Ukrainian labour law for foreign investors: Q&A
With the situation in the eastern Ukraine stabilising, as of recent, Ukraine is becoming more attractive as an investment destination: foreign investors are eager to incorporate their subsidiaries or acquire assets and/or equity rights in Ukrainian companies. In case with the latter, such may already have their workforce, long history of employment relationships, and corresponding paperwork. In reality, however, many potential investors lose sight of important aspects and requirements of Ukrainian labour law. Despite the declared pro-Western course, Ukraine still applies rather non-progressive labour legislation, a legacy of the Soviet era and the planned economy.
With this in mind, we have put together the most common queries we receive from investors on a daily basis together with brief answers and some tips that will make it easier to break into the Ukrainian market and manage relations with the future staff.
Should a CEO have employment relations with a Ukrainian company and receive a salary?
Yes, s/he should. A CEO should be employed within the terms of an employment contract (a special form of an employment agreement) executed in writing. Although the Labour Code allows an employment contract to be concluded via verbal agreement (in this case, employment is formalised through an order issued in a company following a decision on CEO’s appointment), an employment contract with a CEO executed in writing constitutes a bare minimum requirement. The parties may set out their essential rights and obligations in a contract, as well as agree on additional grounds for dismissal.
Many foreign investors believe that corporate appointment is sufficient enough and there is no need to make an employment contract with a CEO. This is a faulty assumption, whereas a CEO is also considered to be an employee. It follows therefrom that a company as an employer should comply with all the statutorily defined requirements and guarantees with respect to him/her as an employee, including payroll payments.
May another company be a CEO of a Ukrainian company? May a Ukrainian company have a nominal CEO?
No, Ukrainian laws do not provide for this possibility. Therefore, the future employer should see about appointment of a CEO in a newly incorporated company in advance, because a CEO should be appointed at the time a company is incorporated/officially registered. As to the employment of foreigners, Ukrainian laws require that the first CEO of a company is a Ukrainian national or a foreigner in possession of a permanent residence permit in Ukraine.
On the practical side, a CEO is often appointed nominally and temporarily, for example, until a foreigner obtains a work permit. That being said, legally speaking such a nominal CEO has the same scope of authority and responsibility as a real one.
May foreigners work in Ukraine?
Yes, they may. But to start with, an employer should obtain a work permit for such a foreigner (typically issued for one-year term or longer, where appropriate). Based on a valid work permit, an employee may receive a temporary residence permit (if necessary). A temporary residence permit may be obtained both before and after the start of employment if an employee is able to legally reside in Ukraine without a permit (visa-free regime or a valid visa).
If a foreigner already has a permanent residence permit in Ukraine, there is no need for the employer to obtain a work permit for him/her. Moreover, a work permit is not required for foreign employees of representative offices/missions (depending on the type of representative office/mission, however, it may be necessary to obtain a service card), foreign Ukrainians, and some other categories of foreigners.
May an employer lease employees from other companies?
Yes, Ukraine legislation allows businesses to use staff of other companies without formally employing them. The relevant options here are: outstaffing and outsourcing. There are many international companies operating in Ukraine that provide such services. However, many aspects in this area remain in the grey zone and are not properly regulated, while case law is continually quite ambiguous in interpreting the issue. In any case, employee leasing should be properly documented/formalised, and the outstaffing companies should comply with certain legal requirements.
May an employer dismiss an employee without any formal grounds?
No, the Labour Code specifically provides for an exhaustive list of grounds for dismissal, and each ground requires certain conditions to be met and demands compliance with formalities. Dismissal of officials on the grounds of termination of their corporate powers is the closest one to the type of dismissal indicated in the question. There is no need to formally flesh out the reasons for such a dismissal, but it can only be applied to a limited range of persons (corporate officials) and requires a mandatory severance pay equalling at least six-month average salary of such official.
Normally, members of management and supervisory boards belong to corporate officials. Similarly, other persons may also be considered as such when so provided for by a charter of a Ukrainian company.
Can an employer dismiss an employee through simplified procedure by providing additional financial compensation?
Yes, it is possible, but only in case of dismissal by agreement of the parties. The law does not require financial compensation (severance benefits) for this type of dismissal. The amount of such compensation is established by the parties and usually pegged to monthly salary.
Is it possible to provide for additional grounds for dismissal in an employment agreement?
Yes, it is possible, but such option is available only for certain categories of employees with whom an employment agreement may be concluded in the form of an employment contract (e.g., CEOs in LLC or JSC and members of management/supervisory board of JSC). Unfortunately, based on our previous experience foreign investors simply forget to sign an employment contract with a CEO at least half the time. In the remaining half, additional grounds for dismissal are contractually agreed only on rare occasions. As a result, even a dismissal based on findings of internal compliance-related investigations is formalised as a dismissal by agreement of the parties subject to the golden parachute rules in 90% of the cases.
How can employer dismiss employees who violate corporate rules or inflict damages on a company?
If there are grounds for dismissal and registered violations, employees at fault may be subject to dismissal for disciplinary reasons. For example, a CEO, his/her deputy or a chief accountant may be dismissed for a one-time gross breach of duty.
For other categories of employees, dismissal for a one-time violation is possible only in exceptional cases, for example, dismissal on the grounds of employee’s absenteeism or showing up for work drunk. In other cases, an employee may be dismissed only for regular violations of employment agreement and/or internal labour policy, i.e. for at least two violations within twelve months and subject to official reprimand for each previous violation. Moreover, a company should comply with the procedures and deadlines for holding an employee liable as provided for by the Labour Codeof Ukraine.
It is worth noting that all the rules and policies of a group of companies should be adopted at a company level, i.e. they should be translated into Ukrainian, adjusted to meet the requirements of Ukrainian labour legislation, and approved by the authorised governing body of an employer. Employees should be acquainted with the rules and policies against their signature.
Is it possible to keep personnel and employment records in e-document management systems?
Many companies in Ukraine are shifting to electronic personnel records management, but the labour laws and personnel-management regulations are still quite outdated in this area. Just recently, competent authorities started introducing simplified procedures (electronic employment record books and sick leave certificates). Nonetheless, we recommend making/duplicating all important documents in hard copies that bear original signatures. Even if an inspector of the State Labour Service of Ukraine fails to notice the absence of paper documents and impose a fine for this, lawsuits filed by employees can have serious financial implications for a company.
Do trade unions play a big part in Ukraine?
Currently, trade unions enjoy a particularly wide range of powers and guarantees that may have a significant impact on business. As a rule, Ukrainian unions are active only in large post-privatised enterprises, banks, etc. However, trade unions sometimes emerge in newly started small businesses. The Verkhovna Rada (Parliament) is now working on updating labour and trade union legislation. Yet, the prospects are vague, as these legislative initiatives evoke considerable opposition from the trade union leaders.
We recommend looking carefully into the history of interactions with trade unions before acquiring large post-privatised companies. After all, a dialogue with trade unions, especially if an enterprise has several unions that fail to coordinate and agree on their position, as well as court proceedings require great administrative resources.
What difficulties an employer may face if an employee files a lawsuit?
Ukrainian labour laws and courts are quite favourably disposed towards employees and first and foremost protect their interests. To showcase the point: an employer should, in case of employee reinstatement following his/her wrongful dismissal, pay employee an average salary for the entire downtime until the date of such reinstatement by court decision. A similar rule applies to incomplete dismissal payments on the day of dismissal and does not depend on the amount in arrears. Such court proceedings may take years. Moreover, an employer should comply with the reinstatement decision immediately once the court of first instance adopts it, even if an employer subsequently appeals this decision.
At the same time, an employer has almost no chance to collect paid money (salaries) from an employee, even if employer wins the appeal in a higher court later.
How does the government oversee employers’ compliance with labour laws? How can an employer minimise the risks of sanctions being imposed following relevant inspections?
Indeed, labour inspectors have such respective authority and a significant range of powers, with inspections taking place as surprise audits. Sanctions for a number of violations are quite stringent, for example, in case of uncovering hidden employment or non-payment of salaries. Therefore, we recommend that employers comply with the laws and conduct regular labour and personnel audits.
Counsel, Arzinger Law Firm