Are you still failing to index wages? Learn how to do it without detriment to your budget-Publication

Pursuant to Article 134 of the Labour Code of the Russian Federation, state bodies, local government agencies, state and municipal institutions shall index wages in accordance with the procedure laid down in the labour laws and other regulations. Such instruments include but are not limited to Order of the Government of the Russian Federation No 2716-r dated 6 December 2017 coming into force on 1 January 2018. Pursuant to the Order, the compensation of persons employed by federal state-funded, budgetary and autonomous institutions whose wages are paid from the federal budget was raised by 4 percent.

The Order is not binding upon businesses. However, the employers that are not state bodies, local government agencies, state or municipal institutions are not exempt from the obligation to index wages. They shall index wages according to the procedure provided by the collective bargaining contract, agreements and bylaws.

Failure to include the procedure for indexing employees’ wages in a bylaw represents a violation of Article 134 of the Labour Code constituting an administrative offence.

Are you still failing to index wages? Learn how to do it without detriment to your budget.

Select the frequency of indexations properly

Wages can be indexed on a quarterly or annual basis or otherwise. If you raise your employees’ wages from time to time at your discretion, pay bonuses, compensate their meal, travel and fitness expenses, etc., you are a fair employer. The wages of persons employed by this sort of companies will not be heavily affected by inflation. You are still not exempt from the obligation to index wages, but you do not have to do it very often – once every two years will be quite enough.
Identify the payments that you intend to index

You may increase solely the salaries. You do not have to index the bonuses, increments and extra pay. It is acceptable to index a certain part of the salary under a certain amount.

For instance, a company has the following salaries attached to different positions: RUB 30,000, RUB 50,000, RUB 100,000, RUB 200,000. If a bylaw specifies that the salaries up to RUB 100,000 are subject to indexation, then the salaries of RUB 30,000, RUB 50,000 and RUB 100,000 will be indexed.

The salary of RUB 200,000 will be indexed in part: An amount of RUB 100,000 will be indexed, while the second part of the salary will be kept unchanged.
Set specific dates for indexing wages

Otherwise, you may be exposed to legal disputes and risks due to wage arrears. Employees need to know the date when their wages will be indexed. If this does not happen in a timely manner, they will acquire the right to claim compensation for late payment of wages, in this specific case – of a part thereof.
Finally, you need to identify the indicators to be used for indexation (a clear mechanism for determining the factor by which the salary and other payments will be indexed).

Indexation can be based on the following indicators:

Consumer price index (CPI) published by the Federal State Statistics Service
Inflation rate (recorded in the federal or regional budget)
Fixed share, e.g. salary share
Fixed amount
Cost-of-living index for working-age population in the relevant region.

Different indicators may be used to index the salaries of various categories of employees.

As Article 134 of the Labour Code of the Russian Federation relates the indexation to growth in the consumer prices of goods and services, let us examine the example of using the consumer price index (CPI).

Wages should be indexed using the consumer price index as a percentage by December of the preceding year.

Use the following formula to index wages:

Salary * % 12py / 100,
where 12py – December of the year preceding the last calendar year.

For example:

The Employee’s salary is RUB 50,000.

The Federal State Statistics Service’s website: index for 2017 as a percentage compared to December 2016 – 102.51%
Calculate according to the formula: 50,000 * 102.51 : 100 = RUB 51,255.

The resulting indexation factor is 1.025. Or 2.5%. The inflation rate in 2017 was also equal to 2.5%. Therefore, wages should be indexed by 2.5% in 2018.
Thus, the general wage indexation procedure for a bylaw has been set:

Salaries or parts thereof under RUB 50,000 are subject to indexation.
Wages shall be indexed on 1 March once every two years starting from 2018.

The indexation factor shall be determined based on the consumer price index (CPI) published on the website of the Federal State Statistics Service of the Russian Federation. The calculations are made using the consumer price index for last December compared to December of the preceding year.

For instance, when calculating the factor for 2018, use CPI for December 2017 as a percentage compared to December 2016 accounting for 102.51% resulting in an index of 1.025.

Not that complicated, right?

Do not forget to check whether your company has joined an industry, regional or any other trilateral agreement (Article 48 of the Labour Code of the Russian Federation). If so, check whether the document lays down the procedure and amount for indexing wages. In this case, you will need to comply with the indexation procedure established by the agreement for all employees in the industry or region.