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Risks connected with fixing salary of employees in foreign currency

08 May, 2012 Newsletters

Dear Sirs,

The practice of fixing the amount of salary in foreign currency (in employment agreements, staff lists etc.) is common for many companies in Ukraine. Hereby we analyze risks connected with such practice.

First of all, it is worth noting that current legislation of Ukraine does not prohibit determining the amount of employees’ salary in foreign currency. However, the change of hryvnia equivalent of salary connected with the fluctuation of the exchange rate creates certain risks for the employer. Especially, it may be topical in view of widely-spread forecasts on hryvnia devaluation.

Conditions of remuneration of labour are considered to be essential conditions on labour in accordance with legislation of Ukraine on labour. According to the Labour Code on labour (hereinafter – “the Code”) the employee must be informed on changes of essential conditions of labour no later than 2 months before its introduction. Therefore, change in salary amount due to fluctuation of the exchange rate might be considered as changes of conditions of remuneration of labour which shall be brought to employee`s notice beforehand.

Moreover, decrease in hryvnia equivalent of salary resulting from change of the exchange rate may be considered as conditions of labour worsening state of the employee. In turn, according to Article 9 of the Code such conditions shall be deemed as void.

Thus, since prior notifying of the employee on lesser amount of salary is impossible for objective reasons, such salary decreasing may be considered as unlawful, and payment of salary in lesser amount for the same scope of work may be considered as payment of salary not in full amount.

We are to note additionally, as companies are obliged to maintain accounting records and financial reporting in hryvnia, proving of underpayment is possible.

In case the employer is interested in keeping practice of fixing salary in foreign currency the variants to minimize the risks connected with such practice are as follows:

  • by including into salary an adjusting bonus at the expense of which the difference in the amount of salary due to decrease of the exchange rate shall be bridged;
  • by setting fixed exchange rate to calculate hryvnia equivalent of salary, and fixing the obligation of the employer to change such rate in case of essential change of the exchange rate;
  • by formalizing employee’s consent regarding the conversion of salary according to the exchange rate set for the accrued/payment date (the least safe variant).

The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.

Kind regards,

© TOV "KM Partners", 2012

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