It has happened: the government transfers the social contribution obligations form the employer to the employee beginning with 01.01.2018.
For the private sector, this automatically implies a considerable decrease of the net income of all Romanian employees.
All Romanian employers must therefore consider as soon as possible to which extent they will cushion their employees against this effect by raising the salaries.
Yet, from an employment point of view, this is linked to problems invisible at a first glance. So how to act in order to reduce risks?
Despite fierce protest from both the economy and trade unions, the government has implemented the measures by Emergency Ordinance (hereinafter “EO”). The EO was published in the evening of 10 November 2017.
As already reported, the EO reduces the social contributions types to only three. At the same time it raises the contributions and shifts the obligation to bear them almost entirely to the employee. As a partial “financing” measure, the income tax is reduced from 16 to 10%.
Of course, higher compulsory contributions lead to a lower net salary. In order to maintain the current net salary level, a raise in the gross salary is required. Compulsory for the public sector, for the private sector, such salary raise will be at the employer’s discretion. According to the press, large parts of the economy have indicated their willingness to raise the remuneration.
In principle, an increase of the gross salary which would enable the employee to maintain his net income is feasible without any considerable extra costs for the employer.
However, as indicated above, such salary increase is associated with some problems. Some of these problems have roots in the effect of the modifications, others in the way the changes have been regulated. Specifically:
- The amount of the increase has to be calculated for each employee separately.
When calculating the exact percentage which is necessary for increasing the gross salary in order to maintain the net remuneration, one must take into consideration both the actual salary and the personal circumstances of the employee. Thus, a separate calculation for each employee is required.
- For certain businesses, a cost-neutral increase is not possible at all.
This concerns activities which are exempted from the income tax, as in these cases, the burden of the raised social contributions cannot be balanced by a lower tax. In these cases, the only counterbalance measure consists in further increases of the gross salaries. In total, this would cause a raise in the employer’s total costs of around 7%. This affects incomes
- from IT-programming
- from R&D
- of employees with handicap (in certain cases)
- from certain activities of seasonal workers.
According to the press, the government has announced counter measures for these cases.
- An increase need to be made prior to 1st January 2018.
Following the latest modifications of the Labour Code, dating from August 2017 (we have reported on this subject), addenda to employment agreements need to be concluded prior to the entry into force of the modifications.
- All modifications have to be registered with the employees’ registry.
All changes to the remuneration have to be registered in the so- called „Revisal“ at the latest one day prior to their entry into force – i.e. until 29th December 2017.
- The real challenge: protecting the employer in the scenario in which the measures will be modified or withdrawn at a later stage.
The social contribution shift and the income tax reduction were implemented by Emergency Ordinance. After entering into force, an EO is followed by a law which either approves it or modifies or even totally rejects it. Hence, it is quite possible that within a few months the EO is modified or even completely annulled. Should this lead to an increase of the net salary again (a scenario much more probable than a further reduction), then each employer which concluded simple, “standard” addenda for the salary increase with its employees would depend on the latters’ consent to reducing the gross salary back. In case such consent was denied, there would be no way of unilateral salary cuts; the staff would thus “win” the raised salaries.
Roadmap for employers
Employers must prepare quickly. The following measures are necessary before the end of 2017:
- Calculation of the concrete amount required for each individual salary raise
- Assessment if such raise should be cost-neutral for the employer or if the net salary should be maintained irrespective thereof
- General decision, whether and when salary raises shall take place
- Decision regarding the documents to be drafted (collective or individual negotiation, manner of realising the salary raise, etc.) with a view to a possible later cancellation
- Document drafting
- Conclusion and Revisal registration.
Employers from the private sector are not compelled to raise salaries. Yet, given the situation on the labour market, even the reluctant ones will probably be de facto obliged to do it for competitive reasons.
This social contribution issue will not only cause significant administrative effort during the following weeks, but it is also linked to considerable legal problems which require quick clarification and decision.