The latest developments in the Latvian labour and tax law
REMOTE WORK AND COMPENSATION OF EXPENSES RELATED THERETO
Regarding remote work, employers need to bear in mind, first and foremost, that the Labour Act prescribes an agreement between an employee and an employer about a place of work. Specifically, the law provides that the employee and the employer need to reach agreement about the workplace (if performance of job duties is not limited to a certain place of work, an option shall be agreed that the employee may be employed at various locations of work) or that the employee may freely choose their place of work.
In practice, it is common for employment contracts to not contain agreement that the employee may work remotely, partially remotely or that the employer is entitled to unilaterally prescribe remote work for the employee. Often employers fail to assess the risks of work environment, confidentiality and other such crucial factors associated with remote work. If the work is performed remotely, such situations may result in a breach of the Labour Act, as well as high risk with regard to work performance. Therefore, employers should approach this issue carefully and, if necessary, consult with lawyers to define that arrangement. When deciding that the employee may perform work, partially or entirely remotely, the employer should have in place a relevant agreement on the procedure for performance of the work. Furthermore, the employer must ensure labour safety risk assessment, relevant protection measures, establish requirements for confidentiality and data safety, decide whether the employee may telework from any location or only their residence, as these and other circumstances clearly may affect conditions of the remote work.
Equipment necessary for performance of the work remotely, and expenses, are important considerations. Employers must know that the Labour Act stipulates an obligation on the employer to provide to the employee all equipment necessary for performance of the work. In contrast, the parties may agree on a procedure to cover expenses associated with remote work. However, if there is no such agreement, such expenses must be covered by the employer according to general principles.
Amendments to the Act on the Personal Income Tax which came into effect on 1 January 2024 stipulate that when an employer compensates monthly expenses related to the remote work in the amount of up to EUR 40, this compensation is not subject to personal income tax (PIT) nor the state social security contributions (VSAOI). However, employers must bear in mind that there are a number of preconditions to be met in order to apply this tax relief, namely:
• the agreement on performance of remote work must be incorporated in the employment contract (or its appendices) or under an employer’s decree, specifying which expenses are compensated by the employer;
• these expenses must be paid by the employer which has in its possession the employee’s payroll tax booklet (if the employee has several jobs, the relief may be applied by only one (principal) employer);
• the amount of the compensation must be proportionate to the workload and the number of teleworking days specified in the contract or the decree if the work is performed both remotely and at the office;
• the compensation is not applied during a prolonged period of leave (sickness, vacation etc.) which exceeds 30 days.
MINIMUM MONTHLY SALARY AND THE DIRECTIVE FOR EQUAL PAY AND TRANSPARENCY OF PAY
Beginning from 1 January 2024, the minimum monthly salary for normal working hours has been increased to EUR 700 in Latvia. Furthermore, the employee will have a subsequent obligation to pay the minimum mandatory contributions of state social security from the said amount if the gross salary of the employee is below EUR 700.
The issue of equal pay is topical for some time already and statistics show that frequently unjustified differences can be observed between the remuneration of men and women. However, Directive (EU) 2023/970 of the European Parliament and of the Council of 10 May 2023 strengthens the application of the principle of equal pay for equal work or work of equal value between men and women through pay transparency and enforcement mechanisms (the “Directive”). It is the obligation of Latvia to transpose this into the national law by 7 June 2026, this issue has become more topical because it is already clear that employers will have to introduce measures to ensure equal pay.
Therefore, even though the amendments to the national law are not developed yet, employers should prepare to revise the current payroll system at the enterprise level. Even though there is no such obligation currently in place, it would be highly advisable for employers to develop a clear policy with regard to establishing work remuneration thus facilitating transparency and predictability. Gender neutral criteria are to be used for establishing the amount of wok remuneration which shall be attributed to duties for performance of the specific role. Namely, the qualifications, skills, effort, level of responsibility, work conditions as well as other factors which are crucial for a specific profession or occupation are to be used. Pursuant to the Directive, a majority of companies will be under an obligation to provide reports about the amount of work remuneration paid to women and that paid to men and will need to justify differences if such are considerably higher than 5%. Employers would be well advised to timely contemplate development of a new work remuneration policy or revision of the existing one in order to make sure that it potentially conforms to the requirements of the Directive as well as already existent requirements of the Labour Act concerning equal pay and the principle of prohibition of differentiated treatment.
AGREEMENT ON VOCATIONAL TRAINING OF AN EMPLOYEE OR IMPROVEMENT OF QUALIFICATIONS, AND FINANCING OF HIGHER EDUCATION
Considering the current situation in availability of the labour force and conformity of employees’ skills for market needs, issues of expense for training of employees or raising of their qualifications (hereafter, the “training”) will become ever more topical. Employers should bear in mind certain nuances in cases when the expenses of training are being covered.
An agreement on covering training expenses can be concluded only on condition that the training is related to the work performed by the employee, while the training does not have the decisive effect in performing the contracted work. Such training is not only advantageous for the employer for the employee to be able to perform his or her official duties but, upon an objective assessment, it shall raise the employee’s value on the labour market.
The maximum period of the said agreement shall be two (2) years; moreover, the timeline of the agreement shall be dependent on the amount of expenses invested in the training. For example, if the training expenses are EUR 1000, then the agreement, most probably, could not be concluded for the maximum 2-year period allowed.
Furthermore, one must remember that the cap amount to be recompensated by the employee upon termination of employment shall be 70% of the overall training expenses; moreover, the amount to be recompensated shall reduce in proportion to the time worked by the employee after completion of the training.
It is crucial that the latest amendments to the Act on the Personal Income Tax stipulate that PIT and VSAOI are not applied to the tuition fees paid by an employer for an employee for acquisition of higher education in accredited educational establishments of Latvia, European Union Member States, and European Economic Area, if the acquisition of such higher education is related to obtaining skills necessary for the employer. Until now, compensation of the tuition fees for higher education was subject to PIT and VSAOI, thus, creating obstacles to compensating these expenses to the employees. It is important to note that the employer will have to complete a notification about the income gained by the employee for acquisition of higher education on a yearly basis, and the employee will not be able to recognize these expenses as one’s own justified expenditures.
HEALTH AND ACCIDENT INSURANCE
In view of the fact that issues concerning health and wellbeing of employees at the workplace have become topical as of late, amendments to the Act on the Personal Income Tax are of importance both for the employers and the employees in this area as well. The amendments stipulate that from 1 January 2024 the amount of insurance premium for health and accident insurance for employees which is exempt from PIT and VSAOI is increased from EUR 426.86 to EUR 750 per year (provided the insurance premium does not exceed 10% of the gross annual income of the employee). The foregoing provides an opportunity for employers to provide their employees with insurance policies having a wider coverage and available range of healthcare services.
For several years already, many organizations involving employers have drawn attention to the fact that the existing limit did not allow employers to offer insurance policies with wider coverage to their employees without an additional tax burden. After the amendments come into effect employers will be able to choose and offer a broader “basket of benefits” to their employees where the insurance premiums paid will not be subject to PIT and VSAOI, thus, providing an opportunity to significantly improve health and wellbeing of employees, as well as the competitiveness of the employer.