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, 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, stricter financial
penaltiesagainst 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 retroactively.
But these finesremained 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 bythe 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 salarieshave 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 agood 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 the subsistence minimum wage for able-bodied
individuals. For example, if an employee’s salary equals Hr10,000,
only Hr 1,378
(or $51) is liable for indexation – this is the base sum for calculatingthe
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 sincethe 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 wasHr 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 x decided to pay extra
bonusesto 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 obligationswith respect to indexation. However, there
are doubts over whether such bonusescan 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.
Authors:
ALEXANDER SHEMIATKIN, Partner, Attorney at Law
TATIANA SUCHYK, Of Counsel
