Expected rate of wage increases 2012

The government decree promulgated on December 22, 2012 on the expected rate of wage increases in 2012 for the keeping of the net value of wages and on the rate of fringe benefits to be considered for this purpose entered into force on January 1, 2012. In the current issue of our newsletter we report to you briefly on the most important rules of the wage increase expected this year and the application of tax allowance from the social contribution tax.

Introduction

As a result of the tax and contribution amendments effective from 2012, the 2011 net nominal wage of the employees earning a monthly amount less than HUF 216,806 can only be maintained in 2012 if their gross wages are increased.

The Labour Code provides an opportunity for determining the expected rate of wage increase required for the maintaining of the net value of wages under gross HUF 300,000 and for the detailed regulation of this wage increase. These regulations for 2012 are included in the government decree promulgated on December 22, 2011. However, this decree does not provide for an expected wage increase in the case of gross wages above HUF 216,806.

Wages are increased at the discretion of the employer this year also but no bids may be submitted in public procurement procedures and no subsidies from the central budget or special purpose state funds may be granted for a period of two years to employers who fail to perform the wage increase prescribed in the government decree for at least two thirds of the employees concerned.

However, the employers not qualifying as a central budget organization, a healthcare, education or social organization maintained by a church and performing public tasks or as an organization performing public collection and public cultural services, which perform the wage increase prescribed in the government decree in respect of all continuously employed employees, may apply a tax allowance from the social contribution tax payable by them.

Common rules

The rate of the expected wage increase was determined so that the net wage of the employees does not decrease under unchanged conditions and the amount of the tax allowance was established so that the employer’s employment costs increase by a maximum of 5 percent per employee. The wage increase applied to ensure the payment of the lowest compulsory wage amount (the minimum wage) and the guaranteed wage minimum established with effect of January 1, 2012 is considered in the expected wage increase.

The conditions of exemption from the sanctions relating to the participation in public procurement procedures and to subsidies from the central budget and special state funds and those of the application of the tax allowance are identical except for the following differences.

• In order to avoid the sanctions, the employer must perform the expected wage increase in the case of two thirds of the employees concerned while the tax allowance is only available if the wage increase prescribed in the government decree is provided to all continuously employed employees.
• To avoid sanctions, the expected wage increase may partly (to 25 percent) be performed by increasing fringe benefits, however, the tax allowance is only applicable if the employer provides the total as wage increase prescribed in the government decree to continuously employed employees. 
• To avoid sanctions, the expected wage increase must be performed for all persons in the employment of the employer on any day of the defined period, while from the perspective of eligibility for the tax allowance, continuously employed employees not only include the employees employed by the given employer on any day of the defined period but also the employees employed by any employer who is a domestic related party of the given employer if they are in an employment relationship with the employer applying the tax allowance in 2012 based on the government decree.

The expected wage increase covers continuously employed employees, which also includes employees permanently absent from work but does not cover the employees employed on the basis of the Act on Simplified Employment.

The 2012 rate of the wage increase necessary for compliance with the statutory expected wage increase and the 2011 reference basis for this purposes must be determined for each employee earning less than HUF 216,806 monthly individually.

Reference period

According to the main rule, the wage data of the period of 2011 has to be considered during which the personal base salary of the employee was identical to that of December 31, 2011 or to his personal base salary at the time of termination of his employment between November 1 and December 31, 2011. The government decree includes detailed rules regarding changes of salary during the year.

From the perspective of changes in the personal base salary during the year, the date to note is October 31, 2011 as in the case of a change before this date the starting date of the period to be considered is the date of the last change in 2011 before October 31, 2011 while in the case of a change of wage after October 31, 2011, the period following the change is not considered irrespective of the starting date of the reference period.

If the employment relationship starts after October 31, 2011, the period to be considered is the 2011 period of the employment irrespective of any changes in the employee’s personal base salary.

Calculation of the regular wage for 2011

The 2011 wage of the employee means a whole month’s average of the employee’s wage during the reference period specified in the government decree, i.e. the employee’s personal base salary as defined in the Labour Code and his regular wage supplements as defined in the Labour Code, which is calculated considering the employee’s working days specified in his work schedule.

If performance related pay is applied, the performance related pay relating to one hundred percent performance is considered as the employee’s personal base salary, including the time-based-pay of the performance related pay, while in the case of commission pay, the actual commission paid is regarded as one hundred percent performance.

Special rules and adjustments are applicable if there were changes in the daily, weekly, monthly work time of the employee or if the job of the employee changed due to the deterioration of his health.

The calculation does not take into account the rewards not considered as part of the personal base salary for the purposes of the Labour Code, thirteenth month pay and the bonuses not considered as a part of the performance related pay. Under regular wage supplements those wage supplements are understood which are specified in the rules regulating the employment relationship or in the employment contract, which are payable to the employee continuously during his work. This includes, for example, night shift supplements, duty service supplements and pay for extraordinary work or on-call duty. The calculation has to be performed for the actual monthly work time in the case of part-time employees also; no conversion to full-time is applied.

Calculation of the expected wage increase

In the case of time pay, the personal base salary of 2011 has to be increased while in the case of performance related pay or performance related pay combined with time pay or a fixed pay, the performance related pay of 2011 has to be increased appropriately.

In the case of regular wage supplements, the government decree gives employers an option in respect of determining the rate of increase of the performance related pay. They may either determine the rate of increase of the personal base salary (performance related pay) considering regular wage supplements using the specified formula or establish and perform the expected wage increase on the basis of the personal base salary of 2011.

Based on the government decree, the rate of the expected wage increase is 26 percent of the monthly wage of 2011 if the 2011 monthly wage does not exceed HUF 59,600. Above this amount, the amount of the expected wage increase is defined for specific income brackets capped at HUF 216,805.

Consideration of increased fringe benefits

In order to avoid the relevant sanctions, the expected wage increase may partly be fulfilled by increasing fringe benefits in 2012. However, the increase considered this way may not exceed 25 percent of the expected wage increase.

According to the government decree, the 2012 fringe benefit increase is to be determined as 130.94 percent of the positive difference of the monthly average net amount of benefit eligibility for 2012 and the monthly average net amount of actual benefits received in 2011.

For example, in the case of an employee who received fringe benefits in a monthly amount of HUF 10,000 in 2011, if the amount of the benefits is increased to HUF 12,000 this year, the amount to be considered for the purpose of the calculation of the expected increase of the personal base salary is 130.94 percent of the HUF 2,000 increase, i.e. HUF 2,619 provided that this amount does not reach 25 percent of the expected wage increase.

Tax allowance

The maximum amount of the tax allowance is HUF 16.126 per employee, which decreases linearly above a gross wage of HUF 75,000.

For example, in the case of a personal base salary increased in 2012 to HUF 140,000, the tax allowance amount is calculated as follows. The part of the salary exceeding HUF 75,000 is HUF 65,000 and the maximum amount of HUF 16,125 must be reduced by 14 percent of this amount. Accordingly, the monthly amount of the tax allowance is HUF 7,025.

If the employer fulfils the relevant conditions, the tax allowance may also be applied to new employees hired in 2012. Newly established employers are automatically eligible for the tax allowance unless in 2012 they employ employees employed after November 1, 2011 by their domestic related parties.

In the case of a wage increase performed during 2012 with retroactive effect, the tax allowance compensation may also be applied retroactively provided that all other conditions are fulfilled.

Legal consequences

Less stringent sanctions than usual were defined for the treatment of potential errors of calculation of the compensation i.e. the tax authority will not establish a tax difference if:

• the recipient of the tax allowance complied fully with the wage increase requirement in respect of at least 90 percent of its continuously employed employees and
• the aggregate difference of the expected wage increase and the wage increase actually performed does not exceed the product of the headcount in the given month of all employees qualifying as continuously employed employees and HUF 300 and
• if at the time of commencement of the audit the employee concerned was in the employment of the employer and the recipient of the tax allowance proves until the effective date of the resolution issued on the findings of the audit at the latest that he has retroactively performed the expected wage increase for all continuously employed employees in respect of the period concerned by the audit.

In such cases, the employer must pay a default penalty equivalent to 15 percent of the amount of the tax allowance applied illegitimately but at least HUF 100,000. Employers are exempted from this default penalty if they retroactively perform the expected wage increase for all continuously employed employees before the commencement of the audit.

Nevertheless, the increasing of wages is at the discretion of employers this year also but the lowest statutory wage amount (the minimum wage) and the guaranteed wage minimum is payable to all employees.

The Newsletter contains general information. Therefore, the content of the Newsletter may not be regarded as professional advice or comprehensive information for decision-making. This information – due to its nature – may not address all details, especially all circumstances of a certain transaction. Although we used every effort for our Newsletter to be comprehensive, we cannot assume liability for the outlining and interpretation of the relevant regulations.