What global businesses need to know about payroll in Italy
Think of Italy and you think of delicious pizza and pasta, beautiful Mediterranean weather, iconic art and cultural works, and the automotive legends of Ferrari and Lamborghini. It’s a place that captures people’s hearts and emotions, but won’t necessarily be thought of as an obvious destination for international business.
But that would be to ignore Italy’s economic power on the European and global stages. Its economy is the tenth largest in the world by GDP, and fourth in Europe after Germany, the United Kingdom and France. A good chunk of this is supported by a historically strong manufacturing sector, while its European Union membership and geographical position in the middle of the Mediterranean Sea gives it strong links to the rest of the world, too. This explains why its export destinations are highly diversified: Germany receives the most at around 12%, with the USA and France just behind.
One thing that stands Italy out from its European neighbors from a payroll perspective is the very strong influence of collective bargaining and trade unions. This means many of the basic rules and regulations, as you’ll read in this guide to running payroll in Italy, are subject to change through negotiation.
Getting Started
Starting a business in Italy is considerably simpler than it used to be thanks to a program of reforms and streamlining. However, anyone from outside the EU or European Free Trade Association (EFTA) area will need a business visa to do so – this includes residents of the United Kingdom.
You can register as one of three types of company; a limited-liability company (SrL), joint-stock company (SpA) or a branch. There are a variety of features attributed to each type of company so it’s important to work out which one is best suited to your business. Setting up a business bank account is mandatory in Italy for incorporated companies. Initial capital at the point of incorporation is at least 25% of the total share capital if that total is higher than €10,000 (approx. £8,300; $10,500), and 100% of the share capital if that is less than €10,000.
You will need to execute deeds of incorporation and company by-laws before a notary public. You must also register with the Tax Agency (Agenzia delle Entrate), Labor Office (Provincia), Social Security Institute (INPS) and Insurance Institute (INAIL). You will also be required to deposit the appropriate documents to the Register of Enterprises, purchase corporate and accounting books, and obtain a fiscal code and VAT number.
Employment Considerations
Employment law in Italy is complicated for two reasons. The first is that it’s based on a system that combines EU regulations with Italian-specific legislation, and the second is that union activity and collective bargaining are very strong in Italy. As a result, the statutory rules that are in place can often vary substantially, depending on the industry involved and the result of negotiations.
For example, Italy doesn’t have a statutory working week enshrined by law. However, a 40-hour week made up of five eight-hour shifts is the expected standard, with a maximum of 48 hours in line with the EU Working Time Directive. Contracts and collective bargaining agreements will determine what the standard week is for an employee, and the point at which overtime pay kicks in. They will also define the rate of overtime pay (usually between 115% and 150% of normal salary), and the limit on overtime in a year (usually 250 hours).
There is no legal requirement for a written employment contract. However, in the absence of one, an employee must receive a written statement of their basic working information within 30 days of starting work. Probation periods tend to be three months, rising to six months for managers and supervisors. These can be influenced by collective bargaining, which also sets the rules around notice periods.
Compensating, Bonuses and Severance
Italy is one of the few countries in Europe where there is no statutory minimum wage. Collective bargaining therefore tends to set rates of pay at industry or even individual company levels, and these rates tend to get legal recognition in courts if disputed. However, generally speaking, average salaries are substantially higher in the north (where there are more professional services, finance, and manufacturing companies), whereas the south is more reliant on lower-paid jobs in agriculture and tourism.
Equally, when it comes to payroll frequency, there are no specific laws. Instead, this is often determined by the various unions and collective agreements for each position. Typically, employers are expected to pay their employees on a monthly basis by the 27th of each month. However, in industries such as construction and agriculture, payments are generally made on a weekly or bi-weekly basis. A 13th-month bonus (and sometimes even a 14th-month bonus if agreed in a CBA) is common in Italy, but not a legal requirement.
Italy has an unusual approach to severance pay, where employers are required to make monthly contributions into a severance pay fund of 8% of the employee’s salary. This can be set aside by employers if the total workforce is less than 50, but must be sent to social security by those with more than 50 employees. When an employee is dismissed, resigns or retires, they should then receive their severance pay fund (although they may be taxed on it).
Tax and Social Security
The employer is responsible for deducting taxes from their employees’ pay and submitting those deductions to the proper tax authorities on a monthly basis. The annual income of the employee determines the appropriate level of tax deduction, as well as other factors including whether or not the employee is disabled or has any dependents.
Italy’s income tax bands have recently been reduced from four to three. The lowest band of 23% now applies to the first €28,000 (approx. £23,200; $29,300) earned each year, after which the middle band of 35% applies. The top band of 43% applies to earnings over €50,000 (approx. £41,400; $52,300). Employees are also required to pay regional taxes of between 1.23% and 3.33%, and some areas also levy a municipal tax of up to 0.9%.
The social security contributions in Italy are relatively simple, with employees contributing a flat rate of 10%. Employers pay between 29% and 32% into the main social security fund, 8% into the severance pay fund, and between 0.4% and 1% into the work insurance fund.
Holidays and Leave
There are 12 public holidays in Italy – which are not included in the minimum holiday entitlement – plus a selection of regional holidays, some of which employees can receive paid time off for. Paid leave entitlement is determined by collective bargaining, with four weeks per year the generally accepted base level.
Medically certified sick leave is covered in full by employers for the first three days of illness, although the rate reduces to 66% for the third period of sickness in a given year, 50% for the fourth and nothing thereafter. Within each sickness period, employees receive 50% salary from employers and 50% from social security from the fourth day until the end of the third week. After this, the ratio changes to 34% employer, 66% social security until six months have elapsed in total.
Maternity leave entitlement is five months – two before the birth and three after this. Employers pay 80% of regular salary, but can then claim this back from social security. Mothers can also take up to six months additional unpaid maternity leave after this period. Paternity leave is ten days; this is compulsory and also covered by social security. Parents can also take one month of paid parental leave (at 80% of salary), plus up to ten months unpaid parental leave.
In Summary
One of the common themes that runs through this guide is the power of unions and collective bargaining in Italy, meaning that payroll and employment requirements can vary substantially from one industry and business to the next. This underlines the need for local expertise, so that you can understand the ins and outs of these agreements, and ensure that your payroll complies with legal demands and workforce expectations. A global payroll partner can help you in this area, especially if they have access to a worldwide network of local payroll experts.
This guide is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional. Click here to see more country payroll guides from CloudPay.