ONV Law Analysis: The new Emergency Ordinance 117 of the Labor Code can blow up the local business environment, by unbalancing the labor market

The new Emergency Ordinance (GEO) no. 117 of October 4th, which will enter into force starting October 20th, sets fines from 5.000 lei to 10.000 lei for each employee whose employer delayed his salary payment for more than one month and this measure can significantly unbalance the labor market (in the current context, in which there is an acute pressure on the labor force in the market) and it can encourage a wave of insolvencies and bankruptcies in the business environment, points out ONV LAW.

Thus, the new GEO 117 / 4.10.2021 for the amendment and completion of Law no. 53/2003 – Labor Code, issued by the Romanian Government and published in the Official Gazette no. 951 / 5.10.2021, establishes at point 7 that “the violation by the employer of the obligation provided in art. 166 paragraph (1) by more than one month, from the date of payment of the salary, established in the individual labor contract, in the applicable collective labor contract or in the internal regulation, as the case may be, with a fine from 5.000 lei to 10.000 lei for each person whose salary was not paid, except for the situation in which the employer is under the incidence of Law no. 85/2014 on insolvency prevention and insolvency procedures, with subsequent amendments and completions.”

“The current measure can trigger a wave of negative effects on the economy, among the most important being the fact that this tool can easily be misused in the relationship between employees and employers, as a pressure tool, increasing the current imbalances in the local market and it can encourage a massive wave of insolvencies and bankruptcies in the business environment,” states Mihai Voicu, ONV LAW Partner and coordinator of the Business Law division within the law firm.

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Among the most important issues reported by ONV LAW specialists regarding the way in which the new GEO is formulated, which will enter into force on October 20 (!):

• The sanction does not differentiate between the correct employers, who face various problems related to payment delays (for example: in the case of industries that depend on delayed delivery of some raw materials, in the current context when various disruptions on the international distribution chains are registered; or any category of business that depends on a single contractual partner – eg. agent or distribution – companies) and those accustomed to breaking the law and not paying employees’ salaries on time.
• The sanction is disproportionate, providing an amount of fine of approximately 1.5 – 3 average salaries per economy for each employee, regardless of the sector of activity. Thus, the character of punishment and pressure instrument prevails and the amount is potentially so high that most employers could not pay it, ONV LAW specialists emphasize. In “labor intensive” industries, where labor costs exceeds 50% of the income, such a sanction could be equivalent to 1 month and a half of expenses, enough to trigger a bankruptcy!
• It provides the employees with a tool that can be easily abused. The threat of a fine of such size will undoubtedly be abused by employees in bargaining situations, to force a certain action on the part of the employer, according to ONV LAW specialists. Given the extremely low unemployment rate in the market at the moment and the pressure that most employers are signaling now, the measure could blow up the local labor market.

• The only protection measure for the employer provided by the local legislation, in such a circumstance, is the Insolvency Law. “Thus, the effect of this sanction will be to rush employers to claim their own insolvency and once insolvent, the employer (through the judicial administrator) can easily terminate any employment contract and employees lose their guarantees, this being the most difficult situation, disadvantageous for employees”, Mihai Voicu comments.

• The provision does not mention a maximum limit of the sanction. Usually, in the case of fines applicable to labor law, the fine was given in the form “X RON / employee without exceeding the amount Y”. Sanctioning without limit means that salary payment delay becomes the most severe contravention.

• The new GEO also offers a very powerful tool (an exorbitant right) to the public authority which, instead of striving for verification, support and compliance will most likely use it coercively, to raise money from the market, according to the law firm representatives.

In conclusion, this provision will have a boomerang effect and will further polarize the interests of employees and employers, without giving chances for cooperation between the two parties or between the authorities and the economic actors. ONV LAW specialists also highlight that the reasoning formulated in the preamble of the provision is abusive, undemocratic according to the Romanian Constitution, replacing the natural path of justice with a sanctioning instrument offered to employees (a social, populist instrument). Thus, the text of the preamble stipulates:

“Given the existence of a difficult socio-economic situation generated by the pandemic that was deeply felt by both employers and employees, the legal mechanism currently regulated in the Labor Code regarding non-payment or late payment of wages is a complex and difficult which involves the promotion of lawsuits, so it is necessary to create a regulation to ensure the social protection of employees in accordance with the principles governing labor relations.”

“Nevertheless, the state puts once again more pressure on private employers, but relaxes the pressure on public employers. At this moment, there is the possibility of staggering the salary payments for 5 years in the case of civil servants. Basically, in the case of the authorities, the payment of the delayed salaries can be made within a period of 5 years, while private companies have only 30 days at their disposal or they bear a very harsh sanction,” the law firm representative concludes.

In the opinion of ONV LAW specialists, a detailed analysis of this provision in the Parliament is mandatory, before approval. Non-payment must be circumscribed, so that no automatic sanctions apply, which are unrealistic versus the way the business environment works in practice. There are certain models in the legislation that can be used as an example to circumscribe the measure.

The correct and democratic decision, in the opinion of the ONV LAW specialists, for removing the imbalance created by the new GEO, would be for the Parliament to reject the text from article 260, paragraph 1, letter s..