I.P. Flexem ter – Oulu 2007

Flexibility of the

fringe benefits in the

European Union

Sylvana Janssen (the Netherlands)

Asta Benetyte (Lithuania)

Lina Pileicikaite (Lithuania)

Brigitte König (Germany)

Evelyne Van Dyck (Belgium)

Anna Puigdecanet (Spain)

Cecilia Orlandini (Italy)

Michele Bazzi (Italy)

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3

1. INTRODUCTION .......................................................................................................................... 5

2. DEFINITION ................................................................................................................................. 6

3. CURRENT SITUATION .............................................................................................................. 7

3. 1 Similarities ............................................................................................................................... 7

3.1.1 The wage calculation .......................................................................................................... 7

3.1.2 The role of law concerning fringe benefits ....................................................................... 10

3.1.2 Labour agreements ............................................................................................................ 10

3.1.3 Common types of fringe benefits ...................................................................................... 11

3.1.3.1 Monetary benefits ...................................................................................................... 12

3.1.3.2 Non-cash fringe benefits ............................................................................................ 12

3.1.3.3 Insurance benefits ...................................................................................................... 12

3.1.3.4 Benefits in form of spare time .................................................................................... 13

3.2 Exeptions ................................................................................................................................. 13

3.2.1 Minimum wages ................................................................................................................ 13

3.2.2 Taxation ............................................................................................................................ 14

3.2.3 Cafeteria systems .............................................................................................................. 16

3.3 Economical and sociological data ......................................................................................... 17

3.3.1 Structure of labour costs as % of total costs ..................................................................... 18

3.3.2 The role of fringe benefits in dependency of economic and social environment ............. 20

3.4 Consequences .......................................................................................................................... 21

3.4.1 Pros and cons for the employees ....................................................................................... 22

3.4.2 Pros and cons for the employers ....................................................................................... 23

3.4.2.1 Loyalty and infrequent turnover ................................................................................ 23

3.4.2.2 Public image of the company ..................................................................................... 23

3.4.2.3 Tax reductions ............................................................................................................ 24

3.4.2.3 Cons: administration costs ......................................................................................... 24

3.4.3 Pros and cons for the state................................................................................................. 25

4. RECOMMENDATIONS ............................................................................................................. 25

4.1 Do’s for practical implementation ........................................................................................ 25

4.1.1 How to implement the green paper ................................................................................... 25

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4.1.2 Simplify and uniform the taxation system ........................................................................ 26

4.1.3 A common criteria for the minimum wage ....................................................................... 26

4.1.3 A solution for the gap between men and women and the benefits concerning women .... 27

4.1.4 Cafeteria-System ............................................................................................................... 30

4.2 Don’t’s for practical implementation ................................................................................... 30

4.2.1 Don´t overrule! Leave the States the space for ruling in case of economic differences. .. 30

4.2.2 Balance between flexibility and security .......................................................................... 31

4.3 Coherent synthesis ................................................................................................................. 31

SOURCES ......................................................................................................................................... 32

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1. INTRODUCTION

The current social, economic and legal situation in European Union is shaped through

globalization, international competition and technological advances. A growing and strong market

pressure forces companies to grasp all current and possible opportunities to stay competitive. That

means – the employers are forced to rethink their plans and programmes for the Human Resources

Departments in order to keep their employees satisfied with the current job position.

The kind of remuneration has a serious influence on success and performance of an

enterprise. The wish to use the potentials of employees optimally and to raise the productiveness by

motivation and incentives are the starting point of many considerations about salary systems. With

such a perception it is not astonishing that remuneration systems are demanded which are

responsive also to the requirements of the employee.

In our paper we will try to give a view on how fringe benefits are regulated in the

different Member States of the E.U. (Spain, Belgium, Germany, Lithuania, the Netherlands and

Italy) by showing differences and similarities and trying to suggest some recommendations and

ways out to solve problems concerning this topic. We are going to analyse legal, economic and

social aspects of the fringe benefits and the way they influence employees, employers and States.

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2. DEFINITION

Flexibility is the popular term for the ability to easily bend an object or the ability to

adapt to different circumstances.1 The origin is the Latin word “flectere”. But even though a general

definition could be found, the interpretation can differ according to the cultural, political and

economical background. In addition to that possible different understanding of the word

“flexibility”, the point of view plays a crucial role. On one hand it could be the possibility to react

in a fast way on changing circumstances, but it could also be seen as unstableness. So when we talk

about flexibility several points of view have to be taken in account.

Employee benefits and (especially in British English) benefits in kind (also called

fringe benefits, perquisites, or perks) are various non-wage compensations provided to employees in

addition to their normal wages or salaries. Where an employee exchanges (cash) wages for some

other form of benefit, this is generally referred to as a 'salary sacrifice' arrangement. In most

countries, most kinds of employee benefits are taxable to at least some degree.

The term fringe benefit has blown over to continental Europe from the Anglo-Saxon

countries. In countries such as the United States employee benefits or fringe benefits are a clearly

established term while in Europe it is quite different, because there is nearly no legal regulation of

fringe benefits. It is about „employee advantages‟ that the employee borrows from the work relation

with the employer. In this case there can be made a socio-economic distinction between traditional

wage and other forms of wage.

Fringe benefits can also include, but are not limited to the following: company cars,

mobile phones and computers, cheap loans, meal cheques, group insurance (health, dental, life etc.),

income protection, retirement benefits, daycare, extra vacations, stock options, funding of

education. There is no fixed distribution of fringe benefits. They could be grouped according to

fiscal treatment, according to the working position of the employee or according to the provided

service, right or privilege. Due to the huge variety of different finge benefits, in this paper fringe

benefits are classified according to the provided right. By that, similar benefits of every discussed

country could be summarised. Otherwise repetitions could not be avoided. For example by

classifying fringe benefits according to taxation, the same benefits would have to be mentioned at

different places, because very often there are different taxation regulations concerning the same

fringe benefit in every country. So for this paper it is useful to classify fringe benefits in the

following four groups:

1 http://en.wikipedia.org/wiki/Flexibility

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Monetary benefits

Insurance benefits

Benefits in form of spare time

Non-cash benefits

One possibility to combine fringe benefits in a flexible way is to offer them in the

context of a so-called “cafeteria-system”. In some countries (i.e. the Netherlands, Germany and

Belgium) such a cafeteria system, which has also flown over from the United States, is already

used. With this concept of flexible payment organization the employee receives the possibility to

add together parts of his salary individually from single components offered by the company.

Finally, we tried to find a common and general definition of fringe benefits and we

concluded that a fringe benefit is: a form of remuneration offered by the employer not strictly

connected to the employee’s individual tasks. Fringe benefits can be regulated on a national,

collective, company and/or individual level.

3. CURRENT SITUATION

3. 1 Similarities

3.1.1 The wage calculation

In first place, a wage is an employment benefit due from the company to the

employee, which is an absolutely necessary element in every work contract, thus it is always an

onerous contract. It is very existence explains the peculiarity of profiting from work, which is a

characteristic of any working relationship. The worker accepts this peculiarity by offering the

benefit of his own work, for which he or she is compensated with a wage.

In every Member State of the European Union the calculation of the wages are similar. Every

country has to pay social contributions and taxes on their wages. The social contributions the

employee has to pay are the highest in Germany (approximately 19%) and the lowest in Lithuania

(approximately 3%) but in a lot of countries the amount depends on the profession. The social

contributions the employer has to pay are in most countries quite high but those contributions often

depend on the type of work the employees do. The problem in a lot of the countries is that the total

cost of wages is too high.

In the first place, the function of a wage as a form of assistance has also served as the

basis for the idea of the "family wage", taking into account not only the amount of work carried out

but also the family responsibilities of the worker, for which he or she has the right to an extra

allowance. We can found this idea in many international documents, such as the Universal

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Declaration of Human Rights, the Economic, Social and Cultural Rights Pact and in the European

Carter. However, it is true that the legal rules in force to control wages completely disregard the

idea of the minimum wage.

On the other hand, there is still a gap between payments towards women and man in

most countries although there are several Declarations or Directives that describe that you can not

discriminate on the grounds of sex. ILO Convention number 100, European Social Charter, article

119 of the EEC Treaty and Directive 75/117 EEC.

Title V of the Economic Reorientation Act of August 4, 1978 comprises the

implementation of the EEC Directive of February 9, 1976 on equal treatment for men and women

as regards access to employment, promotion, vocational training and employment conditions.

Title V of the Act reads as follows: "Equal treatment for men and women as regards employment

conditions, access to employment, vocational training, promotion and access to self-employment";

it is therefore clearly based on the European provisions. It has to be taken in conjunction with

Article 119 of the Treaty of Rome and the EEC Directive of February 10, 1975 on equal pay for

men and women, and is also a step forward along the difficult road to more equal treatment for men

and women. We can conclude that in case of fringe benefits men and women also need to be treated

equally.

For the different types of wage, we can distinguish: wage per unit of time, per unit of

work or both, wage in cash and payment in kind and wages based on the professional category and

on the job classification.

With regard to the former, a wage is calculated per unit of time when its amount is

related to the amount of time taken to complete the work, irrespective of the results or amount of

work rendered. Obviously, this fact does not remove the employee‟s obligation to complete the

work; the fact that the wage is determined by calculating a measurement of time (by hour, day, etc)

does not interfere in any way whatsoever with the duty to perform, which falls contractually and

legally to the worker.

A wage is calculated per unit of work when the amount of payment is fixed depending

on the results, piecework, measurements of specific units or groups of units, irrespective of the time

taken. The contracted worker undertakes to complete a job in a predetermined period of time, and

this work will be considered finished when the task is completed.

Time is therefore important, fixing the period in which the work must be finished. The

execution of the job in less time than required is advantageous for the worker, as he has “saved”

time in completing the task. If management decides that the worker must continue working until the

predetermined allotted time is reached, he would have to compensate the employee for any

additional work at the fixed overtime rate.

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The system of incentives or bonuses is intended to compensate for the inconveniences

of doing piecework, based on the simple correlation between greater effort and higher pay. Given

this rudimentary technique of increasing production, which can cause worker exhaustion, even

leading to negative economic results, there are different methods to try to simplify the procedure

with bonuses linked to production. To that effect, variable bonuses have been created that, to avoid

worker exhaustion, increase to a maximum level, after which they start to decrease; differential

bonuses, non proportional, depending on different levels of production; penalisation when

minimum production is not achieved; the adoption of work measurement units, etc.

Bonuses can be collective (to groups, teams, etc) and individual. The latter have

experienced an increase recently, given modern business policies of “individualising” working

terms and conditions.

In a simplified way, we can say that in determining wages based on incentives or

production, there is a double calculation: one in relation to production at different levels (normal

and optimum) and the other in relation to the payment rates. Production is estimated through

complex technical calculations (time and motion studies, task evaluation, etc), establishing the

corresponding wage rates.

A mixed wage results from the combination of the previous systems (per time unit and

per unit of work). The most usual techniques for mixed wages are the tasks and the system of

bonuses or incentives.

Payment in kind (method agreed in ILO Convention number 95, includes benefits

other than money: electricity, water, subsistence, housing, etc.

Collective bargaining offers a wide range of examples of payment in kind: transport season tickets,

free parking, etc. Although they do not constitute payment in the strict sense, the worker can enjoy

certain benefits connected with work.

In any case, the Law expresses its preference for wages in cash, which is much more

exact and with less likelihood of fraud than payment in kind. Finally, there is a distinction between

classifying by professional category or by job evaluation, which is reflected in two wage types:

category wage, according to professional group or level, and job classification wage, based on an

evaluation of the job, taking into account its specific characteristics. It is also possible for workers

within the same professional category, despite the right to an equal wage, to receive different

wages, due to their respective jobs being graded differently.

While professional classification involves assigning a category, degree or level to a

worker, according to the function carried out, job classification depends on a highly complex

technical evaluation of the tasks of all the classifiable jobs.

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This evaluation includes the following:

Analysis and descriptions of the tasks involved for each job (“specifications”).

Assignment of points according to previous classification factors: physiological,

professional (initiatives, responsibilities, effort, supervision received or

undertaken, working conditions, etc).

Financial translation of classification scales, turning the points into their

monetary equivalent.

3.1.2 The role of law concerning fringe benefits

In most countries of the European Union there is no legal basis concerning the fringe

benefits. Although, employees receive from their employers some benefits, for example, if they

work at night or at the weekends, they receive a surplus. We cannot define these benefits as fringe

benefits, we can better define these benefits as an advantage on your wage, because it fixed by law

and a right for all the workers. These benefits for weekend work are mostly regulated in laws what

we can not say about the “real” fringe benefits. Although the fringe benefits can be fixed in

collective labour agreements. It means that the employer can choose if he wants to use it or not.

In some countries, like Spain, for example the employee has the right to ask for the

benefit if he had received it before for a several times. In Belgium the law also describes that if the

employer gives a fringe benefit several times, he has to do it „all‟ the time, because custom is one of

the legal sources in Belgium. In Germany, they have the so-called “operational practice”2 which is

developed by the German dispensation of justice. An operational practice is the regular repetition of

a certain behavior of the employer, from which the employees can conclude that the benefit or the

privilege is granted on a continuing basis. By the operational practice become voluntary payments

of the employer obliged ones from which the employer can not avoid any more unilaterally.

Condition is a triple repetition of a certain behavior of the employer without reserving the right to

cancel it.

3.1.2 Labour agreements

In most of the countries, companies use labour agreements to define the rights

between the employers and the employees. We all know collective labour agreements, which are

binding for a whole branch.

2 „German Betriebliche Ûbung‟

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On the other hand, companies can also conclude a company agreement which is only

binding for the people who work in that certain company. This company agreements can differ from

the collective labour agreements, but only in a positive way, otherwise they are invalid.

A high number of collective labour agreements negotiated between 1995-1997

introduced more flexibility in the use of certain forms of temporary contracts (for manual work,

services and casual work), moving away from the aim enshrined in the 1994 legal form.

Labour agreements for employees are very important. That gives them legal rights

and power against the employer in case of problems. This, of course, also applies for the employer.

It is important to lay down the agreed terms in writing so no misunderstanding or conflicts between

employee and employer will occur.

3.1.3 Common types of fringe benefits

In the following table we will give a country specific approach concerning the

understanding of fringe benefits.

Belgium Germany Italy Lithuania Netherlands Spain

Company cars X X X X

Mobile phones X X X X

Laptop X X X X

Vouchers X X X X X

Hospitalisation

insurance X X X

Additional pension X X X X X

Life insurance X X

Gifts X X X X X X

Bonus X X X X

Travel expenses X X X X X

Cheap Loans X X X

Child care X X X

Saving schemes X X X X

Additional holidays X X X

Holiday expenses X X X

Study arrangements /

training X X X

Flexible working time X X X X

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A fixed salary is just a fixed salary. The base salary must be good, but the fringe

benefits complete it. If we only focus on the salary, the employee misses great opportunities. Also,

it could be a fiscal advantage for the employer.

Employee benefits are the conditions on which you perform your work. For

example, the height of your salary, working hours, payment during pauses, travel expenses

compensation, particular or exceptional leave, days off, pension structure or ATV (shortening of

working hours). Employers try to bind their employees with various fringe benefits and extra‟s.

3.1.3.1 Monetary benefits

Monetary benefits are the variable part of the wage, related to the performance of the

employees and given in the form of money. They are given “una tantum”, therefore they are not

formally included in the retribution of the worker. Examples of the monetary fringe benefits are the

gifts, usually given for special occasion (i.e. Christmas or a promotion), bonuses, related to the

performances of the worker, travel expenses or childcare expenses paid by the company, interested-

free and cheap loans, saving schemes.

3.1.3.2 Non-cash fringe benefits

Non-cash fringe benefits are not paid in money, but in kind.There are various non-cash

benefits which could be provided by the employer. The most common non-cash fringe benefits are

company cars, mobile phones, laptops and different kinds of vouchers.

The employee usually gets a company car, a mobile phone or a laptop in order to do

his job, but it can also become a fringe benefit if the employee can use it as well for a private

purpose. The only exception are Belgium and Spain, because the employee has to pay taxes and so

it is not regarded as a fringe benefit.

The group of possible vouchers could be very huge. It can range from discounts on

companies‟ goods till meal cheques. The use of several kinds of vouchers is very different in the

discussed countries. For example in Italy and Belgium meal cheques are very often used. In

Germany meal cheques are not used very often. In contrary Spain and Lithuania have no meal

cheques at all.

3.1.3.3 Insurance benefits

Insurance benefits could be understood as a duty fro the employer and as a voluntary

fringe benefit. In most countries such insurance benefits as hospitalisation, pensions are set by law

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and the employer and the employee have to pay certain amount of money as contributions. It is not

an issue of paying or not paying the contributions, so these benefits are seen more as duty to secure

the minimum of fringe benefits for the employee. If employer wishes he could offer additional

pension, life insurance or hospitalisation as the fringe benefits – that means, e.g., if the employee is

ill, he/she is getting both the services provided by the hospital depending on how much

contributions was paid by him/her and the employer and he/she could get the additional services if

the employer it offered as a fringe benefit, e.g., the employee can be hospitalised not in the State

hospital, but in the private one. The same happens with additional pensions. Life insurances are an

exception, because the employee are not provided with the life insurance as a must, the person can

have life insurances if he decides and pay contributions by themselves. Some companies, and

especially this is very popular in Lithuania, offer it as a good incentive for the employee. Additional

pensions and hospitalisation are very popular in all the Member States and used very often as well.

3.1.3.4 Benefits in form of spare time

The time becomes more and more important factor for the employees. The benefits in

form of spare time mostly include flexible working hours, flexible schedule and extra holidays.

Those benefits could be a strong reason for choosing the particular work place concerning that

nowadays we have a lot of employees who work and study at the same time, have two or more jobs.

Concerning women with children, the flexible working time may restore the possibility for them to

work half of the day or several hours and the rest of the time care look after their children. This

assures the situation that the women, quite weak part in labour relations, are not the outsiders and

left out from the labour market. The extra holidays could be given due to marriage or studies which

are very important as well. What is more, those who study, can make their schedule depending on

their study schedule. The fringe benefits in form of spare time are important for some particular

groups of employees. Those benefits are recognized and used in most Member States, though in

some countries extra holidays are not concerned as the fringe benefits, but only as a right of the

employee.

3.2 Exeptions

3.2.1 Minimum wages

The minimum wage leads to the fact that every employer can be guaranteed a certain wage. It is a

kind of protection for the employee because the employer is obliged to pay that legal determined

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wage in every case. He can not pay less then that. It takes care of the people that are not so strong

on the labour market. 3

The next table shows that the gross minimum wage differs per country:

Country euros Date effective

Belgium 1,258.18 01.06.2006

Lithuania 174.00 01.01.2007

Luxembourg 1,570.28 01.01.2007

Moldova 34.00 01.02.2007

the Netherlands 1,300.80 01.02.2007

Spain 570.00 01.01.2007

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In Europe, the statutory minimum wage rates range from just 32 euros a month in the

Russian Federation and Moldova to 1,570 euros a month in Luxembourg. In all but a handful of

countries, these rates provide a standard of living that is close to, or even below, subsistence levels.

As far as our countries are concerned, we found that some of them (Germany and

Italy) do not operate statutory minimum rates, but nevertheless they have minimum rates set

through binding sectorial collective agreements that jointly cover a high proportion of the working

population. However, in Italy the amount of the remuneration must respect the provision of 36 of

the Constitution that provides that workers are entitled to remuneration commensurate with the

quantity and quality of their work and in any case sufficient to ensure to them and their families a

free and decent existence.

Other countries ruled minimum wages in their laws, starting from Lithuanian‟s 174

euros per month to 1,300.80 euros per month given in the Netherlands. Anyway, in order to have a

realistic point of view, we should compare these figures with the standard of living for every

country. Therefore, for instance, the Lithuanian‟s minimum wage does not permit a decent

existence, in contrary to the minimum wage of Belgium and the Netherlands.

3.2.2 Taxation

Taxation and social security systems are very different in the Member States of the

European Union. This is the same situation when we talk about income taxation and social security

contributions concerning fringe benefits. Even when looking only at one country, the fringe benefits

3http://www.pvda.nl/renderer.do/menuId/200017329/sf/37942/returnPage/37942/itemId/10997/realItemId/10997/pageId

/37942/instanceId/37937/ 4 http://www.fedee.com/minwage.html

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are treated differently concerning taxation and social security contributions. In all discussed

countries except Spain and Belgium, there are fringe benefits which are taxed as normal income and

other ones which are completely free of tax and contributions to the social security system.

Normal income taxation rate

Most offered monetary fringe benefits are treated like normal income in the Netherlands, Germany,

Lithuania and Italy. That means, they are taxed with the normal income taxation rate and in addition

contributions to social security system have to be paid. Examples are holiday bonuses and 13th

salary. But in contrary to that, in Spain and Belgium benefits which have to be taxed are not

recognized as fringe benefits, but as extra advantage on the salary. This means that for those

countries all so-called fringe benefits have to be tax-free as an obligatory condition for the term

“fringe benefit”.

Limits

There are several non-cash fringe benefits which are tax-free till a certain amount. If the value of

the fringe benefit exceeds this amount, the benefit has to be taxed like normal income and also

social security contributions have to be paid. Thereby there is no uniform limit amount; it depends

on the kind of fringe benefit. For example employee discounts or different kinds of vouchers like

meal cheques are free of taxes and social security contributions till a certain amount. Such limits

exist in every discussed country. But there are huge differences between the amount of limits and

the concerned fringe benefits. The only exception is Lithuania. There such limits exist only in one

example: employees can win tax-free prices in contests organized by the employer when the value

of the prize does not exceed a certain amount. There are no other tax-free limits in Lithuania.

Tax-free fringe benefits

There are only few fringe benefits in the Netherlands, Germany, Lithuania and Italy which are free

of income taxation and social security contributions. In Germany and Lithuania are these for

example the costs for further education paid by the employer. An example for tax-free fringe benefit

in Italy and the Netherlands is the offering of lunch vouchers or canteen meals. As above already

mentioned for Belgium and Spain all fringe benefits are tax-free by definition.

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Main principles about tax regulations concerning fringe benefits

Taxed like normal

income

Tax-free until certain

limits Tax-free

The Netherlands X X X

Italy X X

Belgium X

Germany X X X

Lithuania X X X

Spain X

So it can be recognized, that in every country there are various different regulations

about the taxation of fringe benefits. There is not only the differentiation between taxable and tax-

free benefits, but also many different limit amounts for various fringe benefits are given by taxation

acts. The main principles of taxation and social security contributions for fringe benefits are almost

the same, but every single fringe benefit is treated differently in every country. So you could not

say, that for example if one fringe benefit is tax-free in the Netherlands it is also tax-free in

Lithuania.

3.2.3 Cafeteria systems

Individualized pay systems offer employees some choice options to exchange

employment conditions for others. They are known under various labels. In the United States,

"flexible benefit plans" appears most commonly used presumably because pension schemes and

other "benefits" are common choice options. In Western Europe, where these conditions tend to be

arranged nationally in collective systems, "cafeteria approach" has been used in the United

Kingdom and "cafeteria systems" is common term in Germany, Belgium and the Netherlands.

The principle of cafeteria systems is simple. Employees are offered the right to

periodically, for instance once a year; exchange certain items within the agreed package of

employment conditions. Both sources and goals have a temporal and a financial dimension. The

special attraction of a cafeteria system is the possibility to increase the use of fringe benefits for the

employee, without the raise of labour costs for the company.

Reasoning from the basic trade-off between time and money, one can exchange time

for wages, and wages for time. In addition, there may be reasons to postpone the payment of wages

(for instance, for a pension) or days off (for instance, for sabbatical and extended leaves). National

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settings form the environment within which the adoption and the design, and therewith also the use,

of cafeteria systems take place. Some choice options may not be needed or may not be feasible

depending on national circumstances.

As far as our countries are concerned, Germany has a very well organized cafeteria

system where it is regulated by law that firmly agreed salary cannot be substituted with other

achievements or be exchanged completely, while in Belgium and in the Netherlands only 3% of the

workers use cafeteria plans. Spain, Italy and Lithuania do not have a cafeteria system.

On the ground of the advantages of cafeteria plans the most important is the

possibility given to the employee to choose the contents of his own packet of benefits, so his

personal wishes are taken into account. Furthermore cafeteria plans can help to improve the quality

of the relation between an employer and his employees. A disadvantage in using cafeteria plans is

the fact that administration work and costs of the employer could increase.

3.3 Economical and sociological data

The economical and sociological data show the real situation concerning the payment

of fringe benefits in the discussed countries. As above mentioned, in every country almost the same

kinds of fringe benefits are known. But in using the fringe benefits many differences could be

recognized. This chapter should give an overview of the percentage of fringe benefits in gross

salary.

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3.3.1 Structure of labour costs as % of total costs

The following graphs show the differences concerning the use of fringe benefits in the discussed.

0 1 2 3 4 5 6 7 8 9

Belgium

Germany

Spain

Italy

Lithuania

Netherlands

EU

Collectively agreed, contractual and voluntary social security contributions in

percentage of total labour costs5

Additional payments to social security systems are very important because the hole in

social security systems is a great problem in society. So the social security provided by the state is

often not sufficient to cover all needs. Therefore the average of additional contributions provided by

the employer in European Union Countries is the highest of all mentioned fringe benefits with 5.10

%. But as it can be seen on the chart above, there are big differences between the discussed

countries. The Netherlands have highest amount of this fringe benefit. It is even above the average

of the European Union. In contrast to that, additional contributions to social security system are

very low. A possible reason for that could be that in Lithuania voluntary social security

contributions are a rather new thing and is not spread widely.

0 0,2 0,4 0,6 0,8 1 1,2

Belgium

Germany

Spain

Italy

Lithuania

Netherlands

EU

Vocational training in percentage of total labour costs

6

5 eurostat, structure of labour cost as % of total cost, 2004

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It could be recognized, that the Netherlands are also in the first place concerning

vocational training. Italy has the lowest rate. A possible reason could be that in Italy vocational

training is often not regarded as a fringe benefit.

0 0,1 0,2 0,3 0,4 0,5 0,6 0,7

Belgium

Germany

Spain

Italy

Lithuania

Netherlands

EU

Payments to employees’ savings schemes in percentage of total labour costs

2

The graph shows that payments to employees‟ savings schemes are especially in

Germany very famous. It could be explained by the fact, that this is a governmental promoted

program to generate assets of an employee. Thereby, payments to an employee‟s savings account

are promoted by law with an employee savings bonus. In the Netherlands in the year 2006 a new

regulation concerning payments to employees‟ savings schemes was adopted. That is the reason

why the number of contributions to savings schemes from the employers increased.

0 0,5 1 1,5 2 2,5

Belgium

Germany

Spain

Italy

Lithuania

Netherlands

EU

Wages and salaries in kind in percentage of total labour costs

7

6 eurostat, structure of labour cost as % of total cost, 2004

7 eurostat, structure of labour cost as % of total cost, 2004

20

As you can see, paying wages and salaries in kind is another very often used fringe

benefit in the discussed countries. Especially in Belgium it is used very often. Germany, Spain and

the Netherlands are almost on the same range.

In general it can be recognized, that the height of fringe benefits are connected with

the size of the company. The more employees a company has, the higher is the amout of payed

fringe benefits. This could be seen in the example of Germany.

Amount of fringe benefits in the gross wages in manufactoring sector after enterprise

dimensions in % in Germany8

3.3.2 The role of fringe benefits in dependency of economic and social environment

Demand and supply determine the price in an economic market. The bigger the supply

and the lower the demand is, the lower is the price. The lower the supply and the bigger the

demand, the higher is the price. This is a basic economic law. The labour market is also a market in

that sence. The demand and supply of work determine the hight of wages and salaries. So also the

amount of payed fringe benefits as a part of remuneration is influenced by the general market

situation. Therby the unemployment rate plays an important role as indicator. The development of

the number of unemployed could have an influence on wages and salaries.

8 Statistisches Bundesamt, Was kostet Arbeit in Deutschland?, 2004

0 2 4 6 8 10 12 14

1000 and more

employees

500 till 1000

employees

250 till 500

employees

50 till 250

employees

10 till 50 employees

21

7,2

7,4

7,6

7,8

8

8,2

8,4

8,6

8,8

9

9,2

2000 2001 2002 2003 2004 2005 2006

Unemployment rate of EU in percentage9

The lower the unemployment is, the more power have the employees in negotiating

the conditions of salary. This has also consequence for the paying of fringe benefits. The needs of

employees‟ become to the fore. Employers who provide more fringe benefits gain in attractiveness

on the labour market.

3.4 Consequences

No doubts, the fringe benefit plans represent both advantages and disadvantages for

the employer and the employee. There is no need to say that salary is not the only one incentive to

work or to choose to work at a particular company – the extra things such as the fringe benefit

plans, the company can suggest for their employees, are one of the most important factors in order

to keep all – level employees and to attract the new ones. The problem here is that the employers

and employees have widely divergent views on the appeal of a whole range of fringe benefits, and

the differences are wider now than they have been in years.10

We all know that the employee will be

satisfied only if he/she gets the exact fringe benefits he/she need personally.

9 eurostat: http://ec.europa.eu/eurostat

10 http://www.myoptionvalue.com/movschool/FAQ/StockOptionBasics

22

3.4.1 Pros and cons for the employees

As far as pros and cons of the employees are concerning, we can see that they are

quite common in all the countries we took into account. The first clear benefit for the employee is

the increasing of the economic security for the employee; although they do not consist on money,

the fringe benefits have an economic value and can improve the lifestyle of the worker with

facilities. So the fringe benefit is an element of satisfaction for the employee.

We debated if the use of fringe benefits could improve the economic security of the

employee: on one hand we can say that fringe benefits can improve his economic condition and

therefore help him in saving money, but on the other hand if he receives benefits that he does not

need (instead of money) it is obvious that his economic security will decrease.

In short terms, the employee can also take advantage from the tax break caused by

the use of the fringe benefits, instead of money wage. On the other hand, on the long terms, this

could be dangerous to his pension, because the employer would have paid for him less contributions

to the social security system.

Various HRM-related goals have been advanced as competitive reasons to use fringe

benefits. Barringer and Milkovich (1998) point to the possibility of using it to increase one's image

and attractiveness on the labour market so that organizations are in a better position than their

competitors to recruit and retain scarce personnel. Other competitive reasons includes improving

employee motivation, enlarging employee satisfaction with their compensation package, stimulating

employees' knowledge about their own employment conditions and adapting labour capacity to the

demand for labour. Concerns about being an attractive employer and thus a competitive labour

market partner became very strong in the late 1990s. IT-companies started pursuing a range of

tactics to recruit and retain new staff, and the use of fringe benefits was among these measures.

Fringe benefits approach a lot different people. This is good for the diversity of an organization.

Under diversity their will be suppurated four domains. Age, Race, Gender and Disability.

Fringe benefits provide opportunities for an ageing workforce.

Fringe benefits are also in advance for people from different races. Benefits such as sabbatical

leave provide for them that they can visit their families in other countries. They can also save for

days off, for example special holidays they have in their culture.

There are a lot of people with a disability or a chronic ailment. Fringe benefits can

tribute with increasing the labour force of disabled people. For example teleworking and adjusted

working hours. Within gender most men prefer different fringe benefits than women. Men choose

23

more often for material fringe benefits, like bonuses and lease cars, women for flexibility.

Companies adapt to this through to support working mothers with flexible working hours. 11

3.4.2 Pros and cons for the employers

3.4.2.1 Loyalty and infrequent turnover

The advantages the employer gets by offering the fringe benefits are that the employer

could be secure about loyalty and infrequent turnover of the employees. In order to offer to buy

shares for the employees the activity of the company should be completely transparent and the

employees should have to believe that the shares of the company are liquid or soon will be. It is not

always easy to do for the employer, especially if the company is not big or just started its activity or

is not competitive on the market. If the employees have become the shareholders at the company

they work as well, they will be concerned in working more, more responsible and reaching the best

results as they can in order to increase the value of the shares they have and get more dividends.

This creates highly motivated, harmonious and permanent team and positive atmosphere. This

results in successful company‟s activity and financial indexes – growing profit, developing activity,

annual turnover, more partners and clients. Financial investors will be always satisfied seeing the

prosperous company and it will come up to their expectations. The shareholders can make the

decisions important for the company – the executives are not anymore that much independent. The

fringe benefits help to attract highly self – determined and well prepared specialists.

If the employees start work more and with more responsibility, the employer for the

purpose to improve company‟s results doesn‟t need to hire more employees – that is, the employer

needs less labour force and doesn‟t need to create additional workplaces. The infrequent turnover of

the employees results in better labour relations.

3.4.2.2 Public image of the company

As we have discussed earlier, the wealthier the State is, the higher the employment

rate is and this means that employers can focus on fringe benefit plans and offer remunerations for

the workers. There is no need to say that the company suggesting those fringe benefits the employee

rates high, it makes more positive and more attractive image of the company for the future

employees.

The workers rate the fringe benefits very high. Those fringe benefits which are visible

are much more important for the employees than those which they might think will never use, e.g.

11

Research from Robert Half Finance & Accounting

http://www.managersonline.nl/index.php?section=article&action=show&id=5709&mid=51

24

free air travel ticket, casino membership card etc. In all cases the employers (or their Human

Resource Departments) have to analyze the work atmosphere and the demands of the employees. It

is significantly important to distinguish what the demands are of different level employees – often

the demands of manager won‟t be same as the demands of the company‟s executive. The employers

will never be successful in keeping the employees if they suggest the fringe benefits which are not

that much important for their employees. In other words, supply should satisfy demand.

3.4.2.3 Tax reductions

Coming to the company level the fringe benefits are very effective way for small

businesses to maximize tax savings – to find ways to convert fixed personal expenses into allowable

business expenses, e.g., many traders convert some of their home expenses into deductible home -

office expenses. At - home traders also take business depreciation on furniture, fixtures and

equipment. Fringe benefit plans provide additional opportunities to convert more family expenses

into business deductions.

3.4.2.3 Cons: administration costs

Everybody who ever faced with the system of fringe benefit plans while being an

employee knows what a difficult system it is – first of all, there is always a lack of information what

fringe benefits the employee could use or belong to her/him.The system how the fringe benefits are

taxed is very complicated as well – sometimes it is even impossible for the employer which has no

legal background to understand how the fringe benefits are taxed. There should be some advisers at

the company or special agency consulting the employees on how the fringe benefits are taxed. The

reason why we don‟t know informative system in the companies on the fringe benefits are that it

costs and often the employers are trying to save the money and not invest the money that is not

directly related with bussiness the company makes.

Lithuania has the so called thirteenth salary system and if we are talking about

thirteenth salary system, it could be harmful if the situation of company gets worse and the

company can‟t pay thirteenth salary anymore. The employees feel that they are not appreciated

(even if we will take into account that the amount of thirteenth salary doesn‟t depend of the

employee‟s results, it is just the same sum of money paid for all employees) and leave the company,

or at least - they won‟t be anymore interested in working at the company and will start looking for

the other job. The employers should think what system they should use – „‟thirteenth salary‟‟ or

bonuses.

25

If the employees start work more and with more responsibility, the employer for the

purpose to improve company‟s results doesn‟t need to hire more employees – that is, the employer

needs less labour force and doesn‟t need to create additional workplaces. The infrequent turnover of

the employees results in better labour relations.

3.4.3 Pros and cons for the state

Due to the fact that some fringe benefits may be excluded from the employee‟s gross

income, this could represent damage for the State, since it will receive a smaller amount of money

from its citizens. For example in Belgium there is a big hole in the social security system, which

misses 4.5 up to 10 billion euro per year. Besides a government intervention and forms of

alternative financing, the budget of the social security comes for the largest part from the

contributions of employees (13.07% of the wage) and employers (24.9% on top of the wage).

On the other hand, we can see that there could be a link between the delivery of the fringe benefits

and the economic wellness of the State itself; in a State where the economic wellness is high,

probably the employers are tented to give more fringe benefits to their employees.

4. RECOMMENDATIONS

4.1 Do’s for practical implementation

4.1.1 How to implement the green paper

While we are talking about flexibility, it should not be applied to all issues we

discussed in the paper. The flexibility is a welcome issue, but we should rely on the certainty – that

is – to set the minimum wage for the future certainty is one of the most important things. Knowing

the minimum wage for the employees means the social and economical security – the employee can

plan his/her income and be sure about his financial situation. We should safeguard this and clear out

the things which are in a need to flexible and can be changed according to different situations.

26

4.1.2 Simplify and uniform the taxation system

Taxation is necessary to serve the common needs of citizens, which cannot be served

better by the free market. So the aim is not to abolish taxation on fringe benefits at all, but to make

regulations concerning that subject more tranparent and uniform as far as possible.

As above mentioned, there are very complex regulations about contributions to social

security systems and taxation systems concerning fringe benefits in all discussed Member States.

Priciples are almost the same, but when looking at concrete fringe benefits, all countries have their

own regulations. So it is almost impossible for the employee, but also for the employer to overview

all these different regulations. There is a need to simplify the taxation system to make a clearly view

on the value of the earned salary and given fringe benefits. It is particularly important for

employees who work in different Member States. For them it is even more difficult to overview all

the regulations.

So we suggest to simplify income tax legislation in order to create more transparency,

efficiency and equity. Simplifying the system, helps to make the execution of tax laws easier for

citizens, businesses and the administration. Every employee should be treated fairly and

proportionately concerning taxation. In addition, the basis imposing the tax should be uniform. That

means that there must be a common understanding of what fringe benefits are in the European

Union.

But due of the diversity of the economical background of every single country it is not

the aim to create only one general taxation system. The aim is to make every country regulation

clearer and more comparable for all employees and employers. The EU could coordinate basic

decisions, but every country has to reformate its system by itself.

4.1.3 A common criteria for the minimum wage

A fundamental instrument for safeguarding a decent remuneration of work is the setting of

minimum wages. ILO Convention No. 131 statues the importance of minimum wages: in the view

of the ILO all states should introduce a national system of minimum wages to protect wage earners

against inappropriately low wages. Depending on the general social and economic conditions in

each country, the level of the minimum wage should be determined “in agreement or after full

consultation with the representative organisations of employers and workers concerned.”

As we introduced before, national rules guaranteeing minimum wages are in wide

application throughout Europe. In the majority of the European States there exist statutory

minimum wages that lay down a specific rate of minimum wage applicable across all sectors. In

other countries minimum wages are laid down exclusively by collective agreements, some of which

27

have been officially declared generally binding. In yet other countries a mixed model exists

whereby minimum wages are governed in some sectors by collective agreements and in others by

law.

What we think about this situation is that there is a need for a European minimum

wage policy. The aim of such a policy would be to halt the spread of poverty-level wages and the

preventing the menace of cross-border wage dumping. In this way, the policy would make an

important contribution to implementing the principle of "equal pay for equal work at the same

place". Furthermore, a European minimum wage policy would also send out positive signals for

other social objectives, such as narrowing the wage differential between men and women and

improving the quality and productivity of work.

In order to implement the right to "decent pay" enshrined in the EU Social Charter, in

the early 1990s also the European Commission recognised the need for a European minimum wage

policy. In a statement dating from 1993, the Commission urged the EU member states to take

appropriate measures to ensure that the right to a decent remuneration for work is protected.

Accordingly, the proposal for a European minimum wage policy would essentially

comprise laying down Europe-wide specific common objectives and criteria on the basis of which

national minimum wage policy can be coordinated with one another because a one European

minimum wage, the same for every State is impossible to propose, both for the flexibility needs of

the employers and for the damages that he would cause to the uprising countries. Thus, the purpose

cannot be to lay down a uniform level of minimum wage across Europe, given the continuing

existence of widely differing levels of economic development in Europe and the associated huge

wage differentials. Instead, the aim must be to lay down a specific minimum norm in each country

for the lowest wage groups representing a specific ratio of the national wage system. As a target

figure, all European countries should set their sights on a national minimum wage norm of at least

60% of the average national wage. As a short-term interim target, all countries should introduce a

minimum norm corresponding to 50% of the average national wage. In this way the need of the

employer of flexibility and the need of the employees of social security could be both satisfied.

4.1.3 A solution for the gap between men and women and the benefits concerning women

As we already mentioned in the part of the wage calculation men and women need to

be treated equally. But there is still a gap between payments towards women and men in most

28

Member States of the European Union. Although there are several Declarations or Directives12

that

describe that you can not discriminate on the grounds of sex, this problem still exists nowadays.

In the European Commission the wage gap is one of the common problems that still

remain discussed very often. In summary the main factors contributing to the gender pay gap are:

• Historical and cultural factors that impact on the setting of wages and a lack of

transparent pay systems;

• Discrimination in pay setting;

• The undervaluing of women‟s work and skills resulting in a culture of low pay;

• Women work shorter working hours and are the majority of part-time workers;

• The unequal sharing of work and family responsibilities coupled with a lack of facilities

for child care and elder care, which means that women are often forced to exit the labour

market or work shorter hours than men;

• A lack of priority given to funding in the public sector to close the gender wage gap.

Next to the equal treatment of payment of salary towards women and men we also

need to consider that both need to be treated also equally on fringe benefits, because fringe benefits

depend often on the amount of the salary.

There had been already a lot of instruments developed, actions were launched,

projects had been set up (2004 EPSU/PSI Survey)13

to stop the wage gap. Although they did not

make a lot of progress. Perhaps, because the conviction to do something about it was still

insufficiently present. There is in any case an urgent need to an accelerated overtaking move.

The gender pay gap remains on average 16% in the EU and there has been little

change in recent years. The table beneath shows the pay gap between women and men in EU

Member States and acceding countries in 1995 and 2001. Overall there is a general narrowing of the

gender wage gap and in particular in the accession countries there is evidence a gradual reduction of

the gender wage gap in all countries other than the Czech Republic. During this time the gender pay

gap also widened in Greece, Sweden, Spain, France and Portugal.

However, there is a lower pay gap in the public sector (at 12%) compared to the

private sector (21%). In the public sector the gender wage gap is lowest in Spain (3%), Greece (9%)

and strikingly in Portugal (17%), and highest in Finland (25%), Germany (20%) and the

Netherlands (19%)14

. Data for Finland suggests that there is a larger gender wage gap in the public

sector than the private sector. The EPSU/PSI survey responses from Finland suggest that the gender

wage gap is 19% in central government and 16% in local government.

12

Title V of the Economic reorientation Act of August 4, 1978; EEC Directive of February 9, 1976. and Article 119 of

the Treaty of Rome and EEC Directive of February 10, 1975. 13

http://www.ei-ie.org/payequity/EN/docs/PSI/PSI-EPSU%20Equal%20pay%20survey.pdf 14

European Commission, 2004b

29

Generally the gender pay gap is smaller in the public sector than the private sector

and data from the ECHP suggest it is only the Netherlands where the gender pay gap is larger in the

public than the private sector.15

16

As a solution to stop this problem we thought it would be a good idea to call in the

labour inspection, which is known in several Member States in the European Union. We think

labour inspection can play an important role to fight against this problem concerning equal payment

towards men and women.

We think the labour inspection should control the companies on the wage gap and if they notice that

the employer does not treat his employees equally, they should fine those companies.

The second possible solution to fight against the gender pay gap is maybe that

instead of giving women also material fringe benefits (for example: company car,…), to give them

more the possibility of family “benefits” (child care, …) . In that way women will not feel forced

again to exit the labour market or work shorter hours than men.

15

Rubery, Grimshaw and Figueiredo, 2002 16

www.vrouwenloonwijzer.be

30

4.1.4 Cafeteria-System

One possibility to offer benefits in a flexible way is to offer them in the context of a

cafeteria-system. This system is not very widespread in Europe till now, so the question arises if it

could be usefull to enlarge its use. As above shown, there are various different advantages in

arranging a cafeteria-plan.

Especially to solve the demographic problem and unemployment problems due to the

wish to have a family, it is necessary to provide a possibility for employees to combine family life

and professional life in a satisfying way. Such a possibility could be the cafeteria-system, because

by that the employee can choose benefits according to his needs.

But often an higher amount of administration cost occur by implementing a cafeteria

system. A possible solution for this problem could be to close together groups of benefits on the

basis of the needs of groups of employees, i.e. younger workers with children may benefit if their

employers apply some particular fringe benefits such as flex – time options or enhanced career

development which are very important for such kind of employees. But for large numbers of

employees, who have perhaps lived through layoffs and sharp cuts in benefits, those kinds of

goodies are less attractive than cash. In general, younger employers are more likely to care about

fringe benefits like child care subsidies and generous leave policies, while older workers might

focus almost solely on health and retirement benefits. By grouping fringe benefits administration

cost could be held low and the advantage of choosing a package according to personal needs still

exists for employees.

4.2 Don’t’s for practical implementation

4.2.1 Don´t overrule! Leave the States the space for ruling in case of economic differences.

First we have thought it would be a good idea to create a Directive concerning Fringe

Benefits for all the Member States of the European Union taking the different economic situations

into account. But then we thought about the legal base of the VAT. We think the VAT is not fair!

For example in France VAT on wine is approximately 15% less than for example in Belgium. So

we came back from the idea!

Making one Directive concerning Fringe Benefits that would be similar for all the

Member States of the European Union and implement that Directive, is almost impossible, because

the economic situations of the different States differ too much from each other. So we suggest that

all the Member States should regulate the fringe benefits themselves taking into account their own

economical situation

31

4.2.2 Balance between flexibility and security

While we are talking about flexibility, it should not be applied to the all issues we

discussed in the paper. The flexibility is a welcome issue, but we should rely on the certainty – that

is – to set the minimum wage for the future certainty is one of the most important things. Knowing

the minimum wage for the employees means the social and economical security – the employee can

plan his/her income and be sure about his financial situation. We should safeguard this and clear out

the things which are in a need to be flexible and can be changed according to different situations.

4.3 Coherent synthesis

As far as the do´s are concerned, first of all would be very useful to simplify income

tax legislation, and to uniform the basis imposing the tax; this would be useful to in order to help

efficiency and equity.

In addition, the green paper of 2006, shows common targets about the labour law at

European level, but it does not mention directly fringe benefits. However, to reach a common and

uniform policy in all the Member State, it would be useful to improve the fringe benefits system.

A common minimum wage policy would be a very good point to reach in order to help

equity and social objectives; however, we have to say that is not so easy to find common criteria to

harmonize the minimum wage, considering the wide differences in the level of economic

development in the different countries.

In addition, we have take into account the possibility to enlarge the use of the cafeteria

system, since not in every country is applied. A possible solution would be also to close together

groups of fringe benefits on the basis of groups of employees.

Furthermore, harmonise and provide common fringe benefits between men and women in their

wage, would be a good step to reach the equal treatment of payment of salary.

32

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33

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