Investor considerations
- Ukrainian labour law still contains many socialist concepts, including a strong sense of the employee's right to work and restrictive conditions on employment.
- Employer contributions to various social security funds exceed 36% of an employee's gross income, up to a maximum income of approximately USD 1,600 per month.
|
Content
7.1 Labour relations and the Labour Code
Employer / employee relations
Employment conditions in Ukraine are generally governed by the Labour Code, which was enacted when Ukraine was still part of the Soviet Union. The Code still contains many socialist concepts, including a strong sense of the employee's right to work, and many protections for employees.
Potential employers should familiarise themselves with the general provisions of the law. Consistent with many other countries, complying with local labour laws tends to be one of the bigger challenges facing investors.
Although employers can enter into individual labour contracts with employees, the terms of those agreements may not be worse than conditions guaranteed under the Labour Code. Contracting out of the provisions of the Labour Code is not possible.
Notwithstanding the above, the Code itself is not that strongly enforced. When issues do arise, they tend to be pursued directly with the courts, rather than through a relevant administrative agency. If employers are aware of and respect the statutory rights of employees, labour should not cause any significant issues for employers in Ukraine.
Unions
Unions have a visible place in the labour market. There is a specific law for Trade Unions. They are easy to establish and the law grants certain benefits to the unions. The largest trade union confederation in Ukraine, the Federation of Trade Unions of Ukraine (FPU), claims to unite more than ten million trade union members.
The Labour Code recognises collective agreements, and employers must accept collective agreements if demanded by employees.
If a collective greement is established, it will be binding for all employees, even those who are not members of a trade union.
The trade union will also monitor the employer's compliance with the agreement. In addition, approval of the trade union is required before overtime may be worked, and in some circumstances when an employee is being terminated.
7.2 Working conditions
Salaries and wages
Minimum wage levels are prescribed in the annual budget law. At the start of 2007, the minimum wage was set at UAH 400 (approximately USD 80) per month. According to the 2007 Budget Law, this increased to UAH 420 from 1 April 2007, and will increase to UAH 440 from 1 July 2007 and UAH 460 from 1 October 2007.
Wages and other payments to Ukrainian employees should be paid in local currency (hryvnia). Salaries should be credited at least twice each month. Wages and other payments to foreign employees may be paid in foreign currency credited on a monthly basis.
Working hours
In general, working time is restricted to 40 hours per week, with a five-day working week. An employer may introduce a six-day working week, but employers may then not work more than seven hours in a day.
Under the law, overtime is restricted. Employers "may only introduce overtime in the cases of emergency." The amount of overtime may not exceed four hours in any two-day period or 120 hours in a year. The law also requires overtime to be paid at double rates.
The Labour Code also contains provisions that entitle some employees to work shorter weeks. The working week is limited to 36 hours for employees performing work under harmful work conditions. Night shift is one hour shorter, as is the day before a national holiday. Employees must also, if requested, grant a short workday or workweek on proportional pay to a pregnant woman or to a woman having a child under 14, a disabled child, or who is caring for a sick family member based on a medical recommendation.
Paid holidays
There are ten official holidays in Ukraine (see Appendix A). In addition, an employee's minimum annual holiday entitlement is 24 calendar days. This increases to 31 calendar days for employees under the age of 18. When determining the length of a vacation for purposes of complying with the Labour Code, weekends during the vacation period are counted as vacation days but public holidays are excluded.
The law also requires additional leave to be granted to women who have two or more children under the age of 15 or a disabled or adopted child, and to single parents. Workers who are engaged in part-time studies may also be entitled to additional vacation leave.
Paid maternity leave is required for up to 70 calendar days before and up to 56 calendar days after childbirth. Payment is funded by the Social Security Fund, and is based on levels of income used for social security contribution purposes.
Equal opportunities
The Constitution of Ukraine and the Labour Code both preclude discrimination based on race, colour of skin, political, religious and other beliefs, sex, ethnic and social origin, property status, place of residence, linguistic or other characteristics.
In addition, Ukrainian law requires enterprises employing eight or more individuals to employ a minimum number of invalids - 4% of their total employees but no less than one working place. If an employer does not meet their quota, they are required to make a payment to the Fund for the Social Protection of Invalids equivalent to the enterprise's annual average salary (50% for enterprises with eight to 15 employees) for each working place that is not properly occupied by an invalid.
Termination of employment
Employment contracts may be indefinite or for fixed periods. Employees on indefinite contracts may terminate the employment relationship at any time by giving at least two weeks notice. For fixed term contracts, an employee may terminate employment only because of sickness or if disability prevents performance of work under the agreement, or the employer infringes provisions of the contract or the Labour Code.
The Labour Code permits employers to terminate employment relationships for such reasons as reorganisation, failure to perform duties, loss of trust in employees involved in financial matters, theft, etc. It is important, however, to ensure that all termination formalities are complied with. Among these, the statutory period for termination notice is two months.
In practice, employment is commonly terminated by mutual agreement.
Normal retirement age is 55 years for women and 60 years for men.
7.3 Social security system
Coverage
The social security system in Ukraine covers pensioners, workers and their dependants for work-related accidents, illness, retirement, death and disability benefits, sickness and maternity benefits, medical care, severance benefit, and for child and family allowances.
Contributions
Mandatory contributions to Ukrainian social security and pension funds only apply if salary is paid through the payroll of a Ukrainian entity or the Ukraine representative office of a foreign entity. Voluntary contributions to the State Pension Fund, the Employment Insurance Fund and the Social Security Fund are also possible.
The taxable base for contributions (both employee and employer) is capped. For 2007, the cap is set at 15 times the living wage set for able-bodied persons (increased from ten times in 2006). Based on revised living wages, as amended by Parliament on 15 March 2007, the cap is/will be:
- UAH 7,875 (approx. USD 1,559) from 1 January 2007.
- UAH 8,415 (approx. USD 1,666) from 1 April 2007.
- UAH 8,520 (approx. USD 1,687) from 1 October 2007.
Contributions (both employee and employer) are not due on income that is not subject to personal income tax.
Employees' contributions
For employees of Ukrainian entities (including those employed by a representative office), social security contributions are withheld by the employer at source from salary payments, and remitted directly to the appropriate authorities.
From 1 January 2007, Ukrainian and foreign national employee's contributions based on gross remuneration are as follows:
- 0.5% to the State Pension Fund from that part of salary up to the subsistence minimum set for able-bodied individuals, and 2% from that part of gross salary exceeding this amount.
- 1% to the Social Security Fund. A lower 0.5% rate applies if the employee’s gross monthly salary does not exceed the subsistence minimum set for able-bodied individuals.
- 0.5% to the Employment Insurance Fund. Non-Ukrainian national employees and working pensioners are not required to make contributions.
The subsistence minimum for able-bodied individuals is set at the following levels for 2007:
- UAH 525 from 1 January 2007.
- UAH 561 from 1 April 2007.
- UAH 568 from 1 October 2007.
Foreign nationals remaining on a foreign payroll are not liable to pay social contributions in Ukraine.
Employers' contributions
Ukrainian employers are liable to pay social security contributions in respect of their Ukrainian and foreign national employees. From 1 January 2007, the following rates apply based on gross remuneration:
- 33.2% to the State Pension Fund.
- 1.5% to the Social Security Fund.
- 1.3% to the Employment Insurance Fund.
- 0.66% - 13.6% to the Fund for Social Insurance regarding Accidents at Work.
The rate for the Fund for Social Insurance should be determined by the Fund's authorities specifically for each entity, and depends on the level of accident risk of the entity's industry sector. In most cases, the rates will be in the region of 1% to 2%. The extreme rates are only likely to apply to high-risk activities (e.g., mining, working with highly inflammable materials).
Penalties for non-compliance
There are potentially heavy penalties for non-compliance with social security obligations, particularly for contributions to the Pension Fund. For payments to the Pension Fund:
- If the Pension Fund identifies that salaries subject to contributions have been underreported, the penalty for the first offence is 100% of the taxable base for contributions (i.e., the employee's income, rather than the amount of contribution). For subsequent underreporting identified within one year of the first offence, the penalty is 300% of the underreported income.
- Late reporting attracts a 10% per month penalty for the first offence, and 20% per month for subsequent offences within one year of the first offence.
- Late payment is subject to a 10% penalty if payment is made up to 30 days late, 20% if payment is made between 31 and 90 days late, and 50% if more than 90 days late.
Interest on late payments is charged at the rate of 0.1% per day, based on the amount of underpaid contributions.
Penalties are separately imposed by the Social Security Fund, Employment Insurance Fund and the Fund for Social Insurance regarding Accidents at Work. As the penalties are based on contributions (rather than salary levels), the potential penalty exposures are much lower than for the Pension Fund. However, penalties of up to 300% of underpaid contributions are possible for repeated offences.
7.4 Foreign personnel
Fiscal registration number
All taxpayers, including foreign nationals, must register with the State Registry for Individuals. Every individual is assigned a personal tax ID number, which is necessary for various transactions such as renting apartments, opening bank accounts, and paying personal income tax. Receiving the ID number is one of the conditions for obtaining the right to claim a tax credit (deduction) in respect of certain expenses incurred by a taxpayer during the reporting year.
Residence permit
Foreign nationals arriving legally in Ukraine may temporarily stay in the country on the basis of their passport and relevant entry visa (if required).
If a foreign national stays in Ukraine for more than three months for foreign nationals from countries with visa-free entry, or six months for other foreign nationals, the foreign national's passport must be registered with the local agency for internal affairs (police/OVIR). A written application of the foreign national and their local employer must be submitted not later than three working days before the three or six month period expires. The extended registration will be evidenced by a registration stamp affixed to the foreign national's passport.
Work permit
Ukrainian employers must obtain work permits for foreign nationals who are either directly employed by local companies or seconded to work in Ukraine by foreign companies.
Work permits are not required for the personnel of representative offices of foreign companies who are employed abroad, for foreign nationals registered as private entrepreneurs under Ukrainian legislation or for foreign nationals having permanent residence status in Ukraine.
A work permit may be issued for up to one year with subsequent renewal. The overall time of employment in Ukraine is not limited.
The labour authorities must consider an application for a work permit within 30 days after its submission.
Non-compliance with the work permit requirements is subject to penalties, as well as potential deportation of the foreign national from Ukraine at the cost of the employer.
