Cost of living allowance: Overview, definition, and example
What is cost of living allowance?
A cost of living allowance (COLA) is a salary adjustment or benefit that employers provide to employees to offset increases in the cost of living. This is usually tied to inflation rates or the rising costs of goods and services such as housing, food, and transportation. COLA is often used to help employees maintain their purchasing power and standard of living when they are located in areas where costs are higher than average.
For example, if an employee is relocated to a city where the cost of living is much higher, the employer may offer a cost of living allowance to help cover the increased expenses of living in that area.
Why is cost of living allowance important?
A cost of living allowance is important because it helps ensure that employees can continue to afford basic needs and maintain their lifestyle despite increases in prices. This is especially relevant in industries where employees are required to move or travel frequently, or in areas where inflation rates are high. For employers, offering a COLA can be a tool for attracting and retaining talent, particularly in areas with higher living costs.
By including COLA in employment agreements, both parties understand the adjustments to salary or benefits that may be made in response to economic conditions.
Understanding cost of living allowance through an example
Let’s say an employee working in New York City is transferred to a branch in San Francisco, where living costs are significantly higher. To help the employee maintain a similar standard of living, the company offers a cost of living allowance. This allowance might cover increased housing costs or transportation expenses in the new city.
In another example, a company might provide a COLA to employees working in countries with high inflation, such as Brazil, to ensure that their purchasing power is not eroded over time.
An example of a cost of living allowance clause
Here’s how a COLA clause might appear in a contract:
“The Employee will be entitled to a Cost of Living Allowance, which will be reviewed annually and adjusted based on the inflation rate or changes in the cost of living in the employee's designated location.”
Conclusion
A cost of living allowance helps employees cope with increases in living costs and maintain their purchasing power. It’s especially useful in areas with high inflation or in regions where costs of housing and goods are significantly above average. By clearly outlining COLA in contracts, employers can ensure that employees are fairly compensated for the economic conditions in which they live and work.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.