Q&A about wage indexation

By Oksana Oleksyuk, Head of Business Development

This article has been drafted drawing from our own practice, opinions from state authorities and court decisions.

O_Oleksyuk.jpg
Oksana Oleksyuk
Head of Business Development

Important facts about indexation

Indexation is a change in wages made to ensure the level of their real content, in particular, in view of rising consumer prices. The law provides for indexation for all employees regardless of the industry in which they work.

In international companies, salaries are usually indexed every year in January-March when the financial results of the previous year are known, and the indexation rate may be greater than the consumer price index and inflation. Russian companies index the wages of certain employees receiving the minimum wage in a number of cases.

The law provides no requirements for wage indexation rate so employers may themselves set out how and how often wages should be indexed. The only thing that employers are required to do is to provide in their internal regulations, a collective agreement or agreement how and how often wage indexation should occur.

Indexation rates depend on various indicators: consumer price index, inflation rate, minimum cost of living, minimum wage, and other factors. Employers themselves determine what they will use as basis for calculating indexation rate. The main thing is to include these provisions in internal regulations and ensure that employees have read and understood these provisions (Russian Labor Code Article 22(2(10))).

    So in brief:

  • Russian labor law does not provide for a single procedure for indexing wages
  • The wages of all employees working under an employment contract must be indexed (Russian Constitutional Court Ruling N 2618-О dated November 19, 2015)
  • Employers determine themselves how often wages should be indexed
  • Employers must include in their internal regulations a procedure for wage indexation. This procedure may also be included in a collective agreement or agreement (Russian Labor Code Article 134)
  • When determining wage indexation rates, employers may take into account consumer price index or inflation rate, minimum cost of living.

Employers’ internal regulations

Internal regulations must specify:
  • The nature of payments to be indexed
  • When indexation will be conducted
  • The procedure used to determine wage indexation rate
  • How wages will be calculated after its indexation
Internal regulations provide how indexation rates are calculated rather than a fixed indexation rate so employers issue indexation orders as often as stipulated in their internal regulations. There is no form provided for such order so employers may use their own. Indexation rates should be specified in those forms. After issuance of indexation orders, staffing tables should be updated by specifying the actual indexed salaries, and additional agreements to employment contracts should also be drawn up to reflect the new salary amounts after indexation.

Liability

When a legal entity fails to index the wages of its employees, a fine from RUB 30,000 to RUB 50,000 is imposed on the legal entity for its first infraction, and a fine from RUB 50,000 to RUB 70,000 is imposed in case of a repeated violation. In such cases, company executives will also be liable and subject to a warning or a fine of RUB 1,000-5,000 for the first infraction and a fine from RUB 10,000 to RUB 20,000 and even disqualification for 1-3 years for a repeated infraction.

Q&A

If wages consist of a fixed salary and a bonus, should only the fixed salary be indexed?

This depends on the wording of internal regulations, but it is rather difficult to index bonuses as they are performance related.
How should the salary of part-time employees or employees still on probation be indexed?

If these employees work under an employment contract, their salaries should be indexed in the same manner as for other employees.
Is it necessary to index salaries which are many times over the minimum wage?

Yes, these salaries should also be indexed as the law does not provide otherwise. We recommend setting out the conditions for indexation (procedure, frequency, etc.) in internal regulations and, most importantly, following these rules once they are established. This way state authorities will have no grounds to bring your company to liability for not indexing certain salaries.
Could a dismissed employee file a complaint with the Labor Inspectorate in case of incorrect indexation?

Yes, and he/she would have a year from his/her dismissal date to do so.
Can an annual salary increase replace indexation?

Yes. Indexation provisions should be set out in internal regulations and salary increase should be specified in an order as it is important to avoid a double interpretation of the situation.

Our recommendations

In order to avoid unpleasant discussions, we recommend checking whether industry agreements are available and whether they provide for indexation (indexation rate, frequency).

It is important to have some internal regulations in place, as well as a collective agreement and a reference to wage indexation in employment contracts. If no provisions on wage indexation are made in internal regulations, they should be included and brought to the employees’ attention.

We recommend verifying whether there is a reference in employment contracts to internal regulations providing for wage indexation. It is important to discuss indexation with employees and clarify certain distinctions.


Our experts look forward to advising you on any payroll, HR management issues you may have, as well as verifying your internal regulations and handling any other related matters so feel free to send your queries to: marketing@intercomp.ru.