The Presidential Decree ("New Decree") on the Amendment of the Decree No. 32 on the Protection of the Value of the Turkish Lira ("Communiqué No. 32") was published in the Official Gazette on September 12,2018. Undoubtedly, this is one of the strongest precautionary measures taken against the Turkish Lira's significant plunge in value during the course of 2018. Whereas the New Decree introduces an attention-grabbing obligation regarding the mandatory use of the Turkish Lira for ongoing as well as prospective agreements in Turkey, the specific details on which type of agreements are subject to the Presidential Decree and the question of how to convert foreign currency amounts into Turkish Lira for pending/existing agreements had remained vague and ambiguous. To eliminate such uncertainty, the Communiqué No. 2018/32-51 ("Communiqué") on the Amendment of the Communiqué No. 32 was published in the Official Gazette on October 6, 2018. By this Communiqué, Article 8 of the Communiqué No. 32 has been re-drafted. In view of the new version of the Communiqué No. 32, what becomes readily apparent is that employment agreements are one of the subjects that are most significantly affected by the Communiqué.
The new Article 8/3 of the Communiqué No. 32 declares the fundamental principle that all employment agreements that are made by parties who are settled in Turkey, shall be required to determine the primary contractual payment obligation, as well as other secondary payment obligations, in Turkish Lira. In other words, a Turkish employer and a Turkish employee, both of whom are residing in Turkey, will not be allowed to denominate, for instance, the salary of the employee in a foreign currency.
This rule applies to ongoing employment agreements as well as future employment agreements, according to the Provisional Article 8 of the Communiqué No. 32. However, Article 8/3 of the Communiqué No. 32 regulates two exceptions to this rule. Firstly, if the contractual obligations subject to the agreement will be performed abroad, it is legally permissible to determine the contractual payment obligation in a foreign currency. Secondly, if either party to the agreement resides outside of Turkey, once again, there is no requirement to determine the contractual payment obligation in Turkish Lira.
In addition to the foregoing, other paragraphs under Article 8 provide further exceptions for employment agreements. To that end, Article 8/4 of the Communiqué No. 32 allows the use of foreign currency in employment agreements under the following circumstances: (i) if either party to an employment agreement is not a Turkish citizen, or (ii) if the subject of the employment agreement relates to export activities, transit trade, sales and deliveries falling under the scope of export activities, and foreign-exchange earning activities, or (iii) if the contractual obligation will be performed abroad, or (iv) if the subject of the agreement is electronic communications, where the service starts in Turkey but finishes abroad, or vice versa.
Moreover, there are two other exceptions set forth under the Communiqué No. 32, one of which is contained in Article 8/11. Article 8/11 states that if one of the parties to the employment agreement is not a Turkish citizen, but resides in Turkey, the payment obligations arising out of the employment agreement could be legally determined in (or otherwise indexed to) a foreign currency. The second exception is provided by Article 8/16, which regulates that contract prices and other payment obligations arising from employment agreements executed by branches, representatives, offices, and liaison offices of those parties residing abroad, or by companies whose majority shares (50% or more) are owned by persons residing abroad, or by companies operating in free trade zones, can once again be determined in a foreign currency or indexed to a foreign currency.
Having said that, the critical question is what happens when the parties to an agreement come into conflict on this subject, and which procedure(s) the parties will be obliged to follow in order to re-determine the contractual amounts that must be converted into Turkish Liras. According to Article 8/24 of the Communiqué No. 32, if the parties to an existing contract cannot come to an agreement on re-determining the contract price and other payment obligations in Turkish Lira, then the Turkish Central Bank's effective foreign currency exchange rates for January 2,2018 (1 USD = 3.7776 TL and 1 EUR = 4.5525 TL) must be used for existing agreements in order to re-determine the contract price and other payment obligations in Turkish currency. However, in order to calculate the final amount of the payment obligation in Turkish lira, the monthly consumer price index rate (as determined by the Turkish Statistical Institute) from January 2, 2018, until the date of redetermination, must also be applied to the amount calculated by using the relevant exchange rate.
In order to provide detailed guidance to concerned parties, the Turkish Ministry of Treasury and Finance published a "Frequently Asked Questions" list on this issue on October 12, 2018, which can be accessed at:https://hazine.gov.tr/sikca-sorulan-sorular-dovize-endeksli-sozlesmeler?type=icon. This document shows how to convert the primary and secondary payment obligation amounts into Turkish Lira by providing a formula for the calculations one may use as a reference tool while re-determining the contractual obligation payments in one's own employment agreements.
To sum up, the Communiqué No. 32 mandates that, inter alia, all employment agreements specified thereunder will be subject to the mandatory usage of Turkish Lira as the payment currency. However, in light of the relevant market dynamics and the sensible reasons that exist for using foreign currencies in foreign-related matters, there are certain exceptions provided by the Communiqué, wherein the parties are entitled to continue to determine their primary and secondary payment obligations in foreign currencies or to index them to currencies other than the Turkish Lira.
Please also visit our previous article published on Mondaq on this subject.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in December 2018. A link to the full Legal Insight Quarterly may be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.