The Romanian Government’s surprise Emergency Ordinance (“EO 114”), which came into force on 1st January 2019, is having an unwelcome effect on important economic sectors, notably the construction industry.
Along with other harshly criticised new regulations, EO 114 has introduced a compulsory and considerable raise of the minimum salary, but also tax exemptions, for several areas of activity. The measure is unprecedented, and its impact quite difficult to cope with. It applies mainly to companies acting in the construction sector, but also other to companies depending on their activity.
New minimum wage
According to the Labour Code, the Romanian Government can impose a minimum salary on private owned companies. While until 2019, the practice was to stipulate a single minimum salary, applicable to all employees, in November 2018, the Government introduced the possibility to impose a variable minimum salary, based on the level of studies and the age of service.
Although the general minimum wage was already raised by Government Decision at the start of this year, EO 114 has stipulated a new minimum salary, amounting to 3.000,00 RON gross, specifically for companies working in the construction sector and related sectors. It is (currently) applicable only during 2019.
There are two important issues related to the new minimum salary:
- It is imposed on all companies working in the construction sector, as defined by the Fiscal Code, but also includes companies providing architectural, engineering and technical consultancy services (CAEN codes 711).
- According to the wording of EO 114, the new minimum salary of 3.000,00 RON applies to all employees of such companies, without any distinction based on the position of each employee. In other words, these employers seem to be obliged to pay at least 3.000,00 RON not just to construction workers, but to all of their employees, irrespective of their function (e.g. cleaning staff, etc.).
Tax exemptions and reductions
For the affected companies and their employees, the following tax exemptions and reductions apply, between 01.01.2019 – 31.12.2028:
- income tax exemption
- health contribution exemption
- pension contribution reduction from 25% to 21,25%
- labour insurance contribution reduction from 2,25% to 0,3375%
These measures are however applicable only if the all of the following criteria are met:
- the company is active in one of the construction fields above.
- its turnover generated by these activities amounts to at least 80% of the total turnover, calculated from the beginning of the year and including the month in which the exemption applies;
- salaries range between 3.000 – 30.000 RON.
As per the wording of the EO, the minimum salary amounting to 3.000,00 RON has to be paid to every employee of every company active in the sectors of construction, architecture, engineering and technical consultancy services (CAEN 711). Please note: addenda (acte aditionale) to the employment contracts are necessary.
Tax exemptions and reductions will however not apply to all these companies, but only to those which meet certain criteria.
In this context, we note that the major part of the tax reductions affect the obligations of the employee. The salary increase is therefore not accompanied by considerable reliefs for the employer (even if applicable).
These measures will have a major impact on companies’ budgets, and might lead to employers taking counter- measures such as dismissals, outsourcing, incorporations of new companies; some may even risk offering undeclared work. The new measures could especially affect small and medium companies disproportionately, as might not be able to sustain such high salaries.
On top of all this, the affected employers face the following problems, which all have to be covered by the necessary addenda to the employment contracts:
- The measure has been taken by Emergency Ordinance, which has to be followed by a Law which confirms, modifies or even rejects the measures. So this salary raise could be changed or cancelled again, which creates uncertainty.
- The salary raise has been applied only for this year. It is not clear what salary should apply after 31st December 2019.
- Employers still have to take into consideration the transfer of social contributions, introduced in November 2017. This measure has, in practice, forced employers to raise salaries in order to cushion employees against losses in their net salary. As it has also been imposed by EO (and therefore is not yet fixed), most companies hav had to find solutions to cover the legal uncertainty. The current salary raise must be reconciled with these measures.