Cover Story (#12 December 2017)

Big Changes

The new Labor Code of Ukraine is on the agenda of legislators at the second reading stage. It is a widely recognized necessity to change employment legislation from the outdated Soviet one to the current needs of the market economy. Certainly, the document really does provide for big changes that will touch everybody in this country. We met Tetyana Ivanovych, counsel of Spenser & Kauffmann, to find our way around the numerous novelties, rights and duties of employers and employees.

What developments in labor and employment requests do you observe from your clients?

Tetyana Ivanovych: Since 2014, the lions share of such requests relate to labor law amendments expected to be implemented (and partially already implemented) in connection with the ratification of the EUUkraine Association Agreement by the Verkhovna Rada of Ukraine. Thus, having embarked on a course towards harmonization of its labor laws with the EU, Ukraine assumed the obligation to align its laws with EU directives on employment, social policy and equal opportunities within the next three years. These directives, the most important ones, in my opinion, set minimum standards for the protection of employees, in particular relating to an employers duty to inform employees of the terms of employment, part-time work, mass redundancies, general requirements for consultations with employees in case of a change in ownership, equal treatment in employment and occupation, and implementation of the principle of equal treatment between persons irrespective of racial or ethnic origin. Meanwhile, Ukraine is free to choose the ways in which it implements the said Directives, and most of their provisions have already, to a lesser or greater extent, been reflected in the Draft Labor Code.

How do the new upcoming changes in legislation alter demand for legal services?

T. I.: Undoubtedly, in order to fulfill its obligations to implement EU employment laws through proper implementation of the said Directives, Parliament will have to consider the Draft Labor Code in its second reading.

Once the Labor Code is adopted, Ukrainian labor laws will undergothe biggest changes since independence and, therefore, the demand for legal services in the field of employment law will rise.

The Draft of the Labor Code envisages lots of novelties. In particular, employment agreements are introduced. What advantages and disadvantages for both parties do you anticipate?

T. I.: The Labor Code provides for the obligatory written form of an employment agreement and sets out its mandatory (material) and additional terms. The list of mandatory terms is exhaustive; they include: 1)the place of work; 2) the effective date of the employment agreement; 3)the job function to be performed by the employee: name of occupation, specialization, qualification and title according to the established classification of occupations and occupational titles; 4)the terms of labor remuneration; 5)the work and rest schedule, if different from general rules established by this employer; 6) safety at work rules.

The employment agreement may also contain other additional terms, such as, for example, a trial period, an undertaking not to disclose commercial secrets and other law-protected information, the employees occupational training, re-qualification and upgrading of qualification, etc. This list is non-exhaustive.

Systemic analysis of the Labor Code and Directive91/533/EEC on an employers obligation to inform employees of the terms of employment allows us to draw the conclusion that upon adoption of the Labor Code, practically all provisions (terms of employment) laid down in the said Directive will be implemented and, therefore, Ukraine will in so doing align its laws (on informing employees) with EU laws.

At the same time, despite the rather high demand for lease of personnel among businesses (both international and domestic), the Labor Code still fails to regulate the procedure for entering into lease of personnel agreements (staff leasing, outsourcing/outstaffing) and the financial terms of such agreements. This causes certain legal ambiguity as to the mandatory terms of such employees written employment agreements regarding their place of work, working hours and safety at work: should these terms be defined by the client company or the outsourcing provider?

In addition, employers have to reestablish their relations with CEOs. What kind of procedure should be followed? Does it leave room for abuse from the employers side?

T. I.: Taking into account the areas of responsibility and range of powers, the most important figure of a business entity is, of course, its CEO. It is important to stress here that the Labor Code abolishes employment agreements in the form of contracts, which have been common practice in Ukraine. Instead, a fixed-term employment agreement may be signed with the CEO. Thus, after adoption of the Labor Code, contracts signed earlier with CEOs will be regarded as fixed-term employment agreements. The Labor Code also retains the possibility to include additional grounds for termination of employment in an employment agreement with the CEO.

A CEOs irregular working hours, which are now a de facto common practice, will have to be paid as overtime work, because the Labor Code provides that if the director is thus called to work twice or more per month, such work will be regarded as overtime work.

In contrast, there will be an additional option of setting a flexible work schedule for directors. In accordance the Labor Code, directors may plan their working time independently, provided that they meet their deadlines, and then the employers will not need to keep record of the hours worked by them.

The grounds for terminating the employment of directors have also changed. The Labor Code contains more detailed provisions regarding termination of the powers of officers as an additional ground for terminating an employment agreement at the employers initiative as compared to the currently existing ground: the CEO may be dismissed by the decision of the supreme governing body or the supervisory board to terminate the powers of the chairperson and members of the supervisory board and/or the executive body. The current severance pay of six months will be abolished.

There will also be new grounds for terminating the employment of the director at the employers initiative. Such grounds will include: violation by a companys CEO or members of its executive body of the rights of its founders (participants); disclosure of a state secret, a commercial secret or other law-protected information, provided that the respective employee has signed a non-disclosure undertaking, and denial of access to a state secret.

With the market getting competitive, restrictive covenants have become a widespread practice that need a regulatory framework. What are the most commonly used covenants? How are they regulated at the moment and in the new Labor Code?

T. I.: As of today, the non-competition clause is one of the most complicated contractual instruments that are universally spread, especially in common law countries. In case law countries, restrictive covenants are divided into the following four main groups: (1)non-compete covenants, which prohibit competition with a former employer; (2)non-dealing covenants, which prohibit an employee from dealing with the employers former or current clients; (3)non-solicitation covenants, which prohibit an employee from soliciting the employers former or current clients, and; (4)non-poaching covenants, prohibiting an employee from enticing away the employers other employees. For performance of such agreements, the practice has formed the following material terms of an agreement: the written form of an agreement; the renewal clause (such agreements are specific in that they are executed for a fixed term, and so if the grounds for renewing the agreement continue to exist, the parties may, of their own free will, extend the term of the agreement); the indication of the geographical area covered by the restriction, and the definition of the compensation payable by the employer to its former employee for compliance with such covenants (in order to maintain a balance between the interests of both employers and employees, the principle applies that the larger the geographical area covered by the restriction, the bigger the compensation payable to the employee).

With regard to Ukraine, non-solicitation and non-compete agreements are contrary in their substance to the right to employment guaranteed by Article 43 of the Constitution of Ukraine, which correlates with Article 9 of the Code of Labor Laws of Ukraine on the invalidity of employment agreements introducing worse conditions for employees and, therefore, related court disputes are settled against the employer. For the same reason, these concepts were not supported by the authors of the Labor Code.

However, the Labor Code still provides for the possibility of binding an employee not to disclose state or commercial secrets and other protected information. Furthermore, the Labor Code provides for payment by the employer of financial compensation for non-disclosure to the employee, which fully corresponds to established world practice. In our opinion, the non-disclosure provisions of the Labor Code will result both in a rise in the number of court cases and in the percentage of precedents favorable for employers, because the Labor Code creates an effective mechanism for protecting businesses as it not only binds employees not to disclose confidential or other information, but also establishes liability for a breach of their non-disclosure obligation (such breach is a separate ground for termination of employment at the employers initiative).

What kind of discrimination do you face in your practice? How would you comment on anti-discrimination amendments?

T. I.: Discrimination cases are not widespread in Ukraine, because it is difficult to collect necessary evidence to prove that discrimination actually took place. Nevertheless, it is hard to exaggerate the importance of the inclusion of anti-discrimination amendments in the Labor Code. Therefore, pursuant to EU directives, the Labor Codes list of basic principles governing legal regulation of employment relations includes, for the first time, prohibition of discrimination in the field of labor and provision of persons subjected to such discrimination with the right to apply to a court seeking recognition of the fact of discrimination and its discontinuation, as well as damages caused by such discrimination.

At the same time, however, the anti-discrimination amendments made to the Labor Code in their wording proposed for the second reading in Parliament do not fully reflect/detail the provisions of EU directives providing for a broader definition of the very concept of discrimination. Namely, introduction of definitions of the terms direct and indirect discrimination, harassment and sexual harassment. Since the availability of these definitions directly affects the possibility to establish whether discrimination has really taken place, we believe that the next step should be to expand Article 3 of the Labor Code in line with the above recommendations.

What is the current role of trade unions? What changes should be expected?

T. I.: The Labor Code provides for a considerable reduction in the role of trade unions. Thus, prior approval by a trade union or a trade union representative is required for termination of an employment agreement at the employers initiative only in case of (1)redundancy or (2)detection of the employees unsuitability for the position held, or the work performed due to his or her state of health or insufficient qualifications.

The permission of a trade union is also no longer required for overtime work; after the Labor Code is adopted, it will be sufficient to obtain the employees written consent and give prior notice to the trade union.

The employer still has the duty to consult with the trade union in case of redundancy, but the period for such consultation has been reduced from three to two months, namely: at least two months prior to the planned dismissals, the employer must provide the trade union or its representative with justification for such dismissals, as well as the number and the categories of employees who can be dismissed.

In the authors opinion, such reduction of the period for consultations with trade unions about forthcoming dismissals restricts, to a certain extent, the rights of trade unions to process information in a timely manner, which, among other things, is contrary to EU directives establishing a general framework for informing and consulting employees providing that information shall be given at such time, in such form and with such content as are appropriate to enable, in particular, employees representatives to conduct an adequate study and, where necessary, prepare for consultation.

There have been many claims made that the new Labor Code protects employers as it, among other things, includes an array of provisions to suspend employment and stop labor relations. What additional risks should be taken into account by employees for them to protect their rights?

T. I.: Certain grounds for terminating employment relations have been expanded to include the following grounds: (1)decision of the employers supreme governing body or supervisory board to terminate the powers of (revoke) the chairperson and members of the supervisory board and/or the executive body, as well as of any other employees if their appointment (election) and dismissal (revocation) falls within the competence of the supreme governing body or the supervisory board in accordance with the employers constituent documents; (2)execution of an employment agreement contrary to requirements of the Law of Ukraine On Prevention of Corruption; (3)circumstances beyond the parties control, namely: entry into force by a judgment rendering further employment impossible and cancellation of the decision on reinstatement of employment; at the request of a minor employees parents or persons substituting them or relevant authorities; upon death of an individual acting as the employer / an employee, his or her recognition as missing or dead; upon breach of the rules governing execution of employment agreements; due to the occurrence of exceptional circumstances preventing their continuation.

As previously mentioned, the expansion of grounds for terminating employment relations at the employers initiative (as a certain ground for employment termination) is a positive thing for the business community, because such changes have been mandated by already existing economic realities. As already mentioned above, such additional grounds include: disclosure of a state secret, a commercial secret or other law-protected information, provided that the employee signed a non-disclosure agreement; denial of access to a state secret; violation by the companys director or members of its executive authority of the rights of its founders (participants); repeated breach by an officer of requirements of the laws governing licensing and issue of permits.

In addition, the Labor Code provides for the possibility of suspending an employment agreement without terminating employment relations. The grounds for suspension of an employment agreement include imposition of a judicial restraint on the employee making it impossible for such employee to continue his or her work; the employees suspension from work, etc. However, as rightfully noted in the Reservations of the Central Legal Department of the Staff of the Verkhovna Rada of Ukraine to the Labor Code, the Labor Code does not provide a procedure for payment of labor remuneration during the period of suspension of an employment agreement and for the execution of an employment agreement. Therefore, this part of the Labor Code needs to be clarified and developed further.

What changes do you expect on the labor market?

T. I.: It is possible to say with certainty that Ukraine is on the right course towards harmonization of its national legislation with that of the European Union. This will make it possible to take legal relations in the field of employment to a new level and maintain the balance between the interests of both parties, employer and employee.

Spenser & Kauffmann Key facts
  • Year of establishment:
  • 2006

  • Number of lawyers/partners/tax consultants:
  • 30/3/2

  • Core practice areas
  • Accounting Services, Antitrust and Competition, Banking and Finance, Capital Markets, Corporate and M&A, Energy and Natural Resources, Enforcement Proceedings, Insurance, Intellectual Property & IT Law, Labor & Employment, Litigation & Dispute Resolution, Private Client, Real Estate and Land, Tax Litigation, Tax Consulting

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