Romania's construction sector: New rules aimed at hindering workforce shortages
At the end of 2018, the Romanian government declared the construction sector a priority economic sector for the next 10 years and decided to support its development with higher minimum wages and tax breaks.
That Romanian businesses are facing difficulties finding a specialised construction workforce is not new or surprising. The country's minimum gross wage, among the lowest in the EU, together with high employee tax costs are two elements that have led to the migration of qualified workers in all sectors to better paid positions.
To increase the attractiveness of the Romanian labour market for people working in construction and to fight tax evasion in this industry, the Romanian government decided to increase the minimum wage and to grant tax breaks in the construction sector, starting with 2019.
Following the introduction in 2019 of a differentiated minimum gross wage tied to education and experience, Romania has introduced a third minimum gross wage applicable in the construction industry starting in 2019. This is the first industry to benefit from a minimum wage higher than the national minimum wage in Romania. It also has the most tax reductions and exemptions available for salary-related taxes, leading to significantly higher net wages.
To enumerate, the minimum gross wage applicable in Romania as of 2019 is RON 2,080 per month (approx. EUR 440). A slightly higher minimum gross wage must be granted to employees with higher education and at least one year of work experience in their field (i.e. RON 2,350 per month, which is approx. EUR 496).
On the other hand, employees working for companies in the construction sector are entitled to a minimum gross wage of RON 3,000 per month (approx. EUR 634), which is 44 % higher than the national gross minimum wage. Noncompliance with the minimum wage requirements is deemed a minor offence under the Romanian Labour Code, triggering fines of up to RON 2,000 (approx. EUR 420).
In addition, noncompliance may annul the tax incentives for the employers that benefit from them. As mentioned above, certain tax incentives have been introduced for wages obtained from employers active in the construction sector. These incentives are applicable over the 10-year period deemed necessary to "refresh" the construction labour market, between 2019 and 2028.
Provided their employer's turnover derives primarily (at least 80 %) from construction activities, including manufacturing of building materials and other connected businesses (based on a set list of NACE codes), individuals whose monthly salary is less than RON 30,000 (approx. EUR 6,340) are exempt from the 10 % income tax and 10 % health insurance contribution. A partial reduction from 25 % to 21.25 % in the pension contribution rate due by the employee is also available.
Therefore, while the net wage in Romania normally is 58.5 % of the gross wage, people working for a construction company are privileged to be left with a 78.75 % net salary. Compared to 2018, a construction company employee earning the minimum wage now receives an extra 94 % on their net wage. However, over the 10-year term, the lower pension contributions may impact the accrual of pension entitlements, thus affecting the short-term beneficiaries of the tax incentives.
For employers, who from 2018 are liable only to a 2.25 % work insurance contribution and an extra pension contribution for special working conditions (4 % or 8 % of the gross wage) following the social security reform transferring most of the social charges to the employee, exemptions and reductions of salary-related costs are also granted, provided they qualify as eligible (i.e. active in the construction industry having a minimum of 80% turnover from building activities). Tax reliefs for employers currently have been put on hold until the appropriate state aid scheme is approved.
While the measures are welcomed by construction workers due to the positive impact on their net wages, they have been criticised by employers for two reasons in particular: (i) the higher minimum wage applies to all employees working for a company in the construction sector, whether operating or administrative staff, and (ii) the minimum wage must be observed even if the company does not qualify for the tax incentives. Therefore, salary costs have increased significantly for employers in the construction sector, putting businesses under pressure and, possibly, the financial well-being of the construction sector at risk.
Despite being regarded as one of the lowest labour cost countries in the EU, Romania is beginning to distance itself from this paradigm as the ever-increasing demand for qualified labour and a higher quality workforce are driving wages upwards.