Milestone court decisions on salary indexation

Pepeliaev Group draws attention to milestone court decisions on salary indexation that may turn around the case law on this type of disputes.

We are referring to Ruling No. 89-KG18-14 of the Russian Supreme Court (the “Supreme Court”) dated 8 April 2019 and the Appellate Ruling of the Tyumen Regional Court dated 9 December 2019 in case No. 33-6899/2019.

Essence of the dispute

An employee went to court demanding that the employer should index his salary for the whole period of his employment with the company (over 5 years). The employer did not have any internal regulation establishing a mechanism for indexing salaries. At the same time, the employee had his wage raised and he was paid bonuses and salary increments, a year-end bonus, vacation benefits and one-off holiday bonuses.

Courts of the first and appeal levels dismissed the employee’s claims, having stated that the employer could not effect salary indexation since no relevant mechanism was established within the company. The courts further pointed out that indexation is not the only way to increase the real content of a salary. The employer raised the employee’s wage, paid bonuses and by doing so virtually complied with the requirements for indexation of a salary and supporting its purchasing power.

Having lost in courts of two levels, the employee appealed to the Supreme Court.

Position of the Supreme Court

Having considered the appeal, the Supreme Court reversed the decisions of the lower courts and sent the case for a new trial to the first instance court[1].

The Supreme Court held that the courts’ conclusions were incorrect and again emphasized that employers may not shy away from effecting indexation on the ground that the relevant mechanism has not been established at the local level. By so doing they deprive their employees of the guarantee of increasing the level of the real content of the salary as provided for by the Russian Labour Code. The Supreme Court pointed out that employers who do not receive financing from the state budget may establish any indexation procedure and terms depending on the specific nature of their businesses, solvency and other circumstances. In this regard, the Supreme Court’s Ruling repeats earlier legal positions concerning indexation.

The Supreme Court referred the case for a new trial and ordered that the legal nature should be established of payments to an employee in the form of wage increases, salary increments and bonuses and that the moment should be identified when an employee learnt or should have learnt that his right to indexation had been violated (to determine the starting point of the statute of limitations for the employee to resort to a court).

Having again considered the employee’s claims, the court of first instance dismissed the salary indexation claims[2]. However, the court of appeal quashed the above decision and sustained the employee’s claims[3]. With no indexation mechanism enshrined in the internal regulation and considering the wordings of employee’s employment agreement and the applicable salary regulations, the court of appeal held that salary increases and bonuses did not amount to salary indexation.

New decision of the court

Since the employer did not establish any indexation mechanism, the court of appeal held it reasonable and just to apply consumer price index (CPI) for the purposes of indexation (as the employee requested).

As a result, the employee’s claims were sustained and the employee was awarded in total over RUB 4.6 million (RUB 2.8 million as indexation arrears for the whole period of his employment (over 5 years), RUB 1.7 million as interest for delayed payments, as well as moral harm and attorney’s fees).

Commentary

The following important conclusions can be made from the above court decisions:

• if an employer does not enshrine in its internal regulations how specifically it will effect indexation (raise salaries, pay bonuses and effect indexation as a separate measure and so on), there is a risk that actual wage increases and bonuses it pays will not be recognised as salary indexation. As a result, an employer can be obliged to effect indexation as a separate measure. This conclusion has been made based on the ruling of the Supreme Court at hand;
• if an employer does not enshrine the mechanism and rate of indexation, employees’ salaries can be indexed by the CPI further to a court decision.

What to think about and what to do

This case went viral on the Internet. Therefore, the example of an employee who won a considerable payout from his employer could inspire other employees.

It should be taken into account, however, that the dispute has its distinguishing features, primarily the reasons for which no statute of limitations was applied to the employee’s claims (owing to a collective bargaining agreement, which is a very rare thing). The choice of indexation rate is also questionable. The court seems to have identified this solely in its discretion. The court decision, however, does not allow for it to be concluded that the court took into consideration such factors as market practice, levels of salaries in the region and others. It is not unlikely that the court of cassation will weigh those aspects differently.

At the same time, the Supreme Court’s opinion that the indexation mechanism should be documented may significantly influence court practice. To mitigate potential risks, those employers who have not enshrined an indexation mechanism in their internal regulations are recommended to do so considering all circumstances that are relevant for them.

As long as an employer may choose any indexation procedure and terms (including methods, regularity, amount, payments to be indexed, and others), it is permissible to draft such flexible wording for the purpose of salary indexation as will leave enough room for the employer to effect such indexation based on all factors relevant for it, including its financial standing and the overall economic climate on the market.

Help from your adviser

Pepeliaev Group’s lawyers will be happy to assist corporate employers in establishing a proper mechanism for salary indexation in their internal regulations, taking into account all factors that are relevant for the company.

We are ready to check current wordings concerning salary indexation and, if required, improve them to mitigate potential risks for employers.

[1] Ruling No. 89-KG18-14 of the Supreme Court dated 8 April 2019.

[2] Decision of the Tyumen Central District Court dated 7 August 2019 in case No. 2-6107/2019.

[3] Appeal Ruling of the Tyumen Regional Court dated 9 December 2019 in case No. 33-6899/2019.