20 of the European Union (EU) and European Economic Area (EEA) member states have a minimum wage set at national level. Out of these, Bulgaria has the lowest gross minimum wage (261 EUR), followed by Lithuania (400 EUR) and Romania (416 EUR). Luxembourg has the highest gross minimum wage (1999 EUR), followed by Ireland (1834 EUR) and Germany (1818 EUR). The effective tax rate in Romania is 44%, the seventh highest compared to the effective tax rates in the 20 member states which have a minimum wage established at national level. The effective tax rates within the Member States range between 15% in Ireland and 87% in France.
KPMG in Romania has issued a survey on minimum wage requirements in all European Union (EU) and European Economic Area (EEA) member states and Switzerland. The survey is in its third edition and it shows the evolution of the minimum wage and the tax burden related to it in each of the countries under review. This year, the survey gives the latest information on the status of the transposition of Directive 67/2014/EU into the local legislation of each Member State, as well as an explanation of some of the proposed changes to the Posting Directive to give fairer treatment to posted workers, based on the concept of “equal pay for equal work.”
As the number of postings within the EU/EEA/Switzerland continues to rise (over 2.3. million postings took place in 2017, 58.6% more compared to 2010), the study’s aim is to provide employers with valuable information on the legal requirements of the countries to which they intend to post their employees. The survey also gives an overview of the legal framework at European level, as well as likely future developments. This information will help employers to effectively plan international assignments and to ensure compliance with applicable laws in the countries where their employees operate.
The survey includes visual representations of minimum wage requirements across Europe, how these have changed during the past few years, the structure of costs incurred by employers in order to grant the minimum wage to their employees, as well as effective tax rates applicable to the minimum wage per country.
According to the survey, for 2018, compared to the other countries under review, Romania has the third lowest gross minimum wage (416 EUR), after Bulgaria (261 EUR) and Lithuania (400 EUR). In 2017, Romania had the second lowest minimum wage (323 EUR) after Bulgaria. This change in position is only due to the artificial increase in the gross minimum wage as a result of the shifting of the employer’s social security contributions to the employee. This can also be observed by looking at net amounts for 2018, as Romania is one place lower, with the second lowest net minimum wage (243 EUR), after its neighbor, Bulgaria (202 EUR).
Surprisingly, countries where the minimum wage is relatively low (including Romania) have high effective tax rates (over 40%) while countries with a high minimum wage (like Luxembourg, Ireland and the UK) have effective tax rates below 30%. When calculating the effective tax rate, the income tax rate as well as social security rates are taken into account, relative to the gross minimum wage.
As Madalina Racovitan, Partner and Head of People Services at KPMG in Romania comments: “In the context of an increasingly mobile workforce, particularly within the EU and EEA, it is becoming more and more common for companies to post workers to other countries. At the same time, the European Commission is looking carefully at the phenomenon and taking steps to regulate it better, to ensure that free movement works to the full benefit of the individuals and businesses concerned and of the European economy as a whole. The Posting Directive was introduced in 1971, when the European economy was very different, with far less movement of workers. Currently a revision of the Posting Directive is under discussion. The targeted revision is intended to combat abuses by strengthening the protection of posted workers against discrimination.”
As Racovitan continues: “In the meantime, companies which want to post workers to another member state need to consider a range of issues. Clearly they have to respect minimum wage requirements in the country the employee is posted to, but to do so can prove quite complicated. Firstly, not all member states have a statutory minimum wage. While some member states have a single minimum wage applicable to all, others have different minimum wages based on economic sector, age and other factors. Second, what elements can be considered as part of the minimum wage? Each member state has its own detailed rules, so these need to be analyzed carefully before the posting begins.”
Legislation in the home country should also be taken into account. For example, in many cases the tax authorities will look carefully at per diems and allowances. If these form a significant part of total remuneration, tax authorities may rule that they are, in fact, salary and hence should be subject to tax and social contributions. On the other hand, if the base salary is increased during the time of a posting, to meet the minimum wage requirements in the host country, this might present difficulties when the employee returns home, as there could be legal complications involved in reducing the salary back to its previous level.
As Racovitan concludes: “Posting of workers can bring enormous benefits, both to employers and to the posted employees. Nevertheless, there are a lot of technical issues which need to be considered. This latest KPMG survey provides a starting point, helping employers gain an overview of potential costs and obligations. Nevertheless, as each country has specific regulations and each posting has its particularities, we recommend that organisations which plan to post employees to other countries should undertake a careful case by case analysis and obtain expert advice on the tax and legal implications.”