Determining absence fee often poses challenges when factoring in performance-based pay or similar pay components. A common question is whether bonuses, premiums, and commissions should be included in the calculation of absence fee.
This issue is critical in payroll management, as absence fee serves as the basis for various benefits, such as payments for vacation and sick leave. Additionally, employees are entitled to absence fee during severance or notice periods.
The correlation between Sections 150 (1) and 137 (3) of Act I of 2012 on the Labour Code (hereinafter “Labour Code“) has sparked numerous debates and varying legal interpretations in recent years. However, the Curia’s precedent-setting ruling in case Mfv.10181/2019/7 sheds new light on the matter.
According to Section 150 (1) of the Labour Code, performance-based pay must be considered when determining absence fee. However, the Labour Code above-mentioned paragraph refers to Section 137 (3) in this context, leading many to interpret that performance-based pay should only be included in absence pay calculations if the employee exclusively receives such pay under their agreement or if the time-based pay they receive is less than the base salary set out in their employment contract. As a result of this interpretation, it has become widely accepted that, in cases other than those mentioned above, the performance-based pay should not be taken into account for the calculation of the absence fee. The Curia’s decision, however, deemed this interpretation incorrect.
The Curia ruled that if an employee receives both time-based and performance-based pay (including benefits such as commissions), this pay component must be included in the absence fee calculation without exception. The Curia found that the employer in the referenced case had wrongly relied on the provisions of Section 137 (3) of the Labour Code, attempting to exclude performance-based pay by arguing that the employee’s time-based pay met or exceeded their base salary. According to the Curia, absence fee must be calculated based on the combined amount of the time and performance-based pay, regardless of whether the time-based pay alone meets the base salary threshold. Therefore, both components of pays from the six months preceding the termination of employment must be considered. In this case, the pay component in question was not a classic performance-based pay but a commission, which, as the Curia stated, must also be included in the absence fee calculation, even if the employee’s time-based pay reached the base salary.
The Curia’s decision introduces a new perspective to legal practice regarding absence fee calculation. Employers and payroll administrators must consider various performance-based pay components, such as bonuses, premiums, and commissions, regardless of whether time-based pay meets the base salary threshold. Employers who previously excluded these components from absence fee calculations may find their practices inconsistent with the Curia’s legal interpretation, potentially leading to employee claims and obligations to pay default interest.