Payment of part of the salary for business performance to the management and consequential return of certain financial aids received under the intervention legislation

Author: Manuela Hervatich

Over the last few months, there has been a lot of uncertainty among the employers in relation to the interpretation of the article of the intervention legislation regulating the conditions for the return of the aids received from the state. In particular, there were many questions regarding the return of (i) the reimbursement of compensation received from the state for the employees temporarily sent to wait for work at home, (ii) exemptions from contribution payment in connection with the reimbursement of compensation received from the state for the employees temporarily sent to wait for work at home and (iii) extraordinary aid in the form of a monthly basic income (hereinafter “Financial aid”).

These questions arose due to the provision of the first paragraph of Article 99 of the Act Determining the Intervention Measures to Contain the COVID-19 Epidemic and Mitigate its Consequences for Citizens and the Economy (hereinafter “ZIUZEOP”) or the so-called first anti-corona law. This article stipulates that an entity who has used the above mentioned Financial aid, shall return it if the profit was paid out, own shares or business shares purchased, or bonuses or part of salaries for business performance paid to management (all referring to payments in 2020 or for 2020) since the ZIUZEOP has entered into force.

In this article, we highlight the issue of paying part of the salary for business performance to the employees and the management and the consequent return of the received Financial aid. The above provision clearly states that an employer may not pay part of the salary for business performance in 2020 or for 2020 (most likely in 2021 or later) to the management in order to avoid the return of the received Financial aid. Based on this provision, many employers have decided not to pay part of the salary for business performance in 2020 or for 2020 to any of the employees (not only management), as they were re convinced that they had no basis for it or that they would have to return the received Financial aid. We have therefore prepared a brief overview of what the employer should check before making a final decision regarding the (non) payment of part of the salary for business performance to the employees, excluding managers.

In accordance with the Employment Relationships Act¹, remuneration for work under an employment contract consists of a salary, which must always be in cash, and any other types of payments if so foreseen by a collective agreement. The salary consists of the basic salary, part of the salary for work performance and the allowances. An integral part of the salary is also the payment for business performance if so agreed in a collective agreement or an employment contract. Part of the salary for business performance may therefore be regulated in the collective agreement and/or an employment contract. If agreed in the employment contract, the employer usually has a general act of the employer (usually certain rules) in place, issued on the basis of the provisions of ZDR-1, where part of the payment for business performance is regulated in more detail (e.g. the criteria and standards for payment, beneficiaries etc.). If regulated by a collective agreement (be it company or sector), part of the salary for business performance is the need for additional regulation and determination of criteria and standards for payment of the part of the salary for business performance, depends on the content of the collective agreement. The payment for business performance can either be sufficiently regulated in the collective agreement itself or the employer needs to set additional regulation and determination of criteria and standards, taking into account the provisions of the collective agreement.

In labour law, the definition of part of the salary for business performance is clearly regulated. The employer may (always) pay part of the salary for business performance, if the criteria and standards are met if the possibility of payment is agreed in the employment contract and/or in the collective agreement binding on the employer, and if paid under the conditions specified therein. The legislation does not provide a uniform indicator of when a company is considered to be successful in business performance. The criteria are usually set out in the employer’s autonomous acts. As a rule, business performance is assessed based on achieving the planned goals, set out in the company’s planning acts (e.g. generated profit, achieved planned sales, etc.). As this is a business success of the company as a whole, all employees are usually entitled to the payment of part of the salary for business performance, but this is not necessary. It may happen that the employment contracts of certain employees do not provide for the payment of part of the salary for business performance. A collective agreement or general internal act of the employer may also exempt certain work posts or position in the company from entitlement to payment of part of salary for business performance. For example, the Collective agreement for the construction industry², which regulates the payment of part of the salary for business performance, stipulates in the article governing personal validity of the collective agreement, that the latter applies to all employees, excluding the managers and procurators, unless otherwise specified in their employment contract. According to the provision on the personal validity of the collective agreement, the managers and procurators are not entitled to payment of the part of salary for business performance, unless they have this specifically agreed in the employment contract. A similar regulation may also be found in the Collective agreement for the Slovenian metal sector³. On the other hand, the Collective agreement for Slovenia’s trade sector⁴ regulates the payment of part of the salary for business performance to the management completely differently. In its initial articles it is stated that it applies also to managers, procurators and executives, unless the employment contract between the employer and such individual determines the relations, rights, duties or responsibilities otherwise. In this case, the manager would be entitled to the payment of part of the salary for business performance provided for in the collective agreement, unless otherwise agreed in his/her employment contract.

To briefly summarize the above. Although it is generally applicable that all employees in a company (including management) are entitled to a part of the salary for business performance, there are exceptions, especially for management. Specifically, as shown above, the managers can be exempted from receiving part of the salary for business performance on the basis of a sector collective agreement which binds the employer, or the exemption may be agreed in the employment contract or in internal acts of the employer. Although the provision of Article 99 of the ZIUZEOP prohibits the payment of part of salaries for business performance to management in 2020 or for 2020 or conditions the payment of the latter with the return of Financial aid listed, this does not necessarily mean that the employees other than management are not entitled to payment of part of salary for business performance in 2020 or for 2020 or that his would result in discrimination between employees.

Before deciding not to pay to the employees (including management) part of the salary for business performance, the employer who has applied for Financial aid should verify whether the management is subject to different rules and regulations, either individually agreed in employment contracts or deriving from the employer’s internal acts or collective agreements (both at the company or sector level. If the manager has only a management contract concluded, he or she should not be classified as an employee. The definition of the term employee is contained in ZDR-1. In accordance with Article 5 of ZDR-1, an employee is a natural person who is employed on the basis of an employment contract and does not, for example, perform work on the basis of a management contract. Pursuant to Article 4 of ZDR-1, an employment relationship is a relationship between an employee and an employer, in which the employee voluntarily joins the employer’s organized work process and personally and continuously performs paid work according to the instructions and under the employer’s supervision.

The payment of part of the salary for business performance is included in the tax base of employment income and is fully taxed with the advance payment of personal income tax on employment income and social security contributions. In certain cases, however, a part of the salary for business performance may be treated more favourably for tax purposes, as the conditions for the payment of this part of the salary without calculating the advance payment of personal income tax are met.

The Personal Income Tax Act⁵, in Article 44, first paragraph, point 12 determines the conditions for exempting part of the salary for business performance from the tax base of employment income up to 100% of the last known average monthly salary of employees in Slovenia. If the employer pays part of the salary for business performance in the amount exceeding this amount, the difference is included in the tax base of the employment income.

In accordance with ZDoh-2, a more favourable tax treatment is possible for the payment of part of the salary for business performance, which is paid once a calendar year to all eligible employees at the same time, provided that:

• all employer’s employees are entitled to the payment of part of the salary for business performance, and the right to the payment of part of the salary for business performance and the criteria for payment are set out in the general act of the employer of which the employees are acquainted in advance, or
• the possibility of paying part of the salary for business performance is agreed in the collective agreement according to the criteria agreed in this collective agreement or agreed in the manner or on the basis of this collective agreement.

As already mentioned, if the criteria for a more favourable tax treatment of the payment of part of the salary for business performance are not met, the payment is treated for tax purposes as other income from employment.

As follows from the explanations of the Financial Administration of the Republic of Slovenia (hereinafter “FURS”) titled “Personal income tax, part of the salary for business performance” of January 2020, there is a difference in the circle of beneficiaries or of the definition of “all eligible” employees to part of the salary for business performance, depending on whether the latter is agreed in a general act of the employer or in a collective agreement. Differentiating between whether the right to a part of the salary for business performance and the criteria and standards for payment are determined by a general act or a collective agreement is based on labour law and the possibility of employee participation in determining the right, criteria and standards when defined in the collective agreement or the inability to participate in the latter when the criteria and standards are set out in the general act of the employer.

As explained by FURS; if the right to payment of part of the salary for business performance is determined in the general act of the employer, the criteria for acquiring the right and for the amount of the payment should be the same for all employees, so that all employees are able to meet these criteria. As the employees have only limited influence on the content of a general act, the tax legislation restricts the employer in such a way that the conditions for acquiring the right to payment and the criteria and standards for payment must be regulated uniformly (in the same manner) for all employees (for example: all employees who had an employment contract with the employer concluded on a certain cut-off day/period, regardless of their work post, business unit, department, category of employee). However, the latter does not mean that an individual for whom the conditions for acquiring the right to payment and the criteria and standards for payment are set out in a general act, is entitled to the payment regardless of whether he or she meets the criteria and conditions set for the receipt of part of the salary for business performance in this act. If, for example, a manager does not meet the conditions set out in the general act of the employer in a given year, he or she is not entitled to part of the salary for business performance and there is no discrimination between employees. It is also possible that on the basis of the uniformly formulated criteria from the general act, the employees are entitled to different actual amounts of payment of part of the salary for business performance. Likewise, a manager is also not entitled to part of the salary for business performance if he or she does not fall under the definition of an employee, i.e.  does not have an employment contract concluded with the employer, but a management contract or other civil law contract. As already stated above, Article 5 of ZDR-1 regulates that an employee is a natural person who is in an employment relationship on the basis of an employment contract. Whereas an employment relationship is defined as a relationship between an employee and an employer, in which the employee voluntarily joins the organized work process of the employer and performs paid work in person and continuously according to the instructions and under the supervision of the employer. It should be pointed out, however, that it does not follow from the FURS explanations how the latter assesses the situation from the tax point of view when an individual has a management contract, and  at the same time an employment contract concluded for another work post (not a position of the manager)., e.g. head of department The  question whether such an individual can be paid part of the salary for business performance as an employee employed on the work post of head of department, while enjoying more favourable tax treatment and without the employer being obliged to return the received Financial aid, remains unanswered.

Where the right to the payment of part of the salary for business performance is regulated in the collective agreement, ZDoh-2 does not stipulate that the criteria for acquiring the right and for payment must be uniform for all employees. FURS’s explanations justify the latter by the fact that the collective agreement is concluded on the basis of an agreement reached between the parties to the collective agreement, where the employees have an active role in drafting and concluding the collective agreement. With other words, they have more possibilities to formulate the wording, criteria, standards and finally also the circle of the beneficiaries entitled to the payment of part of the salary for the business performance. The above-mentioned Article 44 of ZDoh-2 addresses those beneficiaries determined by the collective agreement and not all employees, as determined by a general act. In order to receive a more favourable tax treatment, it is therefore not required that all employees have the right to the payment of part of the salary for business performance. If we look at the example of the Collective agreement for the construction industry already mentioned above, which stipulates that the collective agreement does not apply to managers and procurators (unless differently agreed in the employment contract), the employer could pay part of the salary for business performance only to employees, but not the management (unless the latter are entitled to this part of the payment under the employment contract) and the employees would still benefit from a more favourable tax treatment (provided that part of the salary was paid only once a year and to all beneficiaries at the same time). In such case the employer would not be obliged to repay the Financial aid already received under the intervention legislation. Another possible situation is where the collective agreement regulates the payment of part of the salary for business performance, but does not have certain criteria and standards prescribed for acquiring this right. In such a case, the determination of the criteria and standards is usually the duty of the employer. The employer may or may not set the conditions and criteria uniformly for all employees. Managers, for example, may be treated differently.

Therefore, as an employer, before deciding whether to pay part of the salary for business performance to employees or not in the year 2020 or for the year 2020, it is first necessary to establish whether you want a more favourable tax treatment for the employees or not. If you decide that more favourable tax treatment is not relevant, you need to check the content of employment contracts (especially those of the managers) and/or collective agreements and/or general internal acts. If any of the latter excludes managers from the circle of beneficiaries, you can pay part of the salary for business performance in 2020 or for 2020 (most likely in 2021 or later) to other employees and you will not be obliged to return the already received Financial aid under intervention legislation, and there will also be no discrimination among the employees.

If, however, you want a more favourable tax treatment for your employees when paying part of your salary for business performance, you must ensure that the above mentioned conditions are met, and at the same time verify who the beneficiaries are. In the event that the managers are exempt from entitlement to the payment of part of the salary for business performance, you will also not be obliged to return the already received Financial aid under intervention legislation if you paid part of the salary for business performance to other employees in 2020 or for 2020.

[1] Employment Relationships Act (Official Gazette of RS, no. 21/13 as amended, hereinafter “ZDR-1”).
[2] Collective agreement for the construction industry (Official Gazette of RS, no. 101/15 as amended).
[3] Collective agreement for the Slovenian metal sector (Official Gazette of RS, no. 6/15 as amended).
[4] Collective agreement for Slovenia’s trade sector (Official Gazette of RS, no. 52/18 as amended).
[5] Personal Income Tax Act (Official Gazette of RS, no. 13/11 as amended, hereinafter “ZDoh-2”).