Indexation Is Not a Salary Boost

Arthur Abouzov
Senior Associate
Goltsblat BLP

According to official information from the State Statistics Service, food prices in Russia have jumped by 4.9 percent since the beginning of 2009, whereas many countries of the European Union have had the opposite happen — a drop of approximately 1 percent.

These figures may seem quite neutral but, in reality, they reflect the real value of the salary paid to each and every employee. Food prices are not the only criterion. People also buy services, nonfood products, petrol and so on and, in general, everyone can easily see what they could afford at the beginning of the year and at the end.

One principle of the Russian legislation is every employee’s right to a fair salary, providing a decent lifestyle for the employee and his/her family. This principle should, in fact, be implemented by indexing real wages to the rise in consumer prices for goods and services.

Under the Russian Labor Code, it is the employer’s concern and obligation to ensure that real wages keep in step with the rise in consumer goods and services prices. So, theoretically, employees are entitled to demand salary indexation from the employer. So the question is: What should the employer do in this case?

The rule of law says that the indexation procedure should be stipulated in a collective bargaining agreement, internal act or other agreement such as an employment contract, but employers do not usually comply with this. Does this mean that employers are released from any such obligations? Some lawyers will say “yes.” No procedure — no obligation to index salaries.

The situation is not, however, quite as clear as it may seem at first sight. Indexation is the obligation of the employer, as is payment of salary, so provision of an indexation procedure should also be considered as the employer’s obligation. The more precisely it is described, the better the employer protects itself in case of a dispute. Otherwise, the employer will have no legal arguments to back up saying “no” to the employees’ demand for salary indexation.

Another mistake in respect to indexation: Surprisingly, regular salary hikes given to an employee for performance and other achievements or a promotion do not constitute indexation. These are different things as they have different legal grounds. A salary increase for performance and other achievements is based on personal growth, the employee’s qualifications, input into the company and so on, whereas the idea behind indexation is to restore the real value of salaries, which has nothing to do with personal growth, qualifications and input. Salary increases may be given only to good employees, but indexation should cover everyone.

Nevertheless, even when an employer simply raises a salary, it is also possible to put things right in fulfilling the indexation obligation. The employer may, for instance, include a provision in the order on the salary increase to the effect that the increase also includes salary indexation.

To summarize, it is advisable not to forget about indexation and at least envisage the indexation procedure in internal documents, as prescribed by law, if for no other reason than the fact that violation of that rule of law might constitute grounds for a dispute with employees. Considering the employee-orientated approach taken by Russian courts, the employer’s position is rather more difficult to prove, especially if there is no evidence in favor of the employer.