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Exploring Ukraine’s rapidly expanding outstaffing and self-employment options
Author: Inesa Letych
Source: Business Ukraine. – 18 May 2019
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Innovative approaches to traditional staffing issues are becoming a daily reality in today's Ukraine, but increased attention from regulators means companies must make sure their HR policies are in line with existing legislation. While Ukraine's labor laws continue to borrow heavily from Soviet-era legislation, emerging HR trends reflect significant practical changes taking place in the country's employment sector. As flexible and non-standard forms of employment gain in popularity, this is attracting the interest of legal experts, regulators and law enforcement agencies alike.

Current Trends

Regular employment remains the standard model for relations between Ukrainian businesses and employees, with every aspect of this relationship subject to heavy regulation under local labor laws. However, the existing legislative parameters have become too rigid to deal effectively with the evolving HR demands of modern Ukrainian businesses. This has led to the growth in popularity of numerous alternatives to standard employment.

While it is now increasingly common to hear Ukrainian analysts speak of "non-standard employment" as an umbrella term for the growing list of alternatives to traditional employer-employee relations, two specific options have emerged as the market favorites in today's Ukrainian employment environment. The first is agency work or leased labor, where a staffing agency provides a workforce to a user company. Within the framework of this model, employees work for a user company but conclude employment agreements with the staffing agency. Many in Ukraine refer to this practice as "outstaffing". The second popular approach is to engage self-employed individuals who are not company employees. They work for themselves rather than for a particular employer.

Outstaffing Advantages and Obstacles

Outstaffing depends on a triangular model of relations between an employee, a staffing agency and a user company. The employee enters into employment relations with the staffing agency, which is fully responsible for all the relevant employment-related rights and benefits of the employee. The employee's entitlements and taxes, as well as issues related to the termination of employment or potential employee claims, are the responsibility of the staffing agency. The user company concludes a service contract with the staffing agency and receives the necessary personnel in return for payment of a fee.

This model is especially popular among foreign businesses that operate in Ukraine, particularly in cases where the business has internal limitations governing the number of local staff or payroll expenses. Many businesses also opt for outstaffing as a flexible HR solution because it shifts numerous risks relating to employee claims, dismissals and so forth onto the staffing agency.

Ukrainian laws governing outstaffing are far from perfect but the existing legislative framework does generally allow for the legal use of this model. Nevertheless, the issue of outstaffing is coming under increasing scrutiny and attracted growing attention from regulators and law enforcement agencies during 2018. This including several criminal cases with businesses accused of a variety of offenses ranging from gross violation of labor rights to tax evasion. This was the result of staffing agencies and client businesses grossly neglecting to observe key legislative rules.

What are the main points to consider? Firstly, a company cannot opt for outstaffed personnel to handle the core functions of its business. Legislation specifies that only staff engaged via traditional employment can perform key functions, while outstaffed personnel are restricted to supplementary or support functions. Secondly, businesses cannot use agency personnel for heavy or dangerous work. Furthermore, engaging workforce for low-paid or overtime work may be not possible within the framework of outstaffing due to salary and worktime constraints.

A further potential pitfall is the very unclear legal distinction between outstaffing, where a company borrows a workforce, and outsourcing, where a company pays a third party for a particular service. Lack of attention to this issue, along with the misuse of outsourcing instead of outstaffing, could qualify as a serious violation. Last but not the least is the reliability of the agency itself. It is crucial to verify whether a potential outstaffing partner agency is a true staffing agency rather than a multifunctional services company. Businesses must do their research and clarify whether the agency observes all the major labor rights of hired personnel and pays their taxes.

Self-Employment

The number of self-employed individuals is constantly on the increase in today's Ukraine. Both businesses and workers benefit from the independence and flexibility this offers beyond the boundaries of traditional employment relations.

However, businesses and individuals are not free to choose between self-employment and traditional regular employment, with classification depending on the nature of their role rather than their preferred label.

Current legislation is only clear on black-and-white situations where there is either an employment agreement in place or a civil law contract with a self-employed individual. Any more ambiguous situations automatically create difficulties, as there are no adequate guidelines on how to distinguish between these two forms of employee engagement. This means that any negligent approach may lead to the reclassification by a labor inspector of a contract with a self-employed individual into an employment agreement.

Businesses may also encounter other potential legal problems when utilizing self-employment options. Starting in 2017, labor inspectors have enjoyed very wide powers and can impose significant fines on businesses that abuse contracts with self-employed individuals. Consequently, as of early 2019, the number of court cases where businesses appeal against the decisions of labor inspectors continues to increase.