Amendment on the Protection of the Value of Turkish Currency Law and Its Impact on Employment Contracts

On September 17, 2018, the Treasury had made a press release which was expected to be clarified with further explanations. The alteration to the recently announced regulations and the press release was announced on Saturday, October 6, 2018, through the Communiqué. As per the newly published Communiqué, workplaces (employers) are obligated to have employment contracts based on foreign currency converted to Turkish Lira (TRY) based contracts in certain cases. The deadline to have the employment contracts amended to TRY is October 12, 2018.

The sections relevant to employment contracts announced with the Communiqué (No. 2018 -32/51) regarding the Amendment on the Decree Law No.32 on the Protection of the Value of Turkish Currency (No. 2008-32/34), which was released on Official Gazette numbered 30557, are outlined below.

1. Can employment contracts between an employer and a non-Turkish citizen employee be in foreign currency and/or indexed to foreign currency?

Article 11 of the Communiqué (related to the Presidential Decree No. 32) states that employment contracts between parties that are located in Türkiye, signed between the employer and the employee who is a non-Turkish citizen, can have contractual terms and monetary obligations in foreign currencies or can have the contract indexed to foreign currencies.

Within the scope of this article, it is not mandatory for employment contracts signed with foreign employees/expats to be converted to Turkish Lira agreements. Within this scope, the workplace's share type is not a consideration (The shares are not required to be 50% or more owned by a foreign, non-Turkish-based party.) On the other hand, it is optional to have the employment contract fixed on foreign currency or based on foreign currency.

2. Can the employment contracts between the employer and Turkish citizens be in foreign currency/indexed to foreign currency?

A. Turkish Companies (Workplaces with Turkish shareholders)

Turkish citizen employees who have employment contracts with companies that have 50% or more shares belonging to a real Turkish person or a company based in Türkiye (a Turkish company): Article 3 of the Communiqué (related to the Presidential Decree No. 32) defines that, natural/corporate residents of Türkiye, except the services rendered outside of Türkiye, are not to have foreign currency based contracts among the parties. The contractual terms related to payment of the service fees, wages, etc., are also prohibited from being based on foreign currencies.

Residents of Türkiye: Decree Law 32 defines; the employees working outside of Türkiye, independent businesses of Turkish citizens, and the natural persons/legal entities as the legal residents of Türkiye. Therefore, as per the interpretation of the definitions, excluding the earnings from the services to be rendered outside of Türkiye, Turkish citizen employees are prohibited from signing foreign currency-based employment contracts. In case such contract is applicable, it is mandatory to be adjusted to Turkish Lira within the legal period (October 12, 2018, is the deadline.) The new contractual clauses on wages shall be mentioned either in an additional protocol to the currency employment contract, or a new employment contract shall be put in place.

B. Workplaces with Foreign Shareholders, Subsidiaries, Representative and Liaison Offices

Turkish citizen employees who have employment contracts with; companies that have 50% or more shares belonging to a non-Turkish real person or to a company based abroad Türkiye (a Turkish company), companies incorporated in free-zones, companies that have headquarters outside of Türkiye which operate in Türkiye under the legal entity of subsidiary, representative/liaison office, and similar: Article 3 of the Communiqué (related to the Presidential Decree No. 32) defines that employment contract of Turkish national employees who work for entities as mentioned herein can have foreign currency wages and/or can have employment contracts where wages are based to foreign currencies. It is not required to take any action for the employees already working in such workplaces with foreign currency-based wages.

This Article has put to rest the hesitations regarding the wages of the employees employed by liaison offices incorporated with the provisions of Foreign Direct Investment Law No. 4875.

Considering the clauses explained hereinabove, in case employment contracts need to be converted to Turkish Lira, the relevant amendments to the employment contracts must be finalized between the parties no later than October 13, 2018. Therefore, it is imperative that the relevant revisions to the employment terms are finalized as quickly as possible, considering the short deadline.

If the parties can reach a consensus on the foreign currency exchange rate, adjusting the employment contract currency using the agreed rates is possible.

In case the parties cannot reach a consensus regarding the exchange rates; the employment contract will be converted to TRY using the Turkish Central Bank's effective selling rate from January 2, 2018, which must then be adjusted by the monthly rates of the Consumer Price Index (CPI) announced by the Turkish Statistical Institute (TUIK).

The effective Central Bank USD selling rates from January 2, 2018, are as follows:

1 USD = 3,7776 TRY

1 EUR = 4,5525 TRY

You can access these and other rates from the website of the Turkish Central Bank using the following link:

http://www.tcmb.gov.tr/kurlar/kurlar_tr.html (The link is in Turkish.)

The Consumer Price Index (CPI) rates during January 2018 – October 2018 are as shown below.

2018 CPI Rates:

Sample Calculation:

Let's assume a Turkish employee is earning 1.000,00 USD per month, and a consensus on the currency rate is not reached for the salary conversion. In this case, the salary will be converted to TRY from the selling rate of 2nd January 2018, and the CPI rates declared until October (or the amendment date of the wage) will be used to adjust the final amount. Considering the amendment of the employment contract is signed on October 10, 2018, with an addendum to the current employment contract, the TRY converted salary figure shall be increased with the monthly CPI rates. As we have the September values at the moment, the September rate; 19,37% can be considered for the increase to be applied. (Once the October CPI rates are announced, since the agreement is signed on October 10, 2018, a 10- day increase can be calculated later on.)

To summarize;

1.000,00 USD x 3,7776 = 3.777,60 TRY "Contractual Value calculated from the FX rate of 02nd January 2018"

3.777,60 TRY x 1,1937 = 4.509,32 TRY "Contractual Value calculated with the CPI rate of September 2018"

You can access the relevant Communiqué in Turkish using the link below:

The Communiqué related to Decree Law No. 32 on the Protection of the Value of Turkish Currency has been announced.

Should you have any queries or need further details, please contact your customer representative.