What is the TFR?
Employment agreements in Italy are generally governed by the terms and conditions of the relevant national collective labour agreement (CCNL) negotiated from time to time by the Italian government, the trade unions and employer organisations. These standard contracts make provision for a series of provisions applicable to the hire of individual employees in Italy.
Regardless of any contractual provision, the Italian Civil Code provides that on the termination, for whatever reason, of a contract of employment governed (expressly or by operation of law), the employee has the legal right to receive a leaving indemnity. This indemnity is calculated, first, by adding for each year of employment an amount which cannot in any case exceed the amount of the remuneration due for each year divided by 13.5 (or 7.41%).
The employer is obliged to accrue for the leaving indemnity throughout the period of the contract of employment, and revalue the reserve so created in line with the official inflation index at each year end. 0.5% to the accrual needs to be paid to the Italian Social Security Institute, INPS, by way of payment into the guarantee fund which steps in to pay an employee’s TFR in the event that the employer is unable to do so due to insolvency.
Under Italian GAAP the employer may simply accrue the amount due under Italian law. Under IFRS and other non Italian accounting standards it may be necessary to calculate the accrual on the basis of an actuarial forecast of the future liability to make payment of the TFR.
Unless the relevant collective employment agreement provides otherwise, for the purposes of calculating the TFR, the annual salary to be used as a base includes all amounts paid to the employee pursuant to the employment on a non-occasional basis and excluding any amount paid by way of reimbursement of expenses. From 1 May 2014, the gross annual salary taken as the basis for the calculation may not exceed Euro 240,000.
The employee termination indemnity is to be paid upon termination of the employment contract after deduction of any amount possibly owed by the employee (for instance advances of the employee termination indemnity itself) within 30 days from the date of the termination notice. In case of delay, due to causes not attributable to the employee, interest of 2% over the official discount rate must be paid at the expiration of this time limit.
The employee leaving indemnity, when paid out after termination of the employment relationship, is subject to a special taxation regime. This is a procedure designed to tax the amount received at an average rate over the period of employment rather than the employee’s marginal rate for the year of receipt. The termination indemnity received does not form part of remuneration for social security purposes.
Following a series of reforms over recent years, employees and business have a number of options over the simple accrual of the amount due and payment to the employee on termination.
Payment of TFR into pension fund
As mentioned above, the TFR to be accrued by the employer severance indemnities set aside remains in the company’s coffers. In January 2007, with the entry into force of Legislative Decree 252/2005, certain employees were given the choice of requesting or requiring their employer to pay the amount accrued into allocating it to INPS or a qualifying regulated pension scheme.
This is a personal choice and depends on an evaluation of a number of criteria, such as an assessment of the solvency of the employer and , for contributions to occupational or private sector pension schemes, the possibility of a higher yield on sums invested, compared to the annual inflation uplift, security of the funds and taxation.
TFR in the paycheck
The 2015 Stability Law 2015 provided for the possibility for employees in the private sector to obtain an advance payment of TFR on a monthly basis (ie. the TFR due is paid in a monthly instalment via payroll). This is obviously a personal assessment, with calculations to be made individually, taking into account the need to have an amount immediately available (in essence, a higher salary), in place of a fund which will be made available on termination of the employment at some date in the future or allocated to a supplementary pension fund.
This option can also be exercised by employees who have previously chosen for their TFR to be paid into supplementary pension fund
The TFR paid via the payroll is taxed according to the ordinary income tax scale rates and therefore at potentially a higher amount that the rate applicable to TFR paid out on termination of the employment.
Employees need to have been hired for at least six months before they can request the payment of the TFR via the payroll. The amount paid out cannot exceed 70% of the total TFR due (including up to 75% of any prior year revaluations).
Agricultural workers, domestic workers, and workers of companies subject to insolvency or mass redundancy proceedings may not make this application. Workers who work in production units in extraordinary redundancy fund or in derogation.
In certain cases it is possible to obtain an advance on the accrued severance indemnity. The scope in which it is possible is defined by the regulations (art. 2120 of the Italian Civil Code), so that the amounts received as an advance can never exceed, overall, 75% of the total payments. The general requirements to require an advance of TFR are:
The terms of a CCNL may, however, provide for more favourable rules. The applicable CCNL may establish priority criteria for the acceptance of a requests for an advance payment of TFR In addition, an individual agreement between the company and the employee may make it possible to advance the employee severance indemnity to the worker even if the civil code or CCNL requirements are not met. Also an employer, may unilaterally decide to make an advance payment of severance indemnity even more than once during the course of the employment relationship.
The request for advance payment must be made in writing and must be justified by the need to cover:
a) health expenses for therapy and particular treatment recognized by the competent public health authorities;
b) the cost of purchase of the first house for the employee or his or her family, or extraordinary renovation of the residential property;
c) leave for voluntary absence from work due to maternity, training and continuing education, including company training.
Any amount paid out by way of advance is subject to the usual income tax treatment applicable to TFR.