Outsourcing services in accordance with the new Law of Ukraine “On Employment of the Population”

08 February, 2013 Newsletters

On January 1, 2013 the new Law of Ukraine “On Employment of the Population” No. 5067-VI of July 5, 2012 (hereinafter referred to as “the new Law”) has entered into force. The new Law introduces changes to the legislation of Ukraine on employment, in particular, regarding new requirements and restrictions on rendering outsourcing services.

According to para.3 of part 5 of Article 50 of the new Law employers are prohibited to recruit the employees who are hired by entities providing agency services on employment (hereinafter referred to as “outsourcing companies”) for further work, in cases as follows:

  1. the employer conducted staff reduction during the year;
  2. the employer did not comply with head count standard of primary occupations involved in technological process of primary production;
  3. work in harmful, dangerous and hard conditions, and also involvement in primary occupations of technological process of primary production are expected1.

Following literal interpretation of subpara. 1 the employer cannot hire employees under outsourcing if he dismissed at least one employee (irrespective of profession or job position) within the year due to staff reduction (para.1 of Article 40 of the Labor Code of Ukraine). Meanwhile another interpretation is also possible: it is prohibited to hire employees under outsourcing to fulfill the positions of employees who were dismissed under redundancy procedure. Though, it is unlikely that controlling authorities will take up the second interpretation. More likely the first variant will be chosen and the norm will be interpreted not in favor of employers.

Para. 2 and 3 contain such terms as “primary occupation” and “primary production” without defining them. One may only presume that “primary occupation” means the occupation in which the employee has reached his highest qualification and/ or has been working for a long time. “Primary production” is expected to be interpreted by the controlling authorities as any activity resulting in production (including services).

Pursuant to subpara. 2 it is prohibited to hire employees under outsourcing in case the employer does not comply with “the head count standard of primary occupations involved in technological process of primary production”. The issue of determining the head count standard at the enterprise is regulated by the Methodology of head count calculating of separate categories of employees grounded on the labor standards2, which stipulates that the necessary number of employees means “the number allowing to execute particular job effectively and qualitative under provided scientifically founded work regime and rest conditions”. It is still unclear in what way the controlling authorities will determine the fact of violation of head count standard since the order of conducting audit of head count standard is not established at the moment.

We draw your attention that according to part 1 of Article 39 of the new Law outsourcing companies shall act on the basis of permit issued by the State Employment Service of Ukraine. According to part 2 of Article 39 of the new Law the activity of the outsourcing companies without such permit is prohibited. However, the procedure of issuing such permit is not set. Nevertheless, according to part 3 of Article 53 the outsourcing company acting without permit may be fined at the amount of 20 wage minimums established at the moment of violation detection.

Though the new Law does not establish the liability for the companies-customers using services of outsourcing companies which act without the respective permit, some risks still may occur. As now outsourcing companies render services without the respective permits there is considerable risk that outsourcing agreements (concluded from the beginning of the year 2013) are to be recognized as those inconsistent with the legislation. Taking into consideration this, there is high probability that tax authorities will deny the legitimacy of referring to company-customer’s expenses costs under such agreements.

It is rather interesting what position the tax authorities will take up regarding services rendered and still continuing under outsourcing agreements concluded before the year 2013. We hope that tax authorities will be reasonable and take up the position that outsourcing services rendered before the year 2013 may be referred to the expenses of companies-customers. The issue regarding the possibility of rendering outsourcing services from the year 2013 under the agreements concluded before 2013 is still open.

Considering the abovementioned, we would advise to be very careful concluding the agreements on rendering outsourcing services as for now (until the procedure of receiving the permit by the outsourcing companies will not be established). Such agreements shall be structured in such way that tax authorities will have no grounds to recognize them as outsourcing agreements. While drafting the agreements on rendering services (outsourcing is a service by nature) one should avoid statements which could allow to refer these services to the outsourcing ones. It is very important to describe the scope of the agreement, the procedure on rendering services in detail (invoices, transfer-acceptance acts etc.).

The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.

Footnotes:

1 This provision corresponds to the provisions of part 4 Article 39 of the new Act, which imposes phohibition on economic entity to guide employees to such work.

2Approved by the Ministry of Labour and Social Policy of Ukraine as of 04.09.2000 №  22 .

Kind regards,

© TOV "KM Partners", 2013

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