The quota of workplaces for persons with disabilities: should separate divisions of foreign legal entities comply?
Updated as of August 09, 2023
From October 2022, the way of receiving reports by the Fund for Social Protection of Persons with Disabilities (“Fund”) regarding the fulfillment of the quota of workplaces for the employment of persons with disabilities (“quota”) has been changed. Reporting began to be received by the Fund through the State Pension Fund of Ukraine (“Pension Fund”), which led to problems primarily for representative offices of foreign legal entities and separate divisions of Ukrainian legal entities.
Transfer of information by the Pension Fund to the Fund
After the changes, the Pension Fund has begun to provide to the Fund information about all insurers whose data is contained in the State Register of Compulsory State Social Insurance. But the insurer for the purposes of the Unified Social Contribution and the subject to fulfilment of the quota are not identical terms.
For reference: according to the Law of Ukraine as for July 08, 2010, "On the Collection and Accounting of the Unified Social Contribution for Compulsory State Social Insurance", the term “insurers” includes employers and other persons who, in accordance with this Law, are required to pay the Unified Social Contribution.
According to Article 19 of the Law of Ukraine "On the Fundamentals of Social Protection of Persons with Disabilities in Ukraine" (“Law”), the Pension Fund provides the Fund with information:
“On the creation of workplaces and on employment of persons with disabilities by enterprises, institutions, organizations, and natural persons that hire employees;
necessary for calculating the number of workplaces for the employment of persons with disabilities by enterprises, institutions, organizations, natural persons that hire employees, in accordance with the quota established by part one of this Article”.
In order to fulfill the above quota, there have been adopted the Procedure and Form for the provision by the Pension Fund of Ukraine to the Fund of Social Protection of Persons with Disabilities of information from the register of insured persons of the State Register of Compulsory State Social Insurance, approved by Resolution No. 14-2 of the Pension Fund of Ukraine as of March 10, 2023 (“Procedure No. 14-2”), which actually duplicates the provisions of the Law and also provides for the transfer of information regarding enterprises, institutions, organizations, and natural persons that hire employees.
Therefore, if the Pension Fund had complied with the provisions of the Law, it would have transferred to the Fund information about enterprises, institutions, organizations, natural persons that hire employees (that is, about the subjects to fulfillment of the quota, as defined by the Law and Procedure No. 14-2).
But instead, the Fund "automatically", having received relevant information from the Pension Fund, without carrying out additional analysis of such information, identifies violators precisely among insurers and sends them calculations of the amounts of administrative and economic penalties.
The fact that separate divisions of Ukrainian legal entities and representative offices of foreign legal entities did not register with the Fund and did not submit reports on the fulfillment of the quota also played a role. In the past several years, the Fund has applied to certain separate divisions with the requirement to register. This indicates that the Fund has had information about such separate divisions, but has not taken action to apply the sanctions. However, “automation” has made it possible to determine sanctions without the participation of separate divisions.
As a result, there is the following situation – this year requirements to pay the penalties have been received by persons which have never received such requirements before, namely:
- separate divisions of foreign non-governmental organizations;
- separate divisions of foreign business entities;
- separate divisions of Ukrainian legal entities.
Therefore, first of all, we recommend that all representative offices and separate divisions check the employer's cabinet on the electronic services web portal of the Pension Fund of Ukraine for the availability of the received calculation of administrative and economic sanctions and fines.
The position of the Fund regarding the subjects to fulfilment of the quota
However, in its clarifications as of April 17, 2006 No. 06ю-75/667 (have already expired), the Fund clearly stated the position that "representative offices of foreign companies that are not legal entities do not fall under the list of subjects provided by Article 19 of the said Law", that is, they are not subject to fulfilment of the quota.
The Fund has changed its position since 2014 but has not tried to apply sanctions. Thus, in letter No. 1/3-63/02-01 as of June 20, 2014, the Fund stated the following:
“The term ‘enterprises, institutions, organizations’ used in Article 19 of the Law covers representative offices of foreign legal entities, which are not legal entities. Therefore, representative offices of foreign legal entities that hire employees - citizens of Ukraine, but at the same time are not legal entities, if there are grounds provided for in part nine of Article 19 of the Law, shall register at the Fund's department, submit a report on the employment of persons with disabitities, and comply with the quota for workplaces for the employment of persons with disabilities”.
Trying to justify such a position, the Fund:
- has referred to the changes introduced in the Law in 2011 (although at that time Articles 19-20 were set out in a new version, but the list of subjects to fulfillment of the quota was not changed);
- has referred to Part 2 of Article 1 of the Law, which contains the only mention of separate divisions of legal entities and representative offices of foreign legal entities. The quotation of this provision is here below:
"Central and local bodies of executive power and bodies of local self-government, enterprises, institutions and organizations (regardless of the type of ownership, organizational and legal form, type of activity, industrial characteristics), their branches, departments, representative offices that keep separate records of the results of financial and economic activity, banks and other financial institutions, as well as representative offices of foreign legal entities (including international organizations) that hire employees - citizens of Ukraine, unless otherwise provided for by international treaties of Ukraine, which are binding upon the consent of the Verkhovna Rada of Ukraine (hereinafter “enterprises, institutions and organizations”), natural persons that hire employees, involve representatives of civil society organizations of persons with disabilities to the preparation of decisions concerning the rights and interests of persons with disabilities".
The cited provision does not regulate the fulfilment of the quota but provides for the involvement of representatives of civil society associations of persons with disabilities in certain issues. However, the wording “(hereinafter “enterprises, institutions and organizations”)” was added to the relevant provision, which, according to the Fund, is the term "enterprises, institutions and organizations", covering:
- central and local bodies of executive power and bodies of local self-government;
- enterprises, institutions and organizations;
- their branches, departments, representative offices, which keep separate records of the results of financial and economic activity;
- banks and other financial institutions;
- as well as representative offices of foreign legal entities (including international organizations) that hire employees – citizens of Ukraine.
Does the given wording of the Law really contain a definition of the term? Have really the terms "enterprises", "institutions" and "organizations", which are not defined in the Law, become the terms defined in the Law, and now include a wider meaning than their definitions in the Civil and Economic Codes just because of the phrase in brackets “(hereinafter “enterprises, institutions and organizations”)”? At least it is controversial and ambiguous. A more detailed refutation of the Fund's position is provided below (in the section available to subscribers).
Therefore, despite the position of the Fund, another subject of power – the Central Interregional Administration of the State Labor Service in its latest clarifications as of May 09, 2023, supported the approach of businesses and non-governmental organizations and noted that representative offices of foreign companies that are not legal entities do not need to comply with the quota. We would like to remind you that it is exactly this body that carries out checks on the fulfillment of the quota, in accordance with the Procedure for control over the fulfillment of the quota of workplaces designated for the employment of persons with disabilities, approved by the Resolution No. 70 of the Cabinet of Ministers of Ukraine as of January 31, 2007.
In Letter No. 1/6-367 as of August 14, 2007, the Fund separately provided a clarification regarding the division of responsibilities between the main enterprise and its separate divisions, which is still valid. In this clarification the Fund confirmed that the main enterprise is responsible for fulfillment of the quota and independently decides on the method of its fulfillment:
“Taking into account the above, the Fund considers that:
firstly, a legal entity (a main enterprise) as a defendant in a court, including for its separate divisions, independently resolves the issue of fulfilling the 4% quota for creating workplaces for the employment of disabled persons at the main enterprise, including its separate divisions, or makes a decision to fulfill an alternative obligation - the payment of administrative and economic sanctions to the State Budget of Ukraine;
secondly, taking into account that the main enterprise (legal entity) can, through the charter (regulations) and power of attorney, directly influence its separate divisions, the main enterprise can independently make a decision how to implement the 4% quota: at the expense of the main enterprise, OR at the expense of separate divisions only, OR at the expense of both the main enterprise and its separate divisions proportionally to the employees working for them”.
We would like to note that in case of non-payment of administrative and economic sanctions for non-compliance with the quota, the Fund has the right to file a lawsuit demanding the collection of sanctions and fines. Analyzing the court practice for 2023, there is currently a tendency for the Fund to file such lawsuits against separate divisions and representative offices. For example, the Kyiv District Administrative Court already has about 15 lawsuits filed by the Kyiv City Department of the Fund for Social Protection of Persons with Disabilities for the collection of administrative and economic sanctions and fines against separate divisions of foreign companies (in particular, cases No. 320/20400/23, No. 320/21644 /23, No. 320/20437/23, No. 320/11956/23). It is exactly the Kyiv City Department of the Fund which is actively developing such a practice. However, there are also cases of filing lawsuits against representative offices of foreign companies in Poltava (case No. 440/7995/23), Dnipropetrovsk (case No. 160/15833/23), and Zaporizhzhya regions (case No. 280/4675/23). In the State Register of Court Decisions, we found only one case of filing a lawsuit against a separate division of a Ukrainian legal entity in the Poltava region (case No. 440/8392/23). However, we assume that such lawsuits are simply addressed to the main enterprise and in fact the problem is more massive than it appears from the State Register of Court Decisions.
This indicates the beginning of the formation of judicial practice regarding the filing by the Fund of lawsuits for the collection of administrative and economic sanctions, taking into account changes in the legislation. As we have noted above, the list of subjects under Article 19 of the Law has not changed, only the mechanism for receiving information about the fulfillment of the quota has changed. However, such a small change in the legislation has led to a problem of cardinal importance. Automatically obtaining information and identifying violators will lead to the fact that the courts will be flooded with ill-founded lawsuits, while businesses and non-governmental organizations will be forced to spend resources defending their position.
The legal position that will be formed by judicial practice, including at the level of the Supreme Court, will be decisive (the Fund's position will either be supported or refuted), and therefore this issue requires monitoring.
Penalties as pressure to pay sanctions voluntarily
Violation of the terms for payment of administrative and economic sanctions (non-payment by April 15) leads to the imposition of a penalty calculated based on 120% of the annual discount rate of the National Bank of Ukraine effective at the time of payment, calculated on the full amount of the arrears for the full term.
As for today, it is 30% per year (discount rate of 25% * 120% per annum). In other words, during a year of litigation, the amount of sanctions will increase by 30%, that puts some pressure on representative offices, for which the sanctions are already outside the funding budget. Such a situation leads to the fact that the management decides to pay the sanctions, although the grounds for their imposition are rather doubtful. As a confirmation, the State Register of Court Decisions already contains decisions to withdraw claims due to the payment of sanctions. Everyone makes the decision that they consider more appropriate in specific circumstances, but it should be remembered that the payment of sanctions forms the relevant practice and weakens the position of other representative offices and separate divisions that disagree with the Fund and dispute against the sanctions in a court.
The grounds for appeal against the sanctions imposed by the Fund are described in more detail below.
Currently, the Verkhovna Rada is working on the Draft Law of Ukraine № 5344-д "On Amendments to Certain Laws of Ukraine on Ensuring the Rights of Persons with Disabilities to Employment", which has been adopted as a basis and is being prepared for the second reading.
Its purpose is to change the approach to the system of encouraging employers to hire people with disabilities. However, little changes in the context of non-compliance with the quota, as instead of paying administrative and economic sanctions once a year, it is proposed to pay a monthly contribution, which does not fundamentally change the “employ people with disabilities or pay a fine” approach.
At the same time, the draft law proposes to slightly change the wording regarding the list of subjects to fulfillment of the quota for the employment of persons with disabilities.
Thus, the draft law sets out the rule on the quota in the following wording:
“Article 18-2. EMPLOYERS with an average number of 8 or more employees for the month for which the contribution is paid (hereinafter “contribution payers”) are obliged to pay a monthly contribution to support the employment of persons with disabilities (hereinafter “contribution”)”.
These innovations will stipulate that the employers are the subjects to fulfilment of the quota but not enterprises, institutions, organizations, or natural persons that hire employees (as currently provided by the Law).
At the same time, the draft law contains a definition of "employer" for the purposes of this law, namely: “an employer is a legal entity, regardless of its organizational and legal form, form of ownership and subordination, and an individual entrepreneur that hire employees under the terms of an employment agreement (contract), service contract or other terms provided for by law, except for civil law contracts”.
Separate divisions of foreign non-governmental organizations, foreign business entities, and Ukrainian legal entities are not legal entities, and therefore should not be recognized as subjects to fulfillment of the quota. At the same time, we cannot exclude the interpretation that a foreign legal entity is a legal entity-employer that operates in Ukraine through a representative office located in Ukraine. This approach can also be based on the fact that currently non-residents must be registered with the tax authorities, and a representative office, through its actions, generates legal consequences for a non-resident. We have been already acquainted with cases where the Fund brings a claim against a non-resident through a representative office. The risk of such an interpretation is further increased by the fact that the draft law contains a specific and only exception to the rule regarding which employer is not a subject of the quota:
“The requirements for the quota of workplaces determined in accordance with Article 18-2 of this Law do not apply to diplomatic missions and consular offices of foreign states”.
As one can see, this exception does not include separate divisions of non-residents, so we do not exclude that the Fund will continue to take the position that the obligation to fulfill the quota applies to: (i) a separate division of a non-resident OR (ii) a non-resident that is a legal entity (acting through a representative office in Ukraine). In other words, one way or another, the risks that the quota shall be fulfilled increase.
In view of this, we consider that non-governmental organizations that have a clearly defined funding budget bear an additional financial burden that is not foreseen in their budgets. Therefore, in order to avoid difficulties in the future, it is necessary to engage in the process of introducing appropriate changes to the draft law. For example, you can lobby for the approach that is currently applied to state (budget) organizations – they are obliged to comply with the quota but are not subject to sanctions.
Substantiation of the illegality of the Fund's requirements in case of a claim against a separate division or representative office of a non-resident
Terms of calculation of sanctions
Pursuant to the new Law, the subjects that failed to comply with the quota should be identified and the calculation of administrative and economic sanctions should be sent to them by March 10. Instead, on March 10, 2023, the Pension Fund only approved the relevant acts regulating these issues:
- the Procedure and Form for providing information from the Register of Insured Persons of the State Register of Compulsory State Social Insurance by the Pension Fund of Ukraine to the Fund for Social Protection of Persons with Disabilities, approved by the Resolution of the Pension Fund of Ukraine №. 14-2 as of March 10, 2023, which entered into force on March 2023;
- Procedure for sending the calculation of the amounts of administrative and economic sanctions payable in connection with the failure to comply with the quota of workplaces for the employment of persons with disabilities for the previous year, approved by Resolution of the Pension Fund of Ukraine № 14-1 as of March 10, 2023, which entered into force on March 2023.
The absence of the necessary regulatory framework in 2023 made it impossible for the Fund to identify violators and send them the calculation of penalties, and therefore in some cases, the subjects to fulfilment of the quota were physically unable to pay administrative and economic sanctions on time, by April 15.
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