The outbreak of COVID-19 virus pandemic, which led to worldwide measures that temporally suspended or reduced most civil and economic rights and privileges, has insofar resulted in severe obstruction of functioning of the global markets, including Serbian economy, leaving some of the industrial branches completely paralyzed.
And, to minimize damages and comply with state measures that are being introduced or changed frequently, vigilant employers in Serbia closely monitor developments to timely and properly adjust their business operations to ever evolving circumstances, which reactions inevitably affect their stakeholders, including employees.
Legal Options and Risks of Non-Compliance
That said, many employers sent their employees to work from home, and others, where such option was not feasible, were obliged to ensure that work within their premises or site is carried out in compliance with the statutory protection measures for reducing risks of contagion.
Also, some employers decided to activate collective vacation for either all or some of their employees. And, others have chosen to temporarily cease business operations, which has not suspended their duty to pay salary compensation to their employees (which must not be under 60% of the employee’s average salary in the previous 12 months, but may remain equal employees’ salary paid in regular circumstances, depending each employer’s decision in particular).
In exceptional circumstances, employers may even reduce regular salaries by replacing them with minimum wages.
Since this internal labour measure departs from the general statutory rule, employers that are invoking this exception must have concrete reasons for its application, typically particular extraordinary circumstances causing specific business malfunctioning which resulted in the employer’s objective inability to meet its financial obligations, including due payments of regular salaries and compensations.
Such hardship must be described in detail within the reasoning part of the employer’s decision (or employment contract) by which minimum wages are enforced.
Nevertheless, employers do not enjoy the right to freely set the amount of the minimum wage, since this is determined at the national level, whereby the net minimum wage in 2020 amounts to approximately EUR 255 per month.
The minimum wage regime may initially last 6 months from its introduction, but if reasons for its application continue to exist beyond this period, the employer may further continue in such manner, but is then obliged to inform the representative syndicate with respect to this matter.
Failure to observe the forgoing expose employers to risks of prosecution and punitive damages, whereby only for setting the level of the minimum wage below the legal limit employees may be fined from approx. EUR 7,000 to EUR 17,000, and its responsible persons from approx. EUR 430 to EUR 1,300.
On the other hand, threat of litigation may hover above for the next three years as employees are entitled to file lawsuits for collection of their pecuniary claims towards employers arising from employment relationship which, of course, include due and unsettled minimum wages or unpaid portion of those wages.
If the foregoing legal methods for minimizing adverse economic effects are futile, the employer may resort to least popular option of firing stuff, but only in the manner and for reasons allowed by the labour rules.
For choosing the appropriate option, which effectively represents business tactics and strategy that shall be pursued, each vigilant employer will have to weigh up relevant pieces of information available before making such big decision.
State Intervention
To mitigate and even avoid the worst case scenario of massive dismissals of large number of employees that would inevitably put additional pressure to the state budged which, in such case, would be exposed to meeting unplanned statutory obligations in the form of unemployment compensations to redundant workers, the Serbian Government intervened by adopting the Regulation on Fiscal Benefits and Direct Payment to Private Sector Companies and Monetary Support to Citizens in order to Mitigate the Economic Consequences of COVID-19 Disease (Official Gazette of the RS No. 54/2020, hereinafter referred to as the “Regulation”) .
The subject of the Regulation are benefits for employers in form of non-refundable monetary payments from the Serbian State Budget, in the amount of the basic minimum net salary for March, April and May 2020. The full amount of direct benefits is foreseen for micro, small and medium-sized enterprises, while in the case of large enterprises it will amount to 50% of the minimum salary.
Ostensible ratio legis of the Regulation is to financially help employers combat adverse effects to their business that, during the state of emergency, in many cases is slowly grinding to a halt.
Yet, few employers may have maintained the same level of operations, or even prospered in these circumstances, especially in cases where their product or service is in high demand and competitors are reduced or none.
However, the Regulation equally treats most private sector employers, regardless of individual business circumstances or results.
So, the funds shall be available and paid only to business entities (with few notable exceptions) that were registered or became VAT taxpayers until 14 March 2020. Therefore, business entities established and registered on and after 15 March 2020 are not entitled to the financial measures under the Regulation. Also, the Regulation does not apply to large companies such as banks, insurance and reinsurance companies, voluntary pension fund management companies, financial leasing providers, as well as to payment institutions and electronic money institutions.
To obtain the benefits, employers must not reduce the number of their employees by more than 10% during the period from 15 March 2020 until 10 April 2020. In addition, if employers opt to receive the state benefits, they shall not be allowed to reduce the number of employees by more than 10% within three months of the last payment of direct benefits. Otherwise, employers would lose the right to benefits. This would then trigger the duty of the non-compliant employer to repay the received funds with interest, not later than 5 days after the loss of the right to benefits occurred. The interest is calculated at the rate prescribed for delay with tax liabilities payment.
The financial benefits relate only to permanent employees, and explicitly exclude employees who have concluded a fixed-term employment contract with the private sector employer before 15 March 2020, for the period ending in the time frame from 15 March 2020 until the expiration of three months from the last payment of direct benefits.
The purpose of the benefits in question is to top up employees’ salaries, or to reimburse the full net salary, if the employees’ salary were contracted or set as the minimum wage.
Given that the Regulation relates solely to the financing of the employees’ salaries, the direct benefits cannot be required in respect of the payments to persons outside the employment relationship, who are engaged under temporary and occasional employment contracts, vocational training contracts, and certainly not with regards to persons who have concluded volunteering contracts.
If a private sector business entity satisfies the above defined condition for direct benefits payment, and if the entity has paid employees’ salaries / salary compensations for March by 10 April 2020, in whole or in part, this entity should be qualified to acquire the benefits.
Anyhow, entitled businesses are required to submit the Individual Tax Registration Form on Accrued Taxes and Contributions (Form PPP-PD) to the competent Tax Administration. The registration forms are submitted on three occasions, the first not later than 30 April 2020 (for the accounting period March / April 2020), second one until 31 May 2020 (for the accounting period April / May 2020), and the third until 30 June 2020 (for the accounting period May / June 2020).
The Tax Administration, through the Treasury Administration, submits the obtained data to the National Bank of Serbia (NBS) electronically. Subsequently, NBS submits this information to a commercial bank where the employer has a current account as of 10 April 2020. This bank is obliged to open a specific purpose account – payment of direct benefits – COVID-19 within the deadline set by the NBS. This deadline may not exceed seven days from the date on which this information was provided to the bank, but the final deadline is 30 April 2020.
Therefore, eligible employers’ obligation consists of filing the abovementioned tax forms on three occasions for three accounting periods, while the process of opening bank accounts and transferring funds will be performed by the tax authorities, NBS and commercial banks in an ex officio manner.
The amount of direct benefits that each employer will receive in one month corresponds to the product of the basic minimum net wage for that month and the number of full-time employees with this employer for whose salaries / compensations he has submitted the PPP-PD Form. The number of employees is also increased by the number of part-time employees, so that, for each part-time employee, the total number of employees is increased in proportion to the percentage of part-time employee engagement relative to full-time employment.
Practical dilemmas
The benefits in question are paid in three monthly instalments, namely, in May, June and July 2020. The employer is obliged to utilize these funds solely for the purposes for which they were given, that is, for payment of employee’s salaries (or part of the salaries), by transferring the corresponding amount from the special purpose bank account to the account of each employee individually.
Given that the transfer of funds from the state to employers for March will be made in May, the question arises as to the collision of such salaries’ factual top up or reimbursements in practice with the imperative legal norm that requires timely payment of salaries.
Namely, salary compensations must be paid within the deadlines set by the general act of the employer or the employment contract, but no later than the end of the current month for the salaries earned in the previous month. By applying this labour law rule to the specific case, employers shall be obliged to fully pay the employees’ salaries for March 2020 by 30 April 2020 at the latest, or would be in violation of the imperative employment rule. If an employer is not able to pay the employee’s salary (in whole or in part), he is obliged to explain the reasons for this inability in written form to the employee who is (fully or partially) deprived from his earned salary.
On the other hand, the condition for applying for state direct benefits is that the employer has at least partially paid the employees’ salaries for March until 10 April 2020.
The latter implies that an employer, who is waiting for the state aid in order to settle employees’ salary for March, and who has not previously taken the necessary steps (notifying employees of the reason for not paying their salaries in whole or in part within the deadline) will be in breach of imperative labour rules, regardless of the fact that all this takes place during the state of emergency.
Legal Way Forward
What should employers undertake to stay on the safe side?
If the employer’s business and collection is “as usual” or even better than that, and his funds are accessible and available for remittances, such employer is obliged to timely pay salary compensations to employees in the amount stipulated by employment contracts, as if the circumstances were regular.
Regardless of the fact that the salaries are duly paid, the employer is entitled to the direct benefits from the state, but the obligation to use the benefits solely for the specific purpose (payment of employees’ salaries) remains. In other words, the Regulation strictly defines the purpose of the usage of funds, but does not define explicitly until when such usage must occur.
Therefore, the employer could use these direct benefits for payment of salaries in the future (for example, for July and August 2020 salaries, instead of March and April 2020) since he has already duly paid these salaries by using his own funds before receiving state benefits. Of course, the received benefits should instantly be used for payment of successive salary compensations, considering that the State shall resort to the control mechanisms to check if the funds were used purposefully and immediately. So, keeping of the funds by the employer, or delaying excessively in using them, might create suspicions that the funds are meant to be utilized contrary to their purpose.
Another option for employers is to consider paying a portion of net salaries to employees in a timely manner, whereby that portion may be a sum that results when full salary is deducted by the basic minimum net wage, since the latter amount shall be paid to employees immediately upon remittance of funds by the state into employers’ special purpose accounts. Given that this option leads to payment delay with regards to a part of the salary, the employer is obliged to inform the employee in written form of the reason for partial salary non-payment.
Finally, the employer who exercises the right to direct benefits, although he was not entitled to these under the Regulation, the employer who uses these funds contrary to their explicitly defined purpose, as well as the employer who loses the right to direct benefits and fails to repay the whole received amount together with the interest, shall be fined in the amount of 30-70% of the received direct payments, but not less than approx. EUR 4,300 for legal entities, or EUR 850 for entrepreneurs. Additionally, fines ranging from EUR 430 to EUR 850 will also be imposed on the responsible person in the defaulting legal entity.
Finally, please bear in mind that this article attempts to convey our high level interpretation of its subject matter.
Therefore, like all other materials on this and our web site, this has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. As a result, you should always consult your own tax, legal and accounting advisors before engaging in any transaction.
By Ivana Cvetkovic Diafa, Senior Associate, and Miomir Stojkovic, Principal, Stojkovic Attorneys