Ukrainian Ministry Suggests Legal Test And Factors For Consideration When Assessing Reclassification Of Contractual Relations With Independent Contractors: What Does It Really Mean For IT Industry?

The Ukrainian Ministry of Social Policy's ("Ministry") recent draft law “On Amendments to Certain Legislative Acts of Ukraine with regard to Strengthening the Protection of Employees' Rights and Prevention of Hidden Employment” (“Draft Law“) was unsurprisingly met with uproar in the IT community. It came amid promises from the Ukrainian President to facilitate the development of IT industry¹ to become one of the global leaders within the next five years². It seems that the Draft Law was a surprise for the Ukrainian President, too. According to the President, the Draft Law is a working initiative produced by the Ministry. He claims not to have previously seen the Draft Law, while the Cabinet of Ministers of Ukraine has not yet made any decisions on the Draft Law³. Given the presidential elections in March 2019 and parliamentary election in October 2019, the Draft Law is unlikely to be signed into law during the current year. The Ministry will have no alternative but to find other ways to fill the Pension Fund. The dust should settle soon and only attempts by presidential candidates to use this situation as an opportunity to increase their ratings will remain.

However, despite the unlikelihood of the Draft Law being adopted, it opens the curtain on the official position of the Ministry and controlling authorities (e.g. the State Employment Service of Ukraine) pertaining to this highly debatable and unregulated issue.

Definition and factors of employment relations

While there are various novelties suggested by the Draft Law, most importantly it suggests a legal test to assess whether certain contractual relations with independent contractors are essentially of an employment nature.

In particular, the Draft Law introduces the notion of 'employment relations'. It suggests defining this as relations between employer and employee, which involve the employee’s personal performance of specific paid work assigned by the employer and performed under their supervision and control together with mandatory compliance with the employer’s internal regulations.

Furthermore, according to the Draft Law, work (service) is considered performed within employment relations, irrespective of title and type of contractual relations between the parties, in case three and more of the following factors of employment relations are in place:

1. Regular (two or more times) remuneration (be it monetary form or in kind) provided to the individual for performing the work (providing the services) in favor of another person;
2. Personal performance of work (provision of services) according to specific qualification, profession, or position that is assigned and controlled either by the beneficiary party or its agent;
3. The remuneration for performed work (provided services) is the sole source of the individual's income or constitutes 75 per cent of the individual’s income during a six-month period;
4. The work is performed (services are provided) in the workplace determined either by the beneficiary party or its agent and the individual is expected to comply with internal regulations;
5. The individual performs work (provides services) which are similar to the work (services), which are usually performed by employees of the employer;
6. The beneficiary party or its agent arranges for a working environment, in particular, provides working instruments (facilities, tools, materials, raw materials, working place); and
7. The beneficiary party or its agent determines working time and rest time.

The above one-step legal test is expected to be carried out by the State Employment Service of Ukraine and the courts. The individual performing the work or rendering the services is supposed to have the right to request that the State Employment Service of Ukraine assess whether his or her contractual relations are in fact employment relations.

Comment

Although the Draft Law is not expected to change the current situation, it provides a helpful insight into both the potential legal test and factors the controlling authorities will carry out and primarily take into account when considering whether certain contractual relations with independent contractors are in fact employment. The seven factors listed in the Draft Law are now regarded as the main factors, though without turning them into law and forming an exhaustive list of factors, the controlling authorities will have unreasonable discretion to elaborate on additional factors they might consider relevant for some particular case.

As a matter of precaution in the changing regulatory landscape, IT companies should pay more attention and, where necessary, reconsider the existing structures of contractual relations with independent contractors to make sure any reclassification/hidden employment risks are mitigated to the greatest possible extent and meet the current enforcement trends.

Footnotes

1 https://www.kyivpost.com/ukraine-politics/ukrinform-poroshenko-promises-to-facilitate-development-of-it-industry.html

2 https://ukranews.com/en/news/612713-poroshenko-promises-to-defeat-poverty-due-to-developing-farming-and-it-sectors-if-re-elected

3 https://www.president.gov.ua/en/news/it-sektor-yak-nash-prioritet-maye-vidchuvati-sebe-zahishenim-53378

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.