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Protecting Investors Rights through Employment Law Modernization
Being spurred on by Ukraine's endeavors to move towards EU integration, the Verkhovna Rada of Ukraine has begun adopting new legislation aimed at introducing European values, improving the business climate and attracting foreign investment. Even though not all newly adopted laws illustrate a successful example of harmonizing local legislation with international standards, certain of them may be worthy of attention. In particular, on 13 May 2014 the Ukrainian Parliament adopted the On Amendments to Certain Legislative Acts Regarding Protection of Investor's Rights Act of Ukraine No.1255-VII (the Act) which came into force on 1 June 2014. The Act introduced certain amendments to various legal acts (namely the Civil, Commercial and Labor Codes, and the On Joint-Stock Companies Act), which mostly relate to establishing additional possibilities for the dismissal of company officers and extending the scope of their liability.
New possibilities for terminating employment of senior company managers
Apparently, the primary aim of adopting the Act was to ease certain conservative labor standards in relations with the company's of-fleers, thereby allowing local employers to extend their influence over hired top managers. To do so, the Act introduces certain material changes to labor and corporate legislation. Among these changes is a new provision to the Labor Code of Ukraine (the Code), which stipulates an additional ground for dismissal applicable to the company's officers. Pursuant to this amendment, a company can now dismiss its officer through termination of powers of such an officer. From the perspective of Ukrainian labor law, such a dismissal would qualify as termination of employment at the employer's initiative meaning that no consent of the employee is required.
It is worth noting that this ground is not very typical for Ukrainian labor law, as the law normally requires that, in order to dismiss somebody at the employer's initiative, either an employee should violate some rule or employment obligation or, alternatively, a certain external reason like an employee's continuous sick leave shall arise. By contrast, to terminate employment with this new ground, there is no need for the employer to prove that there were certain pre-conditions (neither connected with the employee's behavior nor independent). The only requirement to be met is that the company shall terminate powers of the officer at first, irrespective of whether such a termination is well-deserved or groundless.
Thus, one may believe that local companies are now free to change their management quickly and painlessly. Nevertheless, there is a need to consider certain aspects related to such dismissals that may impede an employer's efforts to quickly replace its officers.
First of all, it is worth of mention that the Act is aimed at protecting the interests of not only employers but also employees who may be subject to dismissal under the new ground. Specifically, as envisaged by the Act, if the company decides to terminate employment relations with its top manager due to termination of his or her powers, such a company should bear in mind that it will need to make a severance payment to the dismissed employee in the amount of at least six salaries of this employee. Thus, depending on the amount of salary of the employee and financial position of the company, upon certain circumstances it may be worth considering certain other ways to terminating the employment of a top manager.
While granting certain new possibilities to employers with regard to relations with their officers, unfortunately, the Act contains some technical gaps, which may impede successful implementation of such possibilities. For instance, under the Act, the new ground for termination of employment is applicable to a group of employees referred to as "officers". Notably, neither the Act nor Ukrainian labor law in general provides for a definition of "officers". Also, current labor legislation lacks any explicit and multi-purpose guidelines on how to determine which positions shall qualify for being "officers" for the purposes of termination of employment relations with such officers. At the same time, the Code includes some provisions that may give grounds to consider a very broad range of persons as officers, namely, those employees who have any management powers in a company. For example, Article 113 of the Code, which relates to payments in case of production downtimes, refers to the works foreman and taskmaster of a worker as officers.
Certainly, employers may rely on pertinent provisions of other laws that give some criteria to identify positions falling under "officers". Specifically, there are some relevant clauses in corporate legislation, inter alia, in the Economic Code of Ukraine, On Business Entities Act, and On Joint-Stock Companies Act. The said laws limit the circle of company officers to participants of corporate governing bodies of relevant companies types. Nevertheless, these acts are not exclusive among the legal documents dealing with the "officers" issue. For instance, such legal acts as the Customs Code of Ukraine or On Public Service Act also contain their own rules defining group of officers of a company.
Thus, while applying the Act to dismiss its top managers, the company will need to decide how to deal with the vague wording of this legal document. Notably, this issue will likely become even more important in the light of novelties of the Act regarding the so-called material (financial) liability of officers, as described in more detail below.
Another ambiguity introduced to the Code by the Act is that the latter does not clarify what shall be meant under "termination of powers" of the officer as grounds for his or her subsequent dismissal. Giving the purpose and scope of the Act, it seems reasonable to apply the provisions of corporate laws, nevertheless, absence of relevant references or guidelines in the Act creates a basis for some legal uncertainty.
Therefore, apparently, in the event of a dispute regarding dismissal under the new ground, the absence of clear-cut definitions or guidelines in specialized laws would always grant additional chances for an interested party to win.
Scope of material liability
Along with the additional possibilities to dismiss the company's officers, the Act introduces a new approach to measuring the scope of their material (financial) liability. In particular, from now on the officers will be liable for the lost profit suffered by the company and their financial liability to the company will not be limited to average monthly remuneration. Moreover, the Act excludes the possibility to regulate issues related to the officers' liability in constituent and other internal documents of the company and from this point forward such issues can only be regulated by Ukrainian laws.
Indeed, each employer may welcome such legislative changes, as these novelties are aimed to influence on the top managers, raise the level of their prudence and compel them to be more responsible for their managerial decisions. At the same time, the broad and controversial wording of new provisions and lack of clear procedures could cause some difficulties in their implementation.
First of all, one may believe that such novelties contradict the other provisions of the Code which contains the general concept providing guarantees to employees that their liability is limited only for direct damage caused to the company. It is apparent that at some point in the past the legislator meant to extend such guarantees to all employees including top managers. Now, the situation has changed and the Act has just merely made an exception from this general concept set by the Code. Nevertheless, it is no secret that Ukrainian controlling agencies and courts can exercise different approaches. Thus, hopefully, in the near future Ukrainian controlling agencies and courts will add clarity in this issue.
Secondly, as mentioned earlier, the absence of a concise definition of the "officers" in the Act and labor legislation may also impede the smooth implementation by the companies of their rights to impose full financial liability on such categories of employees. Therefore, the company should be prepared to deal with this issue and substantiate its position in court.
Despite the new scope of financial liability of officials, the Act has not introduced any changes to the procedure of imposing full financial liability on such employees. As before, to impose full financial liability the company needs to file a claim to the relevant local court. During a trial the company should prove the grounds for imposing such liability. In particular, it should prove that the damage occurred was due to violation of the work duties assigned to such officer and was a result of his/her unlawful actions or omissions. The company also needs to substantiate that the damage does not belong to the category of normal production and commercial risk and the officer has not caused the damage through extreme necessity. Thus, the Act did not make it easier for the company to impose financial liability on officers.
It is also worth noting that the Act narrows the list of cases when the company may impose the limited financial liability (in the amount not exceeding one average salary of an employee) on chief executive officers and managers of business units of the company, as well as their deputies. In particular, today such cases include liability for failure to take necessary measures to prevent production downtime, excessive payments to employees and inaccurate accounting and storage of valuables. At the same time, the liability of the mentioned employees for production of defective products, making of excessive payments (except for excessive payments to employees), theft and destruction of material and financial values is no longer limited to average monthly remuneration.
It is evident that with the introduction of the novelties stipulated by the Act, Ukraine has taken an important step towards modernization of its labor law standards and showed its eagerness to create a favorable environment for business. Despite endeavoring to make substantial improvements, it is questionable as to whether the new amendments are sufficiently comprehensive and complex to attain the expected goals. Arguably, this may result from general obsoleteness of Ukrainian labor legislation, which reforms envisage a lot of work in the future. Nevertheless, implementation of the Act will hopefully entail positive consequences for the creation of a comfortable legal environment in Ukraine for both local and foreign business.