Risks incurred by foreign companies that do not process holidays, sickness and business trips under Russian rules
(in Russian)
The most frustrating mistake which almost all foreign companies operating in Russia make is their ignorance of the subtleties of Russian labour law and their unwillingness to familiarize themselves with it.
Foreign executives tend to apply foreign standard HR practices on Russian soil. This is where the basic problem lies.
For instance, foreign companies are used to fixed sums transferred monthly to their employees’ accounts, regardless of holidays, business trips and sick pay. However, Russian law processes each of these with a separate payroll document, and the computation of earnings over the period is subject to various rules. Thus, to determine salary payments over the holiday period, one must factor in the employee’s income over the previous year. In the case of sickness, the average income over the last two years is considered. The net result is that employees often earn less than usual over the course of their involuntary absence.
Foreigners seek to avoid these complicated calculations and subsequent arguments with unhappy employees regarding the lower wage rate. For this reason, they often choose the easy way out in not formally processing sickness, holidays and business trips at all. Below, we examine the unpleasant consequences.
Undocumented holidays
Real-life example as seen by WiseAdvice. The foreign companies’ employees went on holiday by verbal agreement with their supervisors. When one of the employees resigned, he issued an ultimatum, demanding that the company compensate him for 40 days of supposedly “accrued” holidays.
In the absence of relevant documentation, the employer could not prove that the employee had, in fact, been on holiday. Rejecting his demand would have violated labour law, with penal measures by supervisory authorities to follow. The company had to pay.
How to avoid financial losses?
By issuing an administrative order confirming the holiday. Holiday pay must be calculated under Russian labour law.
Failure to process sick pay
Real-life example as seen by WiseAdvice. During an HR audit for a client, we noticed that employees’ days of absence due to sickness were growing every year. It turned out that the company had decided to pay equally for sick days and working days. People called in sick more often since they were not losing any money.
Moreover, since the company was not requesting sick notes from its employees, it did not process them officially. As a result, over 3 million roubles were not reimbursed by the Social Insurance Fund.
When we enquired as to the reasons for this practice, we got the time-honoured excuse accountants typically give: it takes too long and it is too complicated to complete the documents required to receive allowances from the Social Insurance Fund for temporary incapacity.
As an accounting company which regularly and successfully applies for the reimbursement of millions of roubles on behalf of its clients, we officially announce: it’s not difficult.
When is the risk particularly high?
The most dangerous risk is the failure to process a sick note in cases of workplace injury. The supervisory authority can interpret this as an attempt to sweep the accident under the carpet. Serious repercussions for management could ensue, including criminal prosecution.
Undocumented business trips
Real-life example as seen by WiseAdvice. The employees of a foreign company that had recently opened its doors in Russia often went on business trips. However, no relevant payroll documents were completed and salaries were paid in the same amount as if the employees had been in the office all month.
Meanwhile, the company had significant expenses: it paid for transport, food, lodging, etc.
How did it turn out?
The company could not allow for these expenses in calculating the tax base and therefore, could not reduce corporate income tax.
In summary: why is it so important to officially process sick notes, holidays and business trips?
- You do not reward your employees for sickness.
- The Social Insurance Fund reimburses you for sick pay.
- You reduce the risk of penalties from labour inspection.
- There is a lower risk of employees taking legal action over compensation for supposedly unused holidays.
- In accounting for business trips, the company can reduce corporate income tax.
How to honour employees’ interests?
If the company wishes to avoid salary shortfalls due to the inclusion of past average earnings in the relevant calculation, it can provide for corresponding supplements. To this end, it is sufficient to add the following clause to the Compensation and Benefits Policy:
„If the employee’s average earnings applicable to the business trip/holiday/sick leave are less than the agreed monthly salary (pro rata), a supplement in the amount of the difference between the agreed monthly salary (pro rata) and the average earnings (pro rata) is paid out.”
We are happy to help you in correctly completing the payroll documentation and drafting the company’s internal policies.
We are pleased to undertake all work related to payroll and off-cycle payments to your employees. Our professional experience and deep knowledge of Russian legislation safeguard your interests at all times.
