Business models with civil contractors are under new threat?
PwC, Kyiv, Ukraine,
Wed, Feb 20, 2019
Recently the Ministry of Social Policy of Ukraine published the draft Law* that aims to prevent the use of “undeclared labor”.
The said draft Law lists 7 specific attributes typical of employment relations, which include, among others, the following:
· Payments for services provided by a civil contractor are made with certain regularity;
· Remuneration for services rendered by the civil contractor to the company is the only source of the contractor’s income, or it constitutes 75% or more of his/her income for the period of six months;
· The contractor provides services, the nature of which is similar to the work duties of the company’s employees
· A company regulates the contractor’s working regime.
According to the draft Law, if at least 3 out of 7 attributes are present, the relations between the company and the civil contractor may be deemed as de-facto employment relations.
The novelties proposed by the draft Law are expected to have a significant impact on Ukrainian businesses that have legal relations with private entrepreneurs based on civil agreements, and to create a threat to normal business operations if such relations become subject to scrutiny by state authorities.
Based on information received from a number of sources within state authorities, the draft Law is designed to uncover hidden employment and impose penalties in cases where:
(a) companies routinely contract physical individuals (non-entrepreneurs) rather than conclude employment agreements with them, and
(b) companies pay salaries “in envelopes”.
At the same time, the draft Law does not explicitly address the problem in this particular context, but rather suggests a wider interpretation affecting also business models where companies have contractual relations with private entrepreneurs. Therefore, this document requires further improvement with its focus placed more on protection of interests of companies using such business models based on justifiable legal, tax and commercial grounds.
The draft Law is currently subject to public discussion. The Ministry of Social Policy is collecting feedbacks from interested parties until 8 March 2019. Please let us know if this topic is likely to affect your business, and we will discuss how we can help.
* Draft law “On Amendments to some legislative acts of Ukraine regarding strengthening of protection of employees' rights and combating the use of undeclared labour”