities that the employee is required to perform, must be, according to the general principles of contract, lawful, possible, determined or determinable (article 1346 of the Civil Code).
When appointing someone at the start of the employment relationship - and for all categories of employees (eg, executives, middle management, clerical staff or blue collar), the employer must provide the worker with the following information (Legislative Decree No. 152/1997), usually contained in the letter of appointment:
- identity of the parties;
- the workplace: in the absence of a fixed or main place of work, it should be specified that the employee is employed at various places, as well as the registered office or domicile of the employer;
- starting date of employment;
- duration of the employment contract, stating whether it is a fixed-term or open-ended employment;
- duration of the trial period if envisaged;
- the placement, level and job title attributed to the worker, or the features or a brief description of their duties;
- starting salary and its components, and specification of the payment period;
- the amount of paid leave to which the employee is entitled or the manner of calculating and taking leave;
- working hours; and
- notice periods in the event of withdrawal.
In the event of the application of the collective labour agreement by the employer, information on the provisions contained under subparagraphs (5), (7), (8), (9) and (10) may be provided by reference to the provisions of the applicable National Collective Labour Agreement.
Incentive compensationTypical structures
What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?
The forms of remuneration recognised under law, collective labour agreements and practice are the following, as established in article 2099 of the Civil Code: ‘Remuneration of the employee may be established according to a time or piece rate and must be paid to the extent determined by the corporate rules, with the terms and procedures used in the place where the work is performed’.
The salary, determined for each sector by the collective bargaining agreement, may be in a mixed form, applying different forms of remuneration, provided these comply with the parameters given by article 36 of the Constitution.
Remuneration on a time basis (general type of compensation)
Proportional to the duration (time) of work - hour, week, month, year - and is regulated by collective labour agreements or agreements between the parties (or both). This is the most common form of remuneration. The worker is paid for the hours of work performed and for making their human resources available.
Remuneration on a piecerate basis
Commensurate with the results of work (and not time), this is regulated by collective labour agreements or agreements between the parties (or both). The piece rate is related to performance and not results. If the expected result is not achieved due to factors unrelated to the worker, the latter is in any case entitled to the fee agreed for the work performed or which could have been performed. The risk remains with the employer and the parties in any case establish a minimum agreed wage to be paid to the worker (‘mixed piece-rate work’).
Apprentice: prohibition of piece-rate remuneration (article 2131 of the Civil Code and article 42 of Legislative Decree No. 81/2015).
Profit-sharing; stock grants
Remuneration may be admitted, entirely or in part, in the form of profit or product sharing (article 2099 of the Civil Code), without prejudice to the fact that the worker may not be exposed to business risk. In any case, workers who are remunerated in this way must also be ensured remuneration that responds to the requirements of article 36 of the Constitution (minimum wage).
Stock options may be open to employees and non-executive directors.
Remuneration in kind
Pursuant to article 2099 of the Civil Code, a worker may also be remunerated entirely or in part with payment in kind. This is a type of remuneration which is complementary to traditional payment and may consist, for example, of: accommodation; or the provision of heating, electricity, water, clothing, etc; or discounts on the purchase of goods produced by the employer; or the provision of goods or services for free.
Remuneration is calculated on the basis of the business dealt with or concluded by the worker (or both). (Sometimes, reference is
made only to successful dealings.) This system of remuneration is widespread, mainly in the commercial sector, but is not however, prevalent, being accompanied by the payment of basic remuneration or minimum guaranteed wages.
Individual and collective extra allowance over minimum pay
Accessory element of remuneration exceeding the minimum levels of pay envisaged under the collective labour agreement. The amount and payment of the collective extra allowance are the result of the ‘weight’ of the contractual power of the individual worker or the merits achieved by them during the performance of their working activity.
Fringe benefits are not part of a minimum remuneration, but in recent years have assumed growing importance. Part of the extra allowance compensation may be paid by the issue of ‘benefits’. The assignment of fringe benefits falls within the wider concept of incentives (company car, granting of mortgages at favourable rates, housing, membership of sports or recreational clubs, assignment of mobile phones, personal computers, tablets and credit cards, etc).
Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?
Remuneration is deemed as being any fee which has the nature of being obligatory, continuous, determined or determinable (cf. Supreme Court No. 2084 of 17 July 1973 and Supreme Court No. 1019 of 27 February 1978).
Remuneration is a right of workers envisaged under the employment contract. In other words, when the issue of payment is imposed by law or a binding collective agreement or has been envisaged in the agreement between the parties, it is included in remuneration and represents an integral element thereof to all effects and purposes.
Determination or determinability
A contract must contain parameters which make it possible to qualify and quantify the amount of the remuneration.
The continued issue of a given payment is sufficient, even if the actual amount varies, for it to be considered an element of remuneration.
The employer acts as a withholding agent, pursuant to articles 23 and 24 of the Presidential Decree No. 600/1973.
The employer is obliged to withhold taxes owed by the worker, which have to be calculated on the income of the latter (articles 23 et seq of Presidential Decree No. 600/1973). The withholding agent also provides for paying the withholding tax deducted to the Revenue Department.
The withholding agent must withhold tax by way of partial payment on the sums (wages, salary and benefits, etc) and values paid in each remuneration period. The remuneration period constitutes a practical criterion for measuring the tax to be deducted so that it coincides as far as possible with when the income is received, in view of the balancing of taxation at the end of the year or at the end of the employment relationship, if this occurs first.
Withholding tax is applied to the overall amount of all the sums and values received by the withholding agent in the remuneration period (month, fortnight, week or day) in relation to the employment relationship as established pursuant to the Consolidation Law on Income Tax (Presidential Decree No. 917/1986). To this end, for each remuneration period, the withholding agent calculates all the sums and values subject to tax related to the period itself according to the cash criterion, excluding additional monthly payments and other remuneration (eg, severance indemnity) of the same kind for which separate procedures are envisaged.
The income earned on shares offered to the employee is not considered income from work under some specific circumstances (article 51, paragraph 2, letter (g) of Presidential Decree No. 917/1986 (Single Text of Income Taxes (TUIR)):
(g) the value of the shares offered to the generality of employees for a sum not exceeding an overall [€]2,065.83 in the tax period, provided the stock is not repurchased by the issuing company or the employer or in any case transferred before at least three years have passed since it was received; if stock is transferred before such period the sum that did not form part of the income at the time of receipt is subject to taxation in the tax period in which the stock is transferred.)
Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?
Stock options, performance-vested stock, options or similar devices are a type of remuneration generally for executives and middle management but extendible to all the type of employees. The performance period for a long-term incentive typically runs between three, five or seven years, with the executive not receiving any pay from the incentive until the end of the performance-vesting period. Long-term incentive goals vary by company but the most prevalent are focused on total return to shareholders, earnings per share and other return measures, such as return on assets. Like annual incentives, long-term incentives typically have a target and a stretch component to encourage executives and middle management to achieve superior performance.
The income earned on options and vested stock options by the employee is considered income and it is subject to withholding taxes as normal remuneration. In any case, the law provides exemption from social security obligations.
Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?
Not applicable (see question 11).Recurrent discretionary incentives
Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?
Fringe benefits that are not part of a minimum remuneration and the participation in wider welfare plans in recent years have assumed growing importance also through collective bargaining agreements. They consist in the issue of ‘benefits’, services and insurance packages which may have significant economic value for the employee in place of money remuneration. The assignment of fringe benefits and the participation in wider welfare plans fall within the broader concept of incentives (company car, granting of mortgages at favourable rates, housing, membership of sports or recreational clubs, assignment of mobile phones, personal computers, tablets, credit cards, transport services and insurances, etc). The economic value of the use of the asset or service - apart from the effective use made of it by the employee - assumes a remunerative nature when this is envisaged in the employment contract signed with the employee.
Such arrangements also benefit from incentive tax measures so they are not rebuttable if they are provided in compliance to the terms and limits established by the law.
Elements that the Consolidation Law on Income Tax (article 51(2)) expressly rules out (also establishing relative limits) are excluded from employment income, namely:
- welfare and social security contributions;
- the provision of food and services, including in canteens organised directly by the employer or managed by third parties; benefits and allowances paid to workers on construction sites and other working facilities of a temporary nature, or production units located in areas where facilities or catering services are lacking;
- the provision of collective transport services for all employees or for categories of employee, even if entrusted to third parties, including those providing public services; sums issued or reimbursed by the employer to all the employees or to categories of employees - also for the family - for the purchase of local or regional transport subscriptions;
- reversionary fees;
- the use (also by the family of the employee) of works or services for educational, instructive and recreational aims, and for social and health assistance; sums issued by the employer for assistance services to elderly or non-self-sufficient family members; sums issued by the employer for services, and insurances, having as their object the risk of non-self-sufficiency in carrying out the actions of daily life;
- monies, services and benefits provided by the employer to all employees or to categories of employee for attendance at nurseries and summer camps by family members, as well as for scholarships for the same;
- stock purchase plans (under specific limits - see question 10);
- sums withheld for deductible charges and sums issued to cover deductible expenses;
- croupiers’ tips; and
- remuneration arising from the worker exercising their right to waive contribution credits regarding general compulsory insurance for invalidity, old age and surviving heirs of employees, and alternative forms thereof, for the period after the first deadline useful for retirement once the minimum requirements under current regulations have been accrued.
Goods in kind (fringe benefits) count towards income according to particular laws that govern their exemption from tax up to a certain limit. In particular, conventional values are applied for establishing the value of a car, loans, accommodation and railway transport.Effect on other employees
Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?
The principle of equal pay for equal work in the same enterprise does not exist in the Italian legal system. This means that workers who perform the same duties may be paid a different wage, while employers must respect the equitable wage and the guaranteed minimum wage as provided by the Workers’ Statute (article 16 of Law No. 300/1970), and the minimum wage level provided for each level of each sector by collective bargaining agreements.Mandatory payment
Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?
Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?
Part of the remuneration may be admitted by the parties in the form of profit or product sharing (article 2099 of the Civil Code - see question 9). Only this part of the remuneration (not the minimum wage that responds to the requirements of article 36 of the Constitution) could be conditioned by the parties on continuing employment and submitted to the rules and limits for payment identified in the remuneration agreement (usually attached to the employment contract).
Equity-based compensationTypical forms
What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?
Not applicable (see questions 9 to11).
Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?
Not applicable.Tax treatment
Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?
Not applicable (see question 11).Registration
Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?
Not applicable (see questions 9 to 11).Withholding tax
Are there tax withholding requirements for equity-based awards?
Not applicable (see question 11).Inter-company chargeback
Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?
Not applicable for labour law (specific tax rules govern this matter).Stock purchase plans
Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?
Employee stock purchase plans are available but not prevalent. See questions 9 to 11.
Employee benefitsMandatory and voluntary employee benefits
Are there any mandatory benefits? Are there limits on changing or discontinuing voluntary benefits that have been provided?
The Civil Code lays down some general rules regarding obligatory social security and welfare, whilst leaving detailed regulations to specialist legislation in the field.
Obligatory social security benefits are all those benefits due as a result of social security payments made or due (eg, sickness or maternity allowances), while obligatory assistance refers to those benefits owed regardless of the payment of contributions (eg, civil or invalidity pensions). The source of these benefits is also different: contribution obligations are required under law, employment contracts or the activity performed and are due automatically regardless of the possible nullity of the employment contract. The rules on social security giving rise to obligatory assistance instead come from public law.
In Italy, obligatory social security aimed at employees is articulated as follows and it is managed by the INPS, the public body issuing these services:
- pensions; and
- temporary benefits (illness, maternity, family allowances, severance pay fund, unemployment, mobility, social security - NASPI service, in other words the new form of social security, redundancy pay).
The Italian legal system also provides for obligatory insurance against accidents at work and occupational diseases, managed by INAIL.
It is the law (article 2114 of the Civil Code) that established mandatory insurance in favour of employees. The insurance relationship is established under law (articles 1 and 3 of Royal Decree Law No. 636/1939) together with the obligation to pay social security contributions.
These concepts are taken up by the Constitution, which in article 38(2) affirms workers’ rights to enjoy adequate means for their living needs in the event of accidents at work, illness, invalidity and old age, and involuntary unemployment.
The structure of the insurance arrangement is based on a trilateral relationship involving the employer, the employee and the state social security body.
The law provides protection for employees in case of illness - a physical or psychological condition of temporary inability which affects the performance of work (article 2110 of the Civil Code). By way of derogation from general regulations regarding contracts, as established under articles 1463 and 1464 of the Civil Code, and justified by the specific protection provided under the Constitution (articles 38 and 32), in an employment relationship illness suspends the working relationship without terminating it. A worker who is unable to perform their working duties is entitled to economic protection. For executives, reimbursements and treatment are provided for by the collective bargaining agreements funds.
The concept of ‘illness’, protected by the legal system, also includes those periods necessary for recovery and those necessary for undertaking specific care and therapy which, while not constituting ‘illness’ in the strict sense, in any case prevent the employee from working.
Any periods in which the worker is admitted to hospital or attending day hospital facilities are considered to be covered by the period of illness, provided that the related certification specifies the necessary details.
‘Generic’ illness should be distinguished from accidents at work and occupational diseases. These are specifically protected within the framework of the protection of health and safety at work and protection against accidents at work (cf. Presidential Decree No. 1124/1965) which is mandatory for occupational diseases listed in the table approved, most recently, under the Ministerial Decree of 9 April 2008.
The Italian legal system also provides a series of general and specific protections linked to the period of pregnancy and maternity (including special types of permits for fathers), aimed at ensuring specific protection for working mothers (including executives) during pregnancy and the subsequent period of parental leave (Legislative Decree No. 151/2001).
The law - often complemented by the provisions contained in collective labour agreements, which may also introduce new types of permits - allows employees to refrain from the obligation of service by taking advantage of permits or periods of leave expressly envisaged thereunder:
- holidays and vacation (article 2109 of the Civil Code and article 10 of Legislative Decree No. 66/2003);
- permits for disabled workers and special leave (article 33 of Law No. 104/1992; article 42 of Legislative Decree No. 151/2001);
- study permits and sabbatical leave (article 10 of Law No. 300/1970 and article 5 of Law No. 53/2000);
- marriage leave (Inter-Trade Union Agreement of 31 May 1941);
- leave for specific personal reasons (article 4 of Law No. 53/2000 and article 2 of Ministerial Decree No. 278/2000);
- compassionate leave (article 1 of Ministerial Decree No. 278/2000); and
- gender violence leave (article 24 of Legislative Decree No. 80/2015).
What types of employee benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?
Not applicable (see questions 9 to 13).
Termination of employmentRules for termination
Are there prohibitions on terminating executives? Are there required notice periods? May executives be dismissed without cause?
Article 2118(1) of the Civil Code: ‘Each of the contracting parties may withdraw from an open-ended employment contract, providing notice according to the terms and methods established by corporative regulations, accepted practice or equity’.
Dismissal at will is now an unusual case, only possible for domestic work, executives, workers on trial, and workers who have achieved pension requirements if they have not opted to continue in employment.
Article 1418 of the Civil Code, which envisages the nullity of legal transactions due to illicit causes or reasons, is also applicable to dismissal at will.
An executive should also be dismissed for just cause under provisions of article 2119 of the Civil Code. Each of the contracting parties to the employment relationship may withdraw from the contract prior to its expiration, if the contract has a fixed term, or without notice, if the contract is open-ended, if there occurs a cause that does not allow the working relationship to continue (even on a provisional basis). In the case of executives, just cause refers also to the position and role played in the company, so that the justified reason of the dismissal may be connected to the fiduciary relationship between the parties (the employer and employee).
Case law recognises that executives are also subject to the procedure provided by the law governing disciplinary dismissals (article 7 of Law No. 300/1970).Mandatory severance pay
Are there statutory or mandatory minimum severance requirements? Are there any other mandatory, post-employment benefits?
The severance indemnity (TFR) is deferred remuneration paid to the employee upon termination of employment (article 2120 of the Civil Code). There follow some notes regarding the content of article 2120:
‘annual remuneration useful for the calculation of the severance indemnity’
This is intended as being the overall total of the sums paid to the worker ‘in fulfilment of their employment contract’, ‘not of a temporary nature’.
The ongoing nature of the payment means that only those payments related to unforeseeable or unplanned business situations should be excluded from the calculation. On the contrary, payments related to work or the organisation of work, even if not paid regularly and frequently, should be taken into consideration for the purposes of calculating severance indemnities.
collective labour agreements may establish the items of remuneration useful for the calculation of the severance indemnity, even if this is less advantageous for the employee (departing from the general principle of the hierarchy of sources)
Collective labour agreements may establish on a mandatory basis the items to include in the remuneration useful for the severance indemnity, excluding those ones that fail to satisfy the requisites of continuity and dependence on the working relationship.
calculating remuneration useful for the purposes of severance pay
It is necessary to establish the elements of remuneration that constitute it, and which months should be considered for the purposes of the calculation. Article 2120 provides the rule, which is then taken up in the majority of collective labour agreements. In the event of appointing an employee or the termination of their employment in the course of the month, the remuneration received becomes part of the basis for calculating the quota of severance pay, only and exclusively if employment has lasted for at least 15 calendar days.
absences protected by law (injury, illness, pregnancy, childbirth)
The worker, while not effectively working, however, has the right to accrue severance pay: these periods are valid for establishing length of service. Article 2120 in fact envisages the mechanism of ‘virtual remuneration’.
Severance pay as deferred remuneration
Severance pay constitutes a part of the remuneration that the worker accrues annually, but normally receives upon termination of employment. As a consequence of this discrepancy between the moment of accrual and effective payment, the person keeping back this sum is obliged to pay an additional sum by way of revaluation.
Revaluation: this affects only the severance indemnity accrued at 31 December of the year preceding termination. It is not recognised on the severance pay quota accrued in the current year. The moment that revaluation is calculated is consequently either 31 December of each year for ongoing employment relations, or the date of termination in the event of termination of employment during the year.
The revaluation index to apply is constructed according to precise rules under law, aimed at ensuring the maintenance of purchasing power of the sums set aside. It is represented by a consumer price index for families of blue-collar workers and clerical staff reported on a monthly basis by ISTAT.
What executive severance payment level is typical?
Not applicable (see question 27).Reasons for dismissal
Are there limits on dismissal for ‘cause’? Are there any statutory limits on ‘constructive dismissal’ or ‘good reason’? How are ‘cause’ or ‘constructive dismissal’ defined? Are there legal or customary rules relating to effecting a termination for ‘cause’ or ‘constructive dismissal’?
The law considers dismissal to be null when, regardless of the formal motivation (or justified reason) adopted, it is ascertained as being:
- discriminatory, in other words, caused by reasons related to political or religious beliefs, race, gender or nationality, or to the membership of a trade union or participation in trade union activities (the concept of trade union activities covers not only the activity performed on behalf of the trade union by one of its members, but also that conduct which - although engaged in outside trade union initiatives - is in any case aimed at supporting positions and claims made by employees). There falls within the notion of discriminatory dismissal that performed by way of reprisal, in other words following conduct disagreeable to the employer. It should be pointed out that the burden of proof of discrimination lies with the worker;
- ordered for a determining illicit reason pursuant to article 1345 of the Civil Code or an unreal reason if referred to the duties and role performed by an executive;
- ordered during the period of protection envisaged by the law on maternity and paternity (article 54 (1, 7) of Legislative Decree No. 151/2001). This regulation provides that women workers may not be dismissed from the beginning of the period of pregnancy until the end of the period of obligatory maternity leave provided for under law, nor before the infant’s first birthday. The protection also applies to a working father, and in fact paragraph 7 of the provision establishes that, in the event of enjoyment of paternity leave, the ban on dismissal also applies to the working father for the duration of the leave itself and is extended until the child’s first birthday. The same system applies in the event of adoption and foster care until a year after the minor’s entrance into the family. In the case of international adoption, the period of prohibition begins to run from the moment of the communication of the proposal to meet the minor to be adopted or of delivering the invitation to go abroad to receive the adoption proposal. There is, however, no prohibition of dismissal in the cases in which dismissal is ordered for just cause, for failure to pass the trial period, due to termination of the corporate activity, or due to expiration of the term for fixed-term contracts;
- ordered for reason of marriage (article 35 of Legislative Decree No. 198/2006). From this point of view, the law presumes that dismissal of an employee (whether male or female) in the period between the day of the request for publication of the banns, up to one year after the wedding itself, has been ordered due to marriage. The employer is entitled to prove that dismissal taking place in the above period has been ordered not due to marriage, but for one of the following reasons:
- termination of the employment relationship for just cause;
- termination of the activities of the company for which the employee works;
- completion of the works for which the worker was appointed; or
- termination of the employment relationship due to expiration of the contract.
The penalty for ascertained discriminatory dismissal is the order to the employer to reinstate the worker.
Resignation can be due to ‘just cause’, as a result of the employer’s behaviour in not consenting to continue collaboration between the parties even on a temporary basis (article 2119, paragraph 1 of the Civil Code). Each of the parties may withdraw from the contract before expiration in the case of a fixed-term contract, or without notice if it is an open-ended contract, if an event occurs that does not allow the continuance, even temporarily, of the employment relationship. If the contract is open-ended, the worker is entitled to compensation in lieu of notice. ‘Just cause’ is serious violation of legal norms or contractual terms, such as violating safety norms, or failure to pay remuneration or social security contributions. In view of the seriousness of these violations the employee is requested to react opportunely, given that for courts tolerating the situation means lack of a good cause for resignation.
Resignation for just cause may not be based on conduct by the employer which falls within the exercise of the latter’s managerial and organisational powers. In the event of resignation for just cause, unemployment benefits are owed, as envisaged under the legal system (NASPI, set forth by Legislative Decree No. 22/2015).
Other types of qualified resignation are envisaged in the event of the transfer of a business or business unit. Article 2112(4) of the Civil Code in fact states that ‘A worker, whose working conditions undergo a substantial change in the three months following the transfer of the business, may resign in accordance with article 2119(1) of the Civil Code’. Further cases may be regulated directly by collective labour agreements. This is the case regarding some collective agreements for executives. The rules provide that in the event of transfer of the individual employee, when there has been a substantial change of work affecting the working position, the executive may resign with entitlement to payment of compensation in lieu of notice, even if he or she does not work during the notice period.Gardening leave
Are ‘gardening leave’ provisions typically used in employment terminations? Do they have any special effect on benefits?
Each of the parties in an employment relationship may withdraw from an open-ended employment contract, by providing notice according to the terms and procedures established under collective agreements, common usage or on an equitable basis. In the absence of notice, the withdrawing party is obliged to pay the other party compensation equivalent to the sum of the remuneration (that includes base salary and incentive remuneration but does not include a reimbursement sum) that would have been owed for the notice period (article 2121 of the Civil Code).
The parties may agree that the resigning executive would receive the payment of compensation in lieu of notice, even if he or she does not work during the notice period (gardening leave).
Compensation in lieu of notice is in any case owed, without any obligation to provide working service, in the following cases:
- death of the worker (article 2118(3) of the Civil Code);
- resignation of the worker for just cause (article 2119(1) of the Civil Code), which may happen for example in the event of failure to pay salary (Supreme Court No. 130 of 6 November 2007);
- resignation rendered by a working mother or working father during the period in which dismissal is prohibited (article 55 of Legislative Decree No. 151/2001); or
- resignation rendered by a female worker following dismissal for marriage declared null and void (article 35 (7-8) of Legislative Decree No. 198/2006).
Is a general waiver or release of claims on termination of an executive’s employment normally permitted? Are there any restrictions or requirements for the waiver or release to be enforceable?
The period set forth by the law in which a dismissal can be claimed is 60 days from the moment the employee receives communication of dismissal (article 6, paragraph 1 of Law No. 604/1966). This first period regards an extra-judicial written claim that case law is recognised as being also applicable to executives (Supreme Court No. 22627/2015). Once put into effect, the first claim triggers a second period of 180 days for presentation of the claim to the court or for communicating a request for conciliation or arbitration to the employer.
At the point of a proposal of arbitration or conciliation being refused, or when no conciliation is achieved, there is a period of 60 days for taking legal action in court (article 32, paragraph 1 of Law No. 183/2010).
An extra-judicial claim of a dismissal must be in writing (article 6, paragraph 1, Law No. 604/1966) and does not necessarily have to contain the reasons for the claim. The claim to court or the claim for activating the conciliation or arbitration procedure, which must be presented in the 180 days after the first claim, must indicate the reasons and provide evidence of the employment relationship and of the dismissal carried out by the employer.
The claimant is the worker or the trade union that assists him or her (article 6 of Law No. 604/1966).
Post-employment restrictive covenantsTypical covenants
What post-employment restrictive covenants are prevalent? What are the typical restricted periods?
The duties of loyalty and non-competition envisaged under article 2105 of the Civil Code are obligations ‘not to do’ something, imposed by the law, in order to protect the competitiveness of the enterprise. Also, this obligation expresses the general principles of fairness and good faith laid down by the Civil Code in respect of general contractual obligations (articles 1175 and 1375 of the Civil Code). The duties of loyalty and non-competition are essentially manifested in the duty not to transact business on behalf of third parties, in competition with the employer, and the duty not to use information and information acquired during the course of the employment relationship in such a way as to cause damage to the company.
In addition, the bond of loyalty is directly proportional to the complexity of the tasks assigned to the employee and to the position the latter occupies in the business organisation, especially in the case of executives.
In other words, the higher the position held by the employee within the organisation of the employer or the higher the professional content of the duties performed, the tighter the bond of loyalty is.
The non-competition obligation during employment is also part of the wider obligation of loyalty defined above (see question 5) and is structured to prevent the worker from carrying out activities exploiting precisely the competitive advantage derived from their role in the company organisation and from their knowledge of its technical and production processes or business practices. The obligation of confidentiality, also envisaged under article 2105 of the Civil Code, is a further expression of the general obligation of loyalty and non-competition as defined above. This obligation is embodied in the non-divulgence of information concerning the enterprise’s organisation and production methods or not using such information in a way as to cause damage to it.
These obligations must be distinguished from non-competition agreements pursuant to article 2125 of the Civil Code. These are merely optional and entered into only upon termination of the employment relationship (see question 33).Enforceability
Are there limits on, or requirements for, post-employment restrictive covenants to be enforceable? Will a court typically modify a covenant to make it enforceable?
With the signing of the non-competition agreements envisaged under article 2125 of the Civil Code, there is an intention to extend, for the period following termination of employment, the obligations of loyalty imposed on the worker by article 2105 of the Civil Code. The rule provides that ‘An agreement that limits the performance of the employee’s activity for a time after termination of the contract is void unless in the form of a written document, unless consideration is given to the employee, and unless the restriction is contained within certain limits in terms of subject matter, time and place. The duration of the restriction may not exceed five years, in the case of executives, and three years in other cases. If a longer period is agreed upon, it will be reduced to the extent indicated above’.
The rule basically establishes, on pain of nullity of the non-competition agreement, that it should possess the following essential elements:
- be in writing;
- specification of the subject matter;
- a predefined duration;
- a pre-established geographical area of operations; and
Establishing the subject matter of the agreement is one of the most delicate aspects of the agreement because it is necessary to define with sufficient precision which activities may not be carried out by former employees and for whom.
Moreover, the limitation may regard not only the duties performed by the employee (eg, an executive) for the original employer, but also the different activities that an employee may still exercise in competition with the former employer. It is clearly impossible to completely suppress the professional experience acquired by the employee in the course of their employment, so as to prevent, in fact, their earning potential. And this is true even if we take into account the effective competitive potential of the new employer and the position that the employee will occupy there.
Another particularly delicate aspect is that relating to the territorial limit of the prohibition of competition. This is closely related to establishment of the subject matter in the sense that, for the purposes of assessing the validity of the non-competition agreement, the subject matter will be evaluated in relation to the scope of the territorial ban. In other words, an agreement regarding a major subject matter could be considered legitimate provided it regards a small geographical area and vice versa.
It should, in fact, be stressed that the evaluation of the fairness of the non-competition agreement is the result of a balancing act between the needs of the company and the employee’s right to engage in employment which enables them to produce income.
Taking into account the fact that we cannot restrict work and business to a merely national dimension, recent case law, sensitive to a globalised economy, has acknowledged that ‘a non-compete agreement can almost never usefully be limited to the national territory, but must regard at least the European dimension’ (Court of Milan, 3 May 2005).
Moreover, we should consider the time factor, in the sense that the ban on competition must be confined within certain time limits. Article 2125 of the Civil Code expressly provides that it may not exceed the limit of three years, or five years in the case of managers.
Finally, we must take into account the element of consideration that, under penalty of nullity of the agreement, must be reasonable and proportionate to the sacrifice required (cf. Supreme Court No. 4891 of 14 May 1998).Remedies for breach
What remedies can the employer seek for breach of post-employment restrictive covenants?
The provision enclosed in the non-compete covenants according to which the employer may reserve the right to decide, at the time of the employment termination, for the execution of the covenant, is considered by the majority of case law as null and void.
In the case of a breach of a valid and enforceable non-competition covenant, the employer has the right to request compensation for the damages suffered; frequently, such damages are predetermined in a ‘liquidated damages clause’ contained in the covenant.
Nevertheless, according to article 1384 of the Civil Code, the labour court can reduce the amount of liquidated damages if they are deemed excessive.
In any case, the non-compete clause does not prevent the employer from claiming additional damages, which must be proven in court.
Moreover, the employer is entitled to reimbursement of the consideration paid to the employee by virtue of the covenant.
It is important to underline that according to Italian jurisprudence the former employer may ask the judge, even with the procedure of urgency provided by the Italian Code of Civil Procedure, to inhibit the employee (who signed the non-compete covenant) from performing in favour of the competitor the same activities carried out for the former employer.
Pension and other retirement benefitsRequired retirement benefits and incentives
Are there any required pension or other retirement benefits? Are there limits on discontinuing or modifying voluntary benefits that have been provided?
The Italian state pension scheme is a compulsory pay-as-you-go first-pillar system that refers to the INPS. The current reformed system mimics a funded system, in the sense that the pension level of each retired employee is based on the amount of contributions he or she paid into the public pension scheme during their working life.
As a result, the level of benefit for employees who have worked continuously until retirement age is generally higher than for those employees who have had an interrupted career.
As regards private pension schemes under pillars 2 and 3, these are regulated by Law No. 252 of 5 December 2005.
Collective bargaining agreements can also regulate private pension schemes.
Early retirement affects benefit calculations and can decrease the amount of the employee’s benefit as regards old-age pension.Typical retirement benefits and incentives
What types of pension or other retirement benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?
Contributions to the state pension scheme are compulsory and amount to roughly 33 per cent of the employee’s gross salary. The state pension is treated as employment income and is therefore subject to the same type of progressive taxation.
Contributions by employers to private and contractual pension schemes are compulsory for executives under provisions of the relevant collective bargaining agreements.
Employees can deduct, for tax purposes, the contributions paid by themselves and their employers up to a limit of €5,164.57. However, it is possible to go over this limit only by choice of the employee and in the case where the contribution to the private pension scheme becomes part of a wider company welfare plan under the provision of a company collective agreement.
The returns on pension funds are generally subject to a reduced tax rate of 15 per cent.Supplemental retirement benefits
May executives receive supplemental retirement benefits?
Not applicable (see question 36).
IndemnificationDirectors and officers
May an executive be indemnified or insured for claims related to actions taken as an executive, officer or director?
The main collective bargaining agreements for executives provide that the executive may be indemnified or insured in case of civil or criminal claim. The company is responsible for any civil liability of the executive to third parties for actions concerning the performance of his or her duties. In case of criminal liability (that does not itself constitute ground for dismissal by the employer), the expenses are borne by the company, and the manager may be assisted by a lawyer of his or her own choosing, charged to the company.
Change in controlTransfer of benefits
Under what circumstances will an asset sale in your jurisdiction result in an automatic transfer of benefit obligations to the acquirer?
Not applicable.Executive retention
Is it customary to provide for executive retention or related arrangements in connection with a change in control?
Not applicable.Expedited vesting of compensation
Are there limits or prohibitions on the acceleration of vesting or exercisability of compensation in a change in control? Are there restrictions on ‘cashing-out’ equity awards?
Are there adverse tax consequences for the employer or the executive relating to benefits or payments provided pursuant to a change in control?
Multi-jurisdictional mattersExchange controls
Do foreign exchange controls rules apply to the remittance of funds, or the transfer of employer equity or equity-based awards to executives?
Not applicable.Local language requirement
Must employment agreements, employee compensation or benefit plans, or award agreements be translated into the local language?
Employment agreements and employee compensation and benefit plans have to be translated into the local language to meet any potential requirements of the authorities (eg, the INPS, tax authorities and the courts).Net salary arrangements
Are there prohibitions on tax gross-up, tax indemnity or tax equalisation payments?
Employment income derives from the employment relationship and involves all the sums, of any nature, paid in connection with the employment relationship (article 49(1) of Presidential Decree No. 917/1986 and Circular No. 326/E of the Ministry of Finance of 23 December 1997). Withholding tax is applied to the overall amount of all the sums and values received by the withholding agent in the remuneration period (month, fortnight, week or day) in relation to the employment relationship as established pursuant to the Consolidation Law on Income Tax (Presidential Decree No. 917/1986). To this end, for each remuneration period, the withholding agent calculates all the sums and values subject to tax related to the period itself according to the cash criterion.
No later than 31 March of each year (or upon termination of employment, if requested by the worker, within the 12 days following), the withholding agent issues the employee with a single certification form (CU) regarding income from employment, income from self-employment and other income.
Moreover, withholding agents must submit these certificates online, no later than 7 March, to the Revenue Department.Choice of law
Are choice-of-law provisions in executive employment contracts generally respected?
The choice of not applying Italian law to an employment contract shall be clearly expressed by the common willingness of the parties and inferable by the contract itself. These are the conditions enforcing respect of choice-of-law provisions.
Foreign law is not applicable when it is in conflict with international public order. Furthermore, according to Regulation (EC) No 593/2008, the choice of the applicable law shall also be taken into account in light of respect for the ‘overriding mandatory provisions’.
Overriding mandatory provisions are provisions respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social and economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract itself.
Update and trendsKey developments of the past year
What were the key cases, decisions, judgments and policy and legislative developments of the past year?47 Key developments of the past yearWhat were the key cases, decisions, judgments and policy and legislative developments of the past year?
On 28 September 2018, the Constitutional Court intervened and declared unconstitutional article 3 of the Jobs Act, Decree No. 23/2015 (Decision No. 194/2018). Article 3, paragraph 1, of Legislative Decree No. 23/2015 (amended by the Dignity Decree in July 2018) provides an indemnity in case of unfair dismissal (stated the reinstatement in case of any discriminatory dismissal) for workers hired after 7 March 2015: an employer could pay the employee an indemnity anywhere between six to 36 months’ gross remuneration.
The Constitutional Court stated on the criterion for determining the amount of compensation that it is determined by the law on the length of service (two months for each year of service). The Court stated that this provision violates the principles of equality and reasonableness set out in articles 4 and 35 of the Constitution.
As an effect of this decision, the Court stated that the criteria on determining the amount of such indemnity also have to be based upon the judge’s discretion and consider the number of employees, the size of the company’s activities and the behaviour and conditions of the parties of the employment contract.
Changes in the employment relationship, the extension of the possibility to work everywhere, anytime, include the necessity to provide new rules for new types of jobs arising from the digital economy, leads to new labour regulations. The approach under existing Italian laws with respect to employment, workplace issues and compensation, as well as issues related to taxation, continues to be based on the traditional ‘either/or’ model and principals based on the traditional employee or contractor distinction and rules that still do not seem to adequately manage the new models of work organisation. This new work organisation requires looking at the employment relationship (and its remuneration), not only in terms of the exchange between work and money for precise time of work but also with regard to the results that a certain activity takes during a given time (eg, hour, day or week). On the other hand, new rules are going to be approved in order to provide new types of jobs, which will generally be performed by independent workers, such as minimum rules on salary, insurance and health and safety at work.