Italy, a republic with more than 60 million inhabitants, is one of the largest countries in the Mediterranean and the fourth largest in the EU by population. While Italy was historically the heart of the Roman Empire, today it is one of Europe’s most important business destinations and boasts the continent’s third-highest GDP. Surrounded by ocean on three sides, Italy’s northern land borders are shared with France, Switzerland, Austria, and Slovenia. The country has developed historic trade connections to the rest of Europe. Considered one of the world’s most industrialized nations, Italy has a mixed economy which draws on a diversity of industries including manufacturing, automobile, fashion, and agriculture.
Registering a Company, Establishing an Entity
To process payroll in Italy, a foreign company needs to be registered with the following Italian authorities, before hiring employees and starting any activity:
- The National Institute of Social Security or Institute Nazionale Previdenza Social(INPS)
- The National Institute for Accidents at Work or Istituto Nazionale per l'Assicurazione contro gli Infortuni sul Lavoro (INAIL—Labor Insurance)
- Italian Ministry of Labor and Social Policies or Ministero del lavoro e delle politiche sociali
These obligations are both due with a permanent establishment (PE) or a simple social security representative office.
In the event of a PE, there will be additional potential tax implications for the company (corporate taxation) and the employees (the company will be required to perform the role of the tax withholding agent). If the company has a stable presence in Italy, the nature of the activity conducted and the level of autonomy and responsibility of the people involved in the activity may trigger some tax implications for the company.
All companies must have the following:
- A tax code
- An employment agency access code
- An INAIL code
- An INPS code
Banking
It is mandatory to make F24 form payments—which cover social contribution, insurance contribution, and taxes—to the authorities from an in-country bank account. All other payments can be made from anywhere.
The use of IBAN is common for bank transfers.
Workweek
The workweek in Italy is usually Monday to Friday and weekly working hours are normally stated by the National Collective Agreement (NCA).
The maximum working time in a day is 13 hours, although Contratto Collettivo Naziionale di Lavoro (CCNL; Italy’s collective bargaining agreement) can set shorter limits. The normal workweek is 40 hours, although CCNL can set a shorter week. The average length of working time must not exceed 48 hours for any period of seven days, including overtime.
Night workers’ working time must not exceed an average of eight hours in a 24-hour period, although CCNL may provide for a longer reference period. Night work must be carried out between midnight and 5 a.m.; however, there are instances where the hours can be adjusted under the CCNL.
Employees who are age 16 or younger cannot work more than seven hours per day or 35 hours per week. Employees who are between age 16 and 18 cannot work more than eight hours per day or 40 hours per week, under the CCNL.
Workers must have a minimum daily rest period of 11 consecutive hours in every 24-hour working period. Rest breaks are usually set by internal collective agreements.
Shift work is widespread, although the law does not specify any minimum conditions or payments to be awarded to shift workers or workers whose working hours cannot be predetermined, measured, or determined by the employees themselves, nor to:
- Executives, managers, and employees who have any form of independent decision-making powers within the organization’s structure
- Employees working from home
- Teleworkers (employees not working on the employer's premises and using the employer's IT equipment such as a computer or other electronic devices)
- Smart workers (employees who can decide where to work from)
Employees are entitled to a weekly rest day which should normally be a Sunday.
Workers are entitled to an equivalent period of compensatory rest if they are excluded from rest periods or rest breaks.
Overtime starts after 40 hours a week and must be conducted in accordance with the CCNL. Overtime must not exceed 250 hours annually, in the absence of different limits set by the CCNL. In any case, the average length of working time must not exceed 48 hours for any period of seven days, including overtime. Overtime salary increases are regulated by the CCNL and may range between an additional 15% to 50% increase in an employee’s hourly wage.
New Employees
Once a contract of employment has been signed, new employees in Italy should be inducted onto company payroll and social security. The employee set-up process involves several steps and requires a variety of documents, materials, and procedures, including the following:
- A completed new employee form—a written working contract signed by the employer and the employee
- On the day before the start date, it is mandatory to send a communication (called COB) to the Labor Office. To do this, the employer must be enrolled with Centro per l’Impiego.
- The employee is required to produce a complete list of personal data, including address, place of birth, fiscal code, family status (spouse, occupational status, age of children), date of employment, and former employment income from the same year
- Appropriate forms (TFR—Tax Deduction Form) are given to the employee to collect information
Failure to meet the compliance with the labor office will result in a penalty per employee. Each labor office per province has their own website where this form must be submitted, and this information is forwarded to INAIL and INPS by the Labor Office.
Collective agreements provide probationary periods, ranging from a few days to six calendar months, during which both parties may terminate the employment without notice.
The documentation required from new expat employees includes the same data as above (date and place of birth, address in Italy, Italian tax code). An employment contract and an Italian tax code are also required as well as—depending on where the expat is from—a residency permit.
For an expat new employee, the following information must also be provided:
- Salary and contractual information
- Secondment letter
- Residency permit for all non-EU nationals
- A1 form (if applicable)
The deadline for new expat employees for registration with the authorities is one day before the start date.
Payroll
In Italy, payroll involves registration with the Labor Office, Social Security Institute, and the Insurance Institute—each process involving its own deadline. Although there are no laws controlling how frequently employees should be paid in Italy, regulations set by unions and collective agreements generally require a monthly payment.
Payroll processing in Italy imposes withholding obligations on employers during each pay cycle. Generally, employees must pay income tax of between 23% and 43% and social security of approximately 10% to the tax authority, and employers must withhold these contributions. Employers are also responsible for withholding local taxes, which could range from between 0.9% and 2%.
Payroll regulations in Italy state that employees must be provided with a pay slip—although it is acceptable to do so electronically. Payroll reports must be kept for at least five years.
Bonuses
Bonuses to employees are either contractual or discretionary. Contractual bonuses come with government rules and regulations that must be adhered to that may include renumeration policies or the Bank of Italy and the Italian Institute for the Supervision of Insurance (IVASS; Istituto per la Vigilanza sulle Assicurazioni). These provide the following:
- Limits on the maximum amount that can be paid under remuneration policies
- Certain obligations (such as to pay part of the compensation in financial instruments, to defer part of the payment, and to include claw-back and malus clauses)
Tax Types
The tax year usually runs from 1 January to 31 December. Companies may, however, choose a different fiscal year.
In Italy, taxable income is subject to Personal Income Tax (IRPEF). Furthermore, a regional tax and a municipal tax are applicable, which vary according to the regional and municipal authorities.
Income Tax
Income tax in Italy is collected at a progressive rate that ranges from 23% to 43%, plus additional amounts of regional and municipal tax. Residency status is relevant to the amount of income tax paid: tax residents (those living or spending more than 183 days in Italy) pay tax on income earned domestically and worldwide, while nonresidents pay only on income earned within Italy.
The Company Identification Number, known as “codice fiscal,” is required for any operation involving local authorities.
For companies without an in-country presence, the in-country payroll office may obtain the company tax code number on behalf of the company by obtaining Italian Personal Fiscal Code and the company code. It normally takes 15 business days to process, and the legal representative will be required to sign the necessary documents.
Any delays in the process will impact the implementation for a new employee as no employees can begin employment before this process is successfully completed.
Income tax withheld from the employee must be paid to the Tax Office (Agenzia Entrate) before the 16th of the following month.
Social Security
Italy operates a social security system, which includes sick leave, maternity and paternity leave, disability benefits, unemployment benefits, and pension funding. Social security contribution rates vary by category of employee and seniority.
Social security contributions in Italy are made by both employer and employee and amount to around 40% of salary. Like income tax, categories of employment and seniority affect social security payments, but general contribution rates are apportioned as follows:
- Employers—around 30%
- Employee—around 10%
The social security body is known as the INPS (Institute Nazionale Previdenza Social). A company must register with the Labor Office, the Social Security Institute, and the Insurance Institute, all of which are public authorities. The core business of the company will define the “class of activity” to determine the contribution rate.
The legal representative of the company is required to sign the relevant documents which are then delivered to the relevant institutions by the in-country payroll at the agreed schedule.
The pre-agreed schedule dates for the process is as follows:
- Insurance Institute (INAIL): Registration must be completed no later than the first day of employment
- Social Security Institute Registration (INPS): By the 16th of the month after commencing the employment
- Labor Office Registration: Must be completed at least one day prior to the start date of employment
Penalties: In the cases of delay, fines and interest are due to the respective authorities.
Types of Leave
Annual Leave
According to the international law firm Simmons & Simmons, employees are entitled to four weeks of statutory paid annual leave per year. In addition to their annual leave, employees are entitled by law to one rest day for each of the 11 public holidays, plus one day for each municipality for the relevant patron Saint Day (see Table 1). Employees are entitled to their normal salary for these days. Employees are also entitled to one rest day for each of the former four holidays that have now been eliminated which they can take during the calendar year.
Leave can be taken in instalments. An employee must give the employer notice specifying the days on which leave is to be taken. The employer may impose specific requirements in relation to the timeframe within which the notice must be given to the employer. Employees cannot waive their right to take holiday and must take their holiday as follows:
- At least two weeks during the calendar year to which the entitlement refers; and
- Two weeks in 18 months after the end of the calendar year to which the entitlement refers.
An employer cannot make a payment in lieu of annual leave, except for:
- Termination of employment
- Holiday periods exceeding the statutory mandatory four-week period
An employee will receive their normal pay during their holiday except for those pay elements connected to any work performed in any given period (e.g., overtime pay).
Employees cannot take their leave while they are under notice of termination of employment.
If an employee is unexpectedly sick and the illness is reported and recognized during a period of holiday, the holiday period ends from the onset of the illness and the following sickness absence is not deducted from the employee’s holiday entitlement.
Maternity Leave
All pregnant employees regardless of length of service are entitled to maternity leave. Even when applying for a job, a woman is not under a duty to tell a prospective employer that she is pregnant (according to Simmons & Simmons). Pregnant workers must take five months’ maternity leave (compulsory rest period) which can be taken from two months before childbirth and for three months after.
During the compulsory rest period, the mother is entitled to 80% of her regular pay from the social security authority and the period is counted as actual work time. In addition to the pay received by the social security authority, CCNL usually require the employer to make up the difference in remuneration so that the worker receives their normal earnings.
When coming back to work at the end of maternity leave, the employer must give the employee the same position, tasks, and duties that were conducted before. A woman cannot be dismissed from the beginning of pregnancy until one year after the child’s birth (the protected period). Maternity leave can be converted into paternity leave (regardless of whether the mother is an employee or freelancer) in three circumstances:
- Child’s mother dies or is seriously ill
- Mother abandons the child
- Father is granted full custody by court judgment
Paternity Leave
See above for the circumstances in which maternity leave can be converted into paternity leave. An employee who takes paternity leave is entitled, and bound by, their normal terms and conditions (except for remuneration and where inconsistent with the ability to take leave). Contracts and collective bargaining agreements may provide for more favorable provisions.
Adoption Leave
Employees, regardless of length of service, are entitled to adoption leave both when adopting children from Italy and when adopting children from overseas (according to Simmons & Simmons). The adoption leave may only be taken by one of the adoptive parents. An employee who adopts children from Italy is entitled to paid adoption leave during the five months following the actual placement of the child with them. An employee adopting from overseas is entitled to start the five months of paid adoption leave prior to the arrival of the child in Italy to comply with the foreign adoption procedure or for the required period of residence abroad. Any remainder of the five months of leave may be taken immediately following the arrival of the child in Italy.
Parental Leave
Both the mother and father are entitled to take further leave up until the child reaches the age of twelve. No qualifying period of employment applies. The total amount of leave taken by both parents cannot exceed 11 months.
Time Off for Dependents
Employees are allowed time for situations affecting dependents. During this type of leave, the employer may not dismiss the employee. Whether the employee will continue to be remunerated for the period depends on the reason for taking time off.
The main laws, according to Simmons & Simmons, are as follows:
- The Italian Constitution
- Italian Civil Code
- Legislative Decree, 08 April 2003, number 66
- Legislative Decree, 19 July 2004, number 213
- National Collective Labor Agreements (CCNL)