Understanding Payroll in Italy: What Global Companies Need to Know About Italy Payroll
With strong links to the European Union, Organisation for Economic Cooperation and Development (OECD) and World Trade Organization, Italy is truly established on the economic and political landscape. Following closely behind France as the eighth-largest economy in the world, the country offers a great trading environment. Additionally, it’s one of the biggest markets in the EU and holds a position of great strategic importance.
Following the global financial crisis of 2008 and 2009, Italy’s economy struggled to kick-start. And while subsequent governmental powers continue to help steer the country onwards and upwards, progress is slow. More recently, the government has committed to Italy being a favourable place for foreign investment, making it a strategic priority for the country. When COVID-19 disrupted the world, Italy was hit badly, but the country’s aggressive approach to protecting its people may have helped the longer-term success of its economy. And coming out of COVID, Italy is now rekindling a sense of solidarity – a vital ingredient it’s been missing even prior to 2008.
The workforce in Italy is both educated and efficient, with most employed in the services sector. The northern parts of Italy are heavily developed, dominated by private businesses. The further south you go, the more you’ll see the vibrant agricultural industry hard at work. It’s easy to see why Italy is such a hotspot for tourism – it’s one of the most visited countries in the world.
Italy is a country with a rich heritage and a well-developed economy and infrastructure, not to mention diversified industry. Combine this with high standards for business, investment and trade and it becomes clear as to why the country is so appealing to developing businesses, particularly with recent reform being designed to make life easier for them. However, high tax, procedural and labor costs, high levels of unemployment and a rigid labor market also make it a very complex country to do business in. Exploring the following aspects of Italian payroll and working regulations will help you gain an understanding of how you can successfully do business in Italy.
Though setting up a business in Italy takes a few more days than some other European countries, it has become easier and the time frame involved for incorporation can be as little as 15 days from the start of the process. Before you can start hiring employees, there are a number of formalities to complete first.
These include opening a bank account in the name of the company and executing 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.
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.
Italian labor law is undergoing continual reform in order to stimulate foreign investment, but it’s still a complex and tricky world to navigate. It’s also a market heavily focused on the rights of employees. At the basic level, current labor law stems from a system of rules in EU and Italian law and collective bargaining agreements.
The complexity arises from much of the workforce being represented by various unions, worker councils and collective labor agreements, depending on their job type. Consequently, employers hiring in Italy will find that they have to adjust their payroll operations accordingly. This can mean taking anything into account from union membership fees and differing standards regarding the number of work hours each week, overtime, minimum wage rates and time-off policies that are affected by collective agreements.
When it comes to unions, employees in Italy have the right to establish/join a trade union or perform trade union activity, and it’s a right that’s protected under the Workers’ Statute. Both the RSA (Rappresentanza Sindacale Unitaria) and RSU (Rappresentanze Sindacali Unitarie) are involved in the collective bargaining process. They also verify the correct application of laws and collective agreements and their rights are both laid down by law and collective bargaining agreements themselves.
Though there is no cap on daily working hours in Italy, the standard working week is 40 hours. Overtime applies to hours exceeding the 40-hour threshold and is capped at eight hours a week and 250 hours per year.
All employment contracts in Italy are required to be provided in writing to the employee within 30 days of hiring. When hiring and onboarding new employees, organizations will find that these processes are also impacted by unions. Probationary periods are common in Italy and many collective agreements provide periods ranging at anything from 20 working days to six months (the maximum period), during which both parties may terminate employment without notice.
In order to successfully onboard new workers, every company is required to provide the employee’s personal data to the local authorities no later than their starting date. Further to this, the employer must also send the appropriate information to the Insurance Institute (INAIL) on the starting date and to the Labor Agency (Provincia) within five days of the employee’s start date. Significant fines are enforced if the required documentation is not provided by the deadline.
Italy does not have an official minimum wage and is one of just a few European countries without one, but a collective bargaining agreement or union could dictate one. Where there are sectors with minimum wages, these are typically around €7 per hour (approximately £6.40; $8.20). As of 2020, there have been ongoing talks regarding the subject and whether to implement an official minimum salary for all worker categories; this is yet to reach any consensus but is something to watch out for. Interestingly, the Courts will more often consider a minimum wage set by a national collective bargaining agreement as the law, whether or not the company chooses to apply that figure.
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.
Overtime must be met with an increase in salary, though the rate is not specified. This, alongside any other wage considerations, are stipulated in the collective bargaining agreements.
There are no laws when it comes to bonuses, however, employers in Italy commonly provide a 13th-month bonus to their employees, which is often paid in December. And depending on collective bargaining agreements, some companies provide an additional 14th-month bonus, though this is usually dependent on performance reviews.
All employees are entitled to a termination payment, regardless of why their contracts of employment are ended. The amount of these payments is based on length of service, typically equating to one month’s pay for each year of service, including unused vacation time and bonus pay.
Once termination has been set, the employer is responsible for making all of the necessary entries in the employee’s employment record and providing that employee with a copy of their income tax declaration. It is then the employer’s responsibility to notify all relevant bodies, including the local employment office (within five days of termination) and the National Social Insurance Institute.
Tax and Withholding Considerations
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.
Income tax rates for individuals ranges from 23% to 43% of an employee’s salary and is broken down as follows:
- 23% up to €15,000 (approx. £13,600; $17,600)
- 27% from €15,000 up to €28,000
- 38% from €28,000 up to €55,000
- 41% from €55,000 up to €75,000
- 43% over €75,000 (approx. £68,000; $88,000)
There are also local taxes the employer must also account for, which are subject to variation, depending upon where an employee lives. This ranges from 0.9% to 2%. These rates may change, however, owing to the fact that the taxation law is undergoing revision.
As with many other countries, social security contributions are paid and are designed to cover a variety of circumstances such as sickness, unemployment, maternity leave and some other minor situations. The amount of social security contributions the employer deducts from their employees is determined by a variety of factors. This includes the individual’s job category, business sector and size of the company. All employee contributions are payable as a percentage of each employee’s total gross pay, typically between 9.19% and 10.48%.
On the employer side of social security contributions, the amount depends on the type and size of the business and the rank of the employee. These contributions range from approximately 27% to 28% of the aggregate remuneration accrued in the relevant year. The employer will need to ensure that all payments and associated forms are sent to the local Social Security authorities by the 16th of each month. Both employees and employers also contribute to a pension fund at a rate determined by salary.
Paid Leave and Sick Leave
There are 12 public holidays in Italy, which are not included in the minimum holiday entitlement. Unless collective agreements specify more favorable terms for employees, all employees are entitled to a minimum of four week’s paid holiday/vacation time per year. There is no unpaid entitlement, unless a collective bargaining agreement specifies otherwise.
Employees are entitled to three days of paid sick leave, which is subject to a doctor’s notice. The allowance for maternity leave is five months: this is taken two months prior to the expected date of childbirth and the three months following.
The allowance for paternity leave is one day, however, a couple of days can be added by way of transference from the mother.
After continuing reform, Italy is ranked eighth in the world for market confidence and fourth in the EU, showing the world that success is part of the Italian strategy. As with taking business into any country, however, there are challenges. Alongside a heavy tax system, unemployment is high and further reform is inevitable. That’s why it’s more important than ever that you have a global payroll solution to navigate you through the complexities ahead and help make your expansion into the country as smooth as possible.
This article 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.