When referring to an employee’s ‘remuneration’, it seems obvious it should be clear between the parties what they are referring to. But this is not the case in Italy. In fact, under Italian law there isn’t a legal single definition of remuneration. On the contrary, the reference standard for ‘remuneration’ changes depending on the purpose for which it is calculated.
By way of example, to calculate an indemnity in lieu of a notice period, the Italian Civil Code provides that all commission, performance-based bonuses and other compensation awarded on a continuous basis should be taken into account, with the exception of reimbursement of expenses. Also, if an employee is compensated in whole or partly using variable remuneration, the indemnity should be calculated taking into account the average monthly variable remuneration paid in the last 36 months.
A different provision exists for TFR (‘Trattamento di fine rapporto’). This is an amount, accrued each year by the employer, equal to the employee’s annual salary divided by 13.5, which is paid to the employee when of the employment relationship ends. In this case, the law provides that the reference salary includes all amounts, including the value of fringe benefits, paid, not on an occasional basis, in connection with the employment contract, but excluding reimbursement of expenses. Derogation from this provision is possible, in contrast to what happens with indemnities in lieu of a notice period, in the collective bargaining agreements applied by the company.
As clarified by Italian case law, the method of calculating compensation due for other indirect components of pay such as holidays, supplementary monthly instalments or leave can be determined contractually and in particular by collective bargaining agreements.
Often these make reference to the ‘global de facto remuneration’, which should include, again, all elements of compensation paid to an employee continuously and systematically during the period of time to be taken into account in calculating the indirect reference remuneration. This is also the parameter used by the Workers Statute to determine the indemnity due to employees in cases of unfair dismissal. However, the Jobs Act, which introduced new remedies against unfair dismissal for employees hired since 7 March 2015, makes reference to remuneration for the purposes of calculating the TFR instead.
As regards executives, each NCBA has instead its own rules.
The difficulties in defining remuneration described above are the reason why often lawyers find themselves arguing, during negotiations, on what should be taken into account when determining the monthly reference salary to be used to conclude a settlement agreement. In fact, in Italy the benchmark for settlement amounts is usually determined based on the economic risk in the event of judicial proceedings on the fairness of the dismissal. This is usually an indemnity ranging between a minimum and maximum number of months’ salary. But if calculation of the monthly reference salary depends on the interpretation of the law and collective bargaining agreements, the negotiations could indeed cover not only how many months to award the employee, but also what the monthly reference salary should be.
The role of the lawyer is, therefore, also to assist employers in understanding, when drafting employment contracts and remuneration policies, what impact each kind of compensation or benefit will have on indirect components of pay and how to limit difficulties in future interpretation. This can help avoid the situation where companies find themselves making unexpectedly high payments during and upon termination of employment contracts.