Labor Code shake-up adds to taxing legislative changes

2011 should be the year when the Romanian government comes up with solutions to ease the fiscal burden and create the legislative background for a more competitive economy, or at least these are its intentions. Some of the major legal changes announced so far this year concern labor law. Last week the government approved the bill to modify the amended Labor Code and sent the document to Parliament. Should the bill be passed through a vote of confidence on March 8 as the government plans, Romania will have a new Labor Code that will bring substantial changes to the local labor market. Meanwhile, further changes to tax law leave firms on an adjustment footing.

Simona Bazavan

Discussions over the need to change the Labor Code are not new. The debate started last year with the changes proposed by organizations of foreign investors active in Romania such as the American Chamber of Commerce in Romania (AmCham) and Foreign Investors’ Council (FIC).

The Labor Code should foster flexibility in relations between employers and employees as well as stimulate competitiveness, say foreign investors active locally. Enforcing performance as a basic principle of labor relations and clearer and simpler legal provisions are also necessary for Romanian employers, says AmCham.

“We believe that the labor market is one of Romania’s competitive advantages and we will continue to support those principles that ensure that this advantage is kept,” said Mariana Gheorghe, president of FIC and CEO of Petrom.

Relocation is an option for any company nowadays which is why Romania should consider reforming its labor law to remain attractive to foreign investors, said Sorin Mindrutescu president of AmCham Romania, during an end of year meeting with the media. According to data from the FIC, a more flexible Labor Code could generate almost 90,000 jobs in the short term.

Many of the changes made to the code should be helpful to companies, but there is still room for improvement. “Some of the amendments have been passed because of an insistence that there is more conformity with EU regulations, or because of a perception that there should be improvements for employees, so elements of the changes are more a question of social policy and politics rather that measures to give direct assistance to business,” said Ray Breden, president-elect of the British Romanian Chamber of Commerce.

Despite the unions’ strong and very vocal disapproval of the proposed changes, as well as threats of protests and general strikes, the government has expressed its commitment to go ahead with the changes at all costs. While union leaders argue that the amended Labor Code draft will leave the door open to abuses against employees and tougher work conditions, Prime Minister Emil Boc said that the changes are expected to generate more jobs and protection for competent employees.

They are also expected to raise more money for the state budget. “We have chosen the version that is the most favorable to the Romanian employee,” said the PM. Opposition parties see things differently and have announced plans to initiate a motion of no confidence against the government.

What’s new?

One of the most controversial changes in the amended code is the government’s decision to forbid collective labor contracts after December 31. Also, current collective labor contracts may not be renewed, but will be effective only until they expire.

The PM said that collective labor contracts will be regulated through a special law, which will be passed immediately after the code is revised.

This is one of the measures that the unions oppose most fiercely, arguing that terms such as working hours, conditions and minimum wage will be abolished, leading the way to possible abuses.

The amended code also brings more drastic measures against employers who use illegal workers. The code stipulates that bosses hiring up to five people without individual work contracts will be fined RON 10,000-20,000 per illegal employee. Hiring more than five people without contracts will constitute a crime punishable by a prison sentence of one to two years or a criminal fine.

A court may also forbid an employer found using illegal labor from receiving state aid, including European Union funds managed by Romanian authorities, for up to five years, or from taking part in a public procurement auction. The employer could also have to refund the state aid or EU funds acquired up to 12 months prior to the crime.

In addition, the employer will be required to pay the state the value of all the taxes and social security contributions that would have been due, had the worker been employed legally, including overdue penalties and administrative fines.

The Labor Code bill also stipulates that in order to check an employee’s abilities, after the signing of an individual work contract, the employer can set a trial period of up to 90 days for executive jobs and 120 days for management jobs.

No more than three consecutive limited period work contracts are allowed between the same employer and employee, each no longer than 12 months, unless extended for the duration of a project’s development with the parties’ written consent, says the amended Labor Code.

The document says the two parties may agree to set a probationary period for the newly hired employee, of no longer than 90 days for regular positions, or 120 days for management positions. Both the employer and the employee can terminate the working contract at the end of this period or beforehand on the basis of a written form. There is no limit to the number of employees a company can hire on probation.

Romanian employees who have committed disciplinary infractions will have their records wiped clean after a period of twelve months, according to an amendment to the Labor Code. The draft Labor Code also contains a provision whereby companies that reduce or temporarily cease their activity may put their employees on unpaid leave, with prior notice to the local union.

Tax cuts back on the agenda

Among the government’s fiscal priorities this year is reducing social contributions, and in the long run, cutting VAT and reducing the flat tax, said Andreea Paul-Vass, adviser to the Prime Minister Emil Boc, during the ninth Romanian Tax, Law & Lobby event organized by Business Review. She added that there is a “high probability” that the social contributions cut will come during the second semester of 2011.

In her opinion, 2011 should be the year when the authorities decrease the fiscal burden, starting with labor costs. “We are surrounded by countries that have lower flat taxes,” she added, naming Bulgaria, Ukraine, Hungary, the Republic of Moldova and Russia as Romania’s fiscal competitors.

Vass also said that there is an “iron political will” to simplify fiscal procedures and to fight tax evasion and that this year companies will see “significant progress” in these areas.

Another important fiscal change is the ceiling on social contributions and the fact that they will be regulated by the Fiscal Code. Although the measure has been welcomed and should reduce compliance costs for companies, experts say that there is still room for improvement.

Also, this modification leaves questions about taxing independent work which hasn’t been included in the Fiscal Code.

Other fiscal novelties are the reintroduction of income tax for micro-companies and two legislative changes in the field of VAT.

The first involves VAT on occasional supplies which comes with new provisions for taxable individuals not established and not obliged to register for VAT purposes in Romania, but who must pay VAT here.

The second concerns VAT on business transfers and is regulated by two orders that were published late last year regarding the payment of VAT by taxable individuals not registered for VAT purposes who receive assets in a business

transfer.