While choosing a form of cooperation with an IT specialist (under a labor or civil law contract) a client/employer should take into account some important factors. In particular, such factors are the process of work organization and inspection of work results, the possibility of early termination of labor contract, the consequences of such termination (especially, those related to the protection of confidential information and non-competition, etc.), as well as the risks of potential inspections carried out by fiscal authorities or the State Labor Service.

The well-known desuetude of legal and regulatory acts in the area of labor law causes the problem of formalizing employment relations under the labor legislation in the progressive IT-industry. As a consequence, employers may face potential difficulties with flexible schedules and a remote workplace for employees, as well as overprotection of workers which currently does not meet the real needs of the employees themselves. At the same time, the employer acts as a withholding agent for personal income tax (PIT), unified social tax and military levy and also pays out statutory guarantees.

In case of using more simple and business-friendly way of formalizing relations on the basis of a civil contract (both with individuals and staff of the company registered as private entrepreneurs), there is risk of determination of substitution of labor relations by civil law relations by state authorities. Such substitution is subject to significant fines. Also, while conducting an extraordinary inspection, the fiscal authorities may consider payment of remuneration under a civil law contract as fictitious and charge an additional amount of unified social tax and PIT to be paid by the company.

Major differences between civil and labor contracts

The subject of a civil law contract (independent contractor agreement or services contract) entered into with an IT specialist (as an individual or a private entrepreneur) does not regulate work organization, the contractor is not required to obey the code of conduct and, at his/her own discretion, can determine the time and place of assignment performance, but is personally responsible for the result of provided services in due time.

Thus, the subject of the contract is to obtain a tangible work result, which is subject to measurement in particular physical values, and not the work process itself. It should be kept in mind that in case of work outside the labor relations, the IT specialist is deprived of any social guarantees.

At the same time, according to labor law, an employee holds a specific position, performs work under the code of conduct, carries out an employment function without reference to the result and has a low level of responsibility (since clear identification of work results is absent). The work activity is not terminated upon completion of the specified task.

The differentiation above is confirmed by the Supreme Court decision No. 127/21595/16-ts determining that the subject of a labor contract is work, while the subject of a civil law contract is a performance by a party of a certain amount of work.

Work organization and remuneration

The nature of IT companies mostly includes a flexible schedule of their employees, their wish to leave the workplace, work remotely from home or while traveling abroad, and so on. However, the remote work issue is not substantially regulated by current labor legislation. The law provides only for the possibility of home-based job under the obsolete Resolution of the State Labor Committee dated 29.09.1981, which completely does not take into account today’s realities. The same thing applies to the work schedule, since the current Labor Code (the “Labor Code”) only establishes the possibility of splitting the working day into parts (Article 60) and setting start and end of the working day for certain categories of workers in the internal code of conduct (Article 57).

Thus, the relevant provisions on remote work (outside the office) and flexible work schedule (mostly in the form of irregular working hours accompanied by the additional annual leave days) must be formalized in the labor contract.

The status of an employee under a labor contract provides the IT specialist with the following guarantees not available in case of conclusion of a civil law contract, in particular:

  • payment of wages twice a month, indexation of earnings;
  • payment of annual and other types of leave, sick leaves, overtime work and night work, maternity leaves, etc.

In civil law relations, the services are paid upon the fact of completion of work based on the act of acceptance for completed assignment. However, the establishment of clear payment schedules (and especially of the advance payment) and social guarantees have a high probability that the relevant authorities will declare such contract as the labor one.

The question arising while working in the IT field is the payment of remuneration based on foreign currency exchange rate. Being not a problem in case of civil law relations, its formalization in the labor contract has some peculiarities.

Current labor legislation does not directly determine in which currency employers are permitted to set salaries for employees. However, it stipulates that in the territory of Ukraine the payment of wages to employees should be made in UAH.  In its letter No. 923/13/84-1 dated 22.08.2013 , the Ministry of Social Policy recommends to set in advance the procedure for conversion of foreign currency (to which the salary is linked) into UAH.

In practice, a possible way of converting into UAH  is the establishment of wages according to the internal exchange rate (much lower than the market rate) determined by the company and fixed in the payroll schedule, and additional monthly compensation of fluctuations in exchange rates according to the NBU rate on the day of payment. Such a mechanism allows to avoid the qualification of the deterioration of the employment terms in case the next month currency exchange rate will be less than the previous one.

Grounds for dismissal

The employer has a limited number of grounds for termination of employment, namely, the law provides for dismissal cases without imposition of fines on the employee.  The most commonly used reasons for dismissal in practice are absence at work, absence due to loss of labor capacity for more than four months, regular non-fulfillment of labor duties or internal code of conduct.

Moreover, single neglect of duties is not a ground for dismissal: only a staff member who was previously subject to disciplinary actions can be dismissed.

It should be taken into account that excessive awareness of the employee of his rights and improper formalization of employment relations by the company itself can lead to long-lasting labor disputes in the courts, since an employee may always refer to Part 3 of Article 38 (breach of labor legislation by the employer) of the Labor Code to require dismissal within terms determined by him/herself and claim for severance pay in the amount of not less than three average wages.

At the same time, a civil law contract may be a fixed-term contract providing for penalties for failure to comply with the provision of services within the prescribed period, disclosure of confidential information, violation of the non-compete obligation.

Risks

The inspection by the State Labor Service and determination of the fact of labor relations substitution for civil law relations may lead to financial sanctions as defined in Article 265 of the Labor Code of Ukraine (up to 30 minimum wages amounting to UAH 125,190).

Nevertheless, any legislative act does not define the features of labor relations.

In the letter No. 10620/0/2-17/13 dated 23.05.2017, the Ministry of Social Policy of Ukraine notes that the features of labor relations are the regular payment of wages for the work process (and not its result); compliance with internal code of labor conduct; performance of work according to profession (position) determined by the National Classifier of Ukraine; the employer’s duty to provide a workspace; observance of the labor protection rights at the enterprise, taking into consideration the labor protection legislation, etc.

In the decisions of the Supreme Administrative Court, namely: decisions No. K-19381/10 dated 07.02.2012, No. K-58453/09 dated 19.01.2012, No. K-24741/09 dated 06.03.2012, the following facts became grounds for determination of civil law relations as the labor ones:

  • a person regularly obeyed the orders of the business entity officials, and the scope of his/her duties fall within the scope of duties of the corresponding job capacity;
  • a person obeyed the internal regulations of the business entity;
  • a person received monthly payments, as other employees;
  • the work hours of the person were indicated in the time sheet.

It should not go without mention about a draft law of the Ministry of Social Policy of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Strengthening the Employees’ Rights Protection and Counteraction to Use of Undeclared Labor” in which it is offered to determine the relations as labor relations if at least three criteria among the following are present:

  • regular (twice and more) remuneration,
  • personal performance of work/provision of services,
  • remuneration is the sole source or equals 75% or more of performer’s income over the past 6 months;
  • compliance with the internal code of labor conduct;
  • performance of work/provision of services similar to the work performed by staff;
  • ordering party provides equipment for performance of work/provision of services;
  • establishing the duration of working and resting time for the performer.

The fact of labor relations presence is established by the official of the Ministry of Social Policy endowed with powers of the State Labor Inspector. The IT community’s response to the abovementioned draft law  was extremely negative.

Conclusion

Thus, despite the contractual freedom established by the Ukrainian legislation, the approach of the State Labor Service and the Supreme Court and other governmental authorities envisages that labor relations should be stipulated in a labor contract with due observance of all legislative guarantees in the field of labor law. However, current labor legislation is not effective because it does not consider the current needs and interests of both business and IT professionals. Of course, currently, the cases of regulating the relationship between the IT employee and the company using civil-law instruments are widespread in practice.

As of today, upon lifting the moratorium on taking planned actions on state supervision (control) in the field of economic activity by the state supervision (control) bodies, there are real risks of imposing fines on companies concluding civil law contracts that, in fact, regulate labor relations. Therefore, when paying attention to the current approach of judicial and supervisory bodies, it is necessary to thoroughly prepare the relevant drafts of both civil and labor contracts.

Yulia Yanyuk, senior associate, exclusively for Yurydychna Gazeta