Why and how to help employees mitigate the effects of the economic downturn?
We present ways in which a company can help its employees, with particular emphasis placed on those that are tax efficient.
The Dickensian days when the role of business was simply to make and accumulate profits are a thing of the past. Businesses want to have a positive impact on society and more and more are citing “positive social impact” and “sustainable development” as their core values.
This trend can also be observed in Slovenia. In the current economic situation, companies are turning to us with the question of how they can help their employees cushion the impact of rising food, fuel and heating costs while keeping their liquidity and financial position relatively good.The decision to help employees depends primarily on the employer’s overall financial situation. However, it is true that even small gestures of caring and understanding can make a big difference in motivating employees. Caring about employees helps build trust and mutual respect. Likewise, a small contribution to the company can have a big impact on the community and the well-being of employees and their families. After all, a one-time payment of up to EUR 15 already covers more than a third of the price of a basic needs basket, which averages EUR 42.31. [1]
Here are some of the ways in which a company can help its employees. Particular emphasis is placed on those that are tax efficient.
Employers’ main levers to help employees are:
- Salary increase
- Increase in reimbursement of work-related expenses
- Performance pay
- Recourse payment
- Other one-time payments or gifts
1. PAY RISE
Employers are not automatically obliged to increase their employees’ wages, despite rising living costs. The minimum wage is an exception. The minimum wage is set by the Ministry of Labour and is based on the increase in the minimum cost of living. The new minimum wage will be known by 31 January next year at the latest and, based on a new calculation of the minimum cost of living[2] , is expected to be between 804 EUR and 938 EUR net.
If the employer’s financial situation allows it, it can also give a pay rise to employees who are paid more than the minimum wage.
An increase in a worker’s salary is treated as income from employment for tax purposes and is taxed as such. This means that in addition to the cost of the salary increase, the employer must also bear the cost of the increase in employer contributions (for pension, social security, and health insurance).
Amendments to the Income Tax Law are currently being discussed and are expected to enter into force as early as 1 January 2023. If adopted, they will also have an impact on wages, with a projected increase in disposable income for those on lower wages.
2. INCREASE IN REIMBURSEMENT OF WORK-RELATED EXPENSES
2.1 GENERAL
Due to tax changes, employers can now pay workers tax-free expenses:
- for meals €7.92 (previously €6.12) per day,
- for commuting €0.21 (previously €0.18) per km,
- for transport in connection with official travel EUR 0.43 (previously EUR 0.37) per km.
In order to be treated for tax purposes in the way described[3] , the reimbursement of expenses must also be, in substance, a reimbursement of work-related expenses.
The reimbursement may be higher, but any amount above these levels is treated as income from employment for tax purposes and is taxed as such (i.e. as salary).
2.2 IS THE EMPLOYER OBLIGED TO INCREASE THE REIMBURSEMENT OF EXPENSES AND HOW IS THE INCREASE REGULATED?
Where a collective agreement, internal regulation or employment contract provides that the amount of an expense allowance is to be linked to the amount specified from time to time in the Regulation on the tax treatment of reimbursements of expenses and other income arising out of the employment relationship (“the Regulation”), i.e. as a maximum tax-free amount, the employer is obliged to pay the employees the increased amount of the expense allowance.
Otherwise, the increase in reimbursement is not automatic, but must be formally regulated by the employer in a collective agreement, a general act of the employer, or an employment contract.
Collective agreement
If the collective agreement provides for reimbursement of expenses in an amount lower than that laid down in the Regulation, the collective agreement must be amended accordingly in agreement with the trade union. This is because the determination of rights arising from the employment relationship is a matter, where a trade union is present in the undertaking, and is regulated at the level of collective agreements.
If a lower amount is fixed in the sectoral collective agreement, a higher amount may be agreed upon with the trade union at the company level. In the absence of an enterprise-level trade union, the employer may regulate the increase in the reimbursement of expenses by means of a general act of the employer, as explained below.
In the event that agreement with the trade union at the company level is not possible, the increase must be agreed individually with each employee in the employment contract. This is because an employment contract can always provide for more rights than those provided for by law or by a collective agreement. If the employer decided to regulate the increase in reimbursement in the employer’s general rules, despite the potential opposition of the company’s trade union, the employer would risk a collective labour dispute.
General Act of the employer
If the employer’s general regulation sets the amount of the reimbursement of work-related expenses at an amount lower than the amount set out in the Regulation, the employer must first amend the provisions of the general regulation in accordance with the Labour Code in order to increase the reimbursement of expenses.
If the amount of the employer’s reimbursement is not already regulated by a general act, we recommend that the relevant act is adopted. By regulating the level of reimbursement of work-related expenses in a general act, the employer can directly pay higher allowances to workers, which are tax-free up to the amount indicated above.
Employment contract
The amount of reimbursement of work-related expenses can also be regulated in employment contracts. In such a case, the latter must be amended or annexed in order to increase the reimbursement of expenses.
We consider that it is more time-efficient if the employer regulates the increase in reimbursement by a general act. In doing so, it should be careful to ensure that the act provides employees with more rights than they are entitled to under their employment contract.
We also point out that an employer may not increase the reimbursement of work-related expenses only for certain employees unless it has a valid reason for the difference, which must relate to the reimbursement of expenses and not to any other employment-related circumstances.
3. PERFORMANCE BONUS OR »CHRISTMAS BONUS«
3.1 GENERAL
Employers can pay employees a portion of their salary as a performance bonus or »Christmas bonus«, which is not included in the income tax base, but social security contributions are calculated and paid. Depending on which is more favorable for the employee, the performance-related part of the salary can be paid either up to 100% of the average monthly salary of employees in Slovenia (i.e. approx. EUR 2,000) or 100% of the employee’s average monthly salary for the last 12 months with the employer, including salary allowances.
Employers can differentiate between different groups of employees when paying »Christmas bonuses«, as long as the conditions for payment are set in advance and are not discriminatory. Often employers make the payment of »Christmas bonuses« conditional on the presence of employees without taking due account of the reasons for absence – we would point out that, according to the practice of the Equality Ombudsman, which has been upheld by the Administrative Court of the Republic of Slovenia, this is a case of discrimination. The reduction in the »Christmas bonus« on the grounds of absence is more likely to affect workers who are absent more often or for longer periods, including pregnant workers, workers with a disability, or with chronic or long-term illnesses or injuries requiring major medical intervention or rehabilitation, those who care for or accompany a family member in cases of illness or injury, older workers, etc. These workers will find it more difficult to meet the attendance criterion because of their particular circumstances, which they cannot change, and this puts them at a disadvantage compared with those who do not have these circumstances.[4]
Employers should also be careful to ensure that the»Christmas bonus«payment does not become a part of the individual employee’s performance-related pay, but that it is linked to the company’s business performance. [5]
To be treated favorably for tax purposes, the right to a »Christmas bonus« must also be formally regulated – i.e. set out in the employer’s collective agreement or general act, rather than simply being stated in the employment contract. It must also be properly paid to all eligible employees.
3.2 MULTIPLE PAYMENTS OF THE »CHRISTMAS BONUS« AND INCREASES DURING THE YEAR
The »Christmas bonus« can also be paid in kind (e.g. food vouchers) and can be paid several times a year.
This means that employers who traditionally pay »Christmas bonuses« at the beginning of the year but want to help their employees with an extra payment can pay the second part of the “Christmas bonus” at the end of the year. It should be noted that the payment of the second part must also be formalised accordingly.
As the “Christmas bonus” has been tax-advantaged since 2017, most companies have already formalised the payment. However, the question arises whether, where the amount of the “Christmas bonus” is already fixed in the relevant acts, the employer can pay a higher amount to employees. We believe that the answer is yes, but that the higher payment should be properly formalised.
The aggregate of all payments (in cash or in nature) up to the amounts mentioned above is tax-free. The “Christmas bonus” payment may be higher, but the higher amount is treated as income from employment for tax purposes and is taxed as such (i.e. as a salary).
4. PAYMENT OF RECOURSE
Employees who are entitled to annual leave are also entitled to tax-free (social security contributions are also exempted) recourse pay of at least the minimum wage, with a tax advantage for amounts up to 100% of the average monthly salary of employees in Slovenia (i.e. around EUR 2,000).
The deadline for payment of the allowance is 1 July of the current year. If the 2022 recourse payment has already been paid, it can no longer be paid this year.
However, until 1 July of the current year, the allowance can be paid in several instalments. If the employer wishes to help employees to overcome the current hardship by paying (all or part of) the recourse, it can pay part or even all of the recourse for 2023 as early as January 2023. We suggest formalising the payment of the recourse before the first payment in order to adequately demonstrate that the recourse has actually been paid, and not perhaps some other payment.
In any case, it is the total amount of the recourse payment that is relevant for tax purposes. If the total amount exceeds the maximum tax-free amount, the difference will be taxed as income from employment, which will be taxed as salary.
5. ADDITIONAL PAYMENTS OR GIFTS
5.1 GIVING PRESENTS TO CHILDREN OF EMPLOYEES
In December, employers can give presents to employees’ children up to (and including) 15 years of age), If the value does not exceed 42 EUR, the gift is not considered a bonus and does not count towards the tax base.
5.2 GIFTS FOR EMPLOYEES
Gifts to employees themselves are also excluded from the tax base if their total value in a month does not exceed 15 EUR[6] and they are not regular or frequent gifts.
6. CONCLUSION
Through these measures, employers can (in a tax-efficient way) help employees to cope with the effects of economic downturns. In this way, they increase their disposable income and give them some security in times of market instability
Employers must ensure that payments are substantively and formally appropriate. Finally, we would like to reiterate that care must be taken to ensure that payments are not differentiated between employees on the basis of personal circumstances, as this could constitute prohibited discrimination in the workplace.
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[1] See more at https://www.nasasuperhrana.si/primerjava-cen/ (accessed 17.10.2022).
[2] The new published minimum cost of living is €669.83, a 9.2% increase on the 2017 figure.
[3] If, in assessing the economic substance of the benefit in question, it is found that, despite the formal legal regulation of the type of income and the manner of its payment in the employer’s regulations, it is not in substance an expense reimbursement but another remuneration from the employment relationship (e.g. a New Year’s bonus), this benefit is subject to the full calculation and payment of income tax and compulsory social security contributions.The employer must also pay the income tax and compulsory social security contributions.
[4] UPRS Judgment I U 29/2020-21 of 11.11.2020.
[5] As the FURS Explanatory Note – Performance-related pay (1st edition, April 2022) on page 3 explains, “This is a payment linked to a performance criterion. It should be borne in mind that the language of the performance-related payment is already linked to the business performance of the payer of the income and that, in order to obtain a more favourable tax treatment of the income, it is necessary to determine the criteria and criteria for the payment, which certainly include criteria relating to the payer’s business performance. In the light of the above, individually determined payments linked to an individual’s performance cannot be treated more favourably for tax purposes. “
[6] Article 39(5) ZDoh-2.Why and how to help employees mitigate the effects of the economic downturn?
