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You might even say that people love pay. Even if the younger generations do not base their employment decisions merely on pay (as shown by the ‘Great Resignation’ phenomenon), the latest human resources survey reports that increased salary is the primary motivation that drives Italians to look for a new job, even eclipsing the opportunity for professional growth or a more advanced role in line with their education. In fact, 81% of Italian employees would change employer if they could earn more (against a global average of 75% and a European average of 70%). Therefore, given the passion that most of us have regarding compensation, it helpful to recall what the law and the current legislation defines as pay.
The role of compensation
As a key part of the social policies adopted with the aim of guaranteeing greater flexibility in the employment market, pay tends to become a variable factor, capable of adapting to changing organisational needs. The employment relationship is a contract of exchange, and pay constitutes the employer’s main obligation in relation to the service provided by the employee. Compensation is therefore the means of exchange of mutual benefits between the contracting parties (i.e. the employer and the employee).
For this reason, employment is always assumed to be performed in exchange for payment, unless it is clearly proven otherwise by the original intention of the parties and the way in which the relationship has been carried out. However, ‘free’ work can be legitimate where it involves interests worthy of protection by the legal system (e.g. internships).
The principles grounding compensation
As a starting point, at the time of this article, in Italy there is no statutory minimum wage. However, under the Italian Constitution, compensation must be proportional and sufficient. It must reflect not only the nature of the work performed, but also must guarantee the social right of the employee to lead an honourable life and fully realise his or her personality.
On one hand, the principle of sufficiency is assigned a mere corrective function in terms of the minimum threshold of economic treatment. In this sense, the sufficiency principle acts on a residual basis with respect to the proportionality principle, representing a minimum limit based on the basic needs of the employee.
Under the applicable case law, proportionality of compensation has been largely entrusted to the collective bargaining process, by virtue of the powers and decision-making areas that the constitutional system reserves to it. However, the minimum pay provided by national CBAs remains subject to the principle of proportionality enshrined in the Constitution. In this regard, a recent Supreme Court ruling has confirmed that the minimum pay established by collective bargaining, even if provided by an NCBA, is not per se to be considered as sufficient and proportional. It is only presumed to be proportional, and therefore the adequacy of pay must still be assessed on a case-by-case basis. In fact, if the NCBA’s minimum pay is found not to comply with the Italian Constitution, the pay can be deemed judicially void and the judge may adjust it based on discretionary and reasoned standards (such as higher minimum pay established in other NCBAs for similar industries).
What does ‘all-inclusive’ compensation mean?
If it is true that we fall in love with the simple things, this is not the case with regard to pay. In fact, it is not easy to assess what falls within the scope of compensation.
In addition to its core part (the basic salary), compensation also includes all disbursements paid in favour of the employee that are by their nature:
- remunerative (i.e. amounts that are directly or indirectly caused by the employment relationship);
- mandatory (i.e. it must constitute an obligation for the employer deriving from the law, a collective agreement, or an individual contract); and
- specific (i.e. the amount of each individual part of the compensation is provided by the individual or collective employment contract).
In this regard, it is worth also mentioning what is defined as pay from a taxation perspective. The main piece of Italian legislation regarding taxation considers as employment-related pay any amount or thing of value received by the employee that is connected to the employment relationship.
This is also known as principle of ‘all-inclusiveness’ of compensation. However, this principle has been narrowed by the relevant case law. In fact, courts do not consider this principle as a general rule, and the parties are not necessarily bound to it. Therefore, under the most recent case law, the autonomous bargaining activity of the parties (both collective and individual) is empowered to define the extent and the content of the pay, within the constraints set out in the Constitution and any applicable legal requirements (e.g. indemnity in lieu of notice, severance pay).
In light of the above, in order to determine whether or not a payment, bonus or indemnity is part of the relevant pay base for purposes of the calculation of each specific provision (e.g. the rules regarding indemnity in lieu of holidays, the pro rata portion of the additional monthly instalments), it is recommended to assess on a case-by-case basis what the relevant provisions actually envision. This assessment must be performed carefully in order to avoid additional costs and unpredictable litigation.
Different kinds of compensation
The Italian Civil Code provides that in addition to the usual cash payment, an employee may be paid (in whole or in part) in kind, or through the provision of goods and services.
As for the ways of measuring remuneration, the most used is the ‘time-based’ one, whose unit of measurement is the time period of the work performance (i.e. hours, days or months of work). The remuneration unit is multiplied by the periods worked. Piecework (i.e. ‘Cottimo’) is another form of remuneration identified by the law; however, this kind of pay belongs to the past and is no longer in current use.
Remuneration can also be measured by so-called ‘participation’ forms of compensation, which are those based on factors external to the duration of work performance. These can include commissions and participation in profits or products. While the Italian courts are consistent in not considering stock options as part of the employee’s pay for purposes of the notice period and severance payments, the debate is still open with specific reference to ‘Restricted Stock Units’.
With reference to payments in kind, benefits (the concession of use of goods and services by the employer in favour of employees) are currently finding new applications in the changed economic business context. Benefits can be used as a tool for reducing employment costs, since they are exempt from the related social security contributions. While other types of remuneration in kind (consisting in the direct provision of goods and services) were once widespread as a primary means of payment, especially in the agricultural sector, today they occupy a residual place.
The current challenges of compensation
The real challenge for the future will be to identify a common parameter for defining and determining a fair and sufficient minimum level of compensation. According to the EU Commission, in the majority member states the minimum wage is insufficient or there are gaps in the coverage of protection. For this reason, EU legislation promotes collective bargaining on wage determination along with adequate levels of statutory minimum wages.
Currently, most of the EU member states have a legal minimum wage. Italy is among the exceptions where collective bargaining agreements fill the void in the absence of legal provisions. A strong political debate in Italy has been ongoing for years on this regard, and the recent Supreme Court ruling regarding the adequacy of NCBA minimum pay has led to increased media attention on the issue. In addition, in 2023, a draft of piece of legislation was proposed regarding the introduction of a statutory minimum wage.
Takeaway for Employers
In light of all the above, the debate on the definition and the adequacy of pay will occupy more space in political and judicial circles in the near future, and the outcome is uncertain.
