Introduction to Employment Law of Ukraine
If you decided to establish a company in Ukraine, you will probably need to hire local and/or foreign staff. On this stage it is important to take into consideration particularities of Ukrainian employment law, employment culture, and rules of taxation of employees in Ukraine. Careful legal planning and organization of your workforce in Ukraine can help you to save costs and attract the most qualified candidates to work for you.
Find below a comprehensive overview of Ukrainian employment law, types of employment and rules of their termination, information on working time and vacation, most common employees’ benefits, salary taxation rules and much more.
In Ukraine, a company can hire people either under:
- labor agreement under the Labor Code of Ukraine (i.e. as a salaried employee); or
- sub-contractual agreements governed by Civil Code of Ukraine (i.e. as a freelancer)
In most cases, Ukrainian freelancers are registered as private entrepreneurs (PE) on simplified tax scheme. Terms of their employment are not regulated by Labor Code of Ukraine and all the conditions of employment are included in the services agreement with a freelancer.
Note that if hired as a salaried employee, the company should assume roughly 40% tax overhead on top of the salary in-hand to the employee. On the other hand, in a freelancing arrangement, the salary tax burden is approx. 5%.
As a result of this anomaly, many companies tend to reduce their costs by arranging staff as a mix of freelancers and full-time staff. However, such a structure requires careful tax and legal planning in order to avoid getting on the wrong side of the law. For more information on procedure of registration of PEs and rules of their taxation, please refer to our articles Private Entrepreneur Registration and Private Entrepreneur Tax in Ukraine.
Below you may find particularities of employment of salaried employees under labor agreement.
Requirements for Employment
Residents of Ukraine can work starting from 16 years old, however in certain cases it is possible to employ underaged individuals if they are 14 years old, providing their studies are not affected and parents have given them consent for the employment.
Non-residents of Ukraine are allowed to work on the territory of Ukraine upon obtaining a work permit (with certain exceptions) and residence permit. After obtaining such permits non-residents have the same labour rights in Ukraine as residents of Ukraine.
Types of Employment Agreements in Ukraine
Ukrainian law allows to conclude employment agreement in oral or in writing, however, in certain cases written form is obligatory. Written form of an employment agreement is mandatory for employment of non-residents of Ukraine, persons under 18, if an employee requires so, if the employer is an individual and some other cases as defined by law.
Main types of labor agreements in Ukraine include:
Labor agreement for indefinite term
This type of agreement is the most common in Ukraine and by default, employees are hired for an indefinite term. The indefinite term labor agreement is regulated by the labor law of Ukraine, internal rules of a Company and a collective agreement.
Fixed-term labor agreement
The main difference between fix-term labor agreement and the first one is that the Parties limit employment term to a specific period of time. Note that Ukrainian law provides certain limits regarding repeated concluding fixed-term labor agreements (in certain cases, if a person is employed again for a short term – less than 2 months – by the same employer, he will be considered as employed for indefinite term)
If you need to hire people on seasonal base for the specific scope of work, Ukrainian law allows to conclude a special type of agreement for this purpose with indication of type and scope of work as well as term of employment.
In certain cases, specified by law, it is allowed to conclude employment contract (which is a special type of fixed term labor agreement and has to be only in writing). As an example, employment contract has to be concluded with a CEO of every company and contain the following terms:
- contract duration
- rights and obligations of the parties (including material liability)
- terms of renumeration of employee and organization of his work
- terms of termination of contract and notice period
Term & Limitations of Probation
The probation period may not exceed 3 months for regular employees. For certain categories of employees it is not allowed to implement a probation period, including for:
- persons under 18
- young specialists who have just graduated from the university
- disabled persons
- persons which were hired after competition selection, held by employer
- pregnant women or single mother with a child under 14 or disabled child
- if person is hired for the term not exceeding 12 months
- persons who are hired for temporary seasonal works
- other cases as defined by law
In some cases, employer may introduce a probation period up to 6 consecutive months subject to approval by the Primary Trade Union Organization. Workers (blue-collar occupation) are the subject of a maximum 1 month probation period.
Salary Payment and Taxation Requirements
Types of Employment Agreements in Ukraine
The minimum salary for a full-time employee in Ukraine is UAH 3,200 (approx. EUR 120). According to the State Statistic Service of Ukraine average salary on the territory of Ukraine amounts UAH 6,659 (appx. USD 260) and in Kiev it is UAH 10,788 (USD 415).
Salary has to be paid monthly in two installments, with maximum 16 calendar days break between them.
Companies with place of registration on the territory of Ukraine may pay salary only in local currency Hryvna, salary in foreign currencies is not allowed.
The employer as a tax agent is obliged to pay taxes on behalf of the employee before paying the salary, namely:
- Personal income tax – 18 % payable from the salary base (paid at the cost of the employee)
- Military tax – 1.5 % payable from the salary base (paid at the cost of the employee)
- Social security Tax – 22 %, payable on the top of the salary base (paid at the cost of the employer).
Note that social security tax is calculated for the salary base which does not exceed twenty five minimum living salaries in Ukraine. The minimum living salary is defined in Ukrainian law for the specific period; starting from May, 2017 it amounts UAH 1,684 and as a result, maximum base for social security tax is currently 25*UAH 1684=UAH 42,100.
If salary exceeds UAH 42,100, social security tax is calculated only for the amount which does not exceed UAH 42,100, i.e. the maximum monthly social security tax contribution for one employee amounts UAH 9,262 (22% from UAH 42,100).
Types of Employment Agreements in Ukraine
An employee has a right for an annual minimum 24 calendar days vacation. While the employer may choose to grant an employee a paid leave for longer period, for certain categories of employees the employer is simply obliged to do this (disabled persons, persons under 18, educators, persons with hard or harmful working conditions and some others).
Additionally, an employee may be entitled to get additional leave: a) social (pregnancy leave, paternity leave (for care after children under 3 year old), related to adoption of child; b) educational; c) creative; d) related to preparation for competitions; e) unpaid additional leaves.
Standard working week length is 40 hours with 5 working days per week and 8 working hours per day.
However, the employer may adopt a decision to introduce a six-day working week with up to 7 working hours per day.
Note that employees under harmful working conditions and persons under 18 are entitled to work shorter hours per week (for example, persons aged 14-15 can work up to 24 hours per week, persons aged 16-18 – up to 36 hours per week).
Additionally, some categories of employees may require shorter working week with proportional decrease of salary payment (such as pregnant women or a woman who has a child under 14, a disabled child or those who care after sick members of the family).
Types of Benefits and Their Taxation
The most common employee’s benefits include:
- financial bonuses
- professional training
- language courses
- the option to work from home
- extra days off
- discounts on company’s products
- flexible working hours
- company phone
- rent of accommodation
- company car
- medical insurance
- gym membership
Such benefits can be stipulated by the collective agreement or labor agreement with the specific employee.
Any financial bonuses and personal benefits are added to the gross salary of the employee and taxed accordingly. Exception is if an employee is provided with a company car, company phone, rent of accommodation, other property or gets compensation for their lease and providing their use is related to performing by the employee his labor duties under his/her labor agreement or if such benefits are prescribed by a collective agreement of the company.
At the same time, providing such benefits as professional training, language courses, company phone or car (if used for business purposes) are considered as company expenses and deducted from the tax base of the company.
Termination of Employment
Grounds and Procedure
Ukrainian law defines separate rules for termination of employment under labor agreements, concluded for indefinite period of time, and fix-term labor agreements.
Termination of Labor Agreement at the Initiative of Employee
The employee may terminate labor agreement, concluded for indefinite period of time, at any time at his own discretion with prior 2 weeks written notification of the employer. In certain cases, employee may terminate the agreement at once (if such termination justified and proven by supportive documents, e.g. it is a result of relocation of employee, pregnancy, medical reasons, entering university), In addition, employee is entitled to terminate the labor agreement in a term at its own discretion, if the employer violates terms of labor or collective agreement or Labor legislation of Ukraine.
The employee may terminate labor agreement, concluded for fixed period of time, only based on one of the following grounds:
- he may not perform his duties due to illness
- he was recognized disabled
- if such termination is a result of relocation of employee, pregnancy, medical reasons, entering university, which has to be proven by supportive documents
- if employer violates terms of labor or collective agreement or Labor legislation of Ukraine.
Termination of Labor Agreement at the Initiative of Employer
Employer can terminate labor agreement (both concluded for indefinite period of time or fix-term) only based on grounds, defined by law, including:
- staff reduction
- liquidation of the company
- professional or medical noncompliance of employee
- if a sick leave of the employee exceeds 4 month term
- violation of labor agreement, labor law or internal rules by the employee
- call-up for military service or mobilization of employee
In case of staff reduction or liquidation, the employer has to notify in writing the employee minimum 2 months prior to such termination of the labor agreement and pay him a termination benefit in the amount of his one average salary.
Summing It Up
In Ukraine, a company can hire people either under labor agreement (i.e. as a salaried employee) or under civil services agreement (i.e. as freelancers).
The main law, which regulates employment in Ukraine of salaried employees, is the Labor Code of Ukraine, which was adopted a while ago during the Soviet Union times. Being already rather outdated and often inefficient, it far not always complies with requirements of the modern labor market and economic requirements and therefore, it is probably one of the most frequently violated areas of legislation. Nevertheless, it is highly recommended to carefully adopt employment policy in the company and follow labor regulations so that to avoid time-consuming court disputes and significant losses.
As alternative, both for tax reasons and for flexibility of regulation, more and more companies choose to hire people as freelancers under civil services agreements. In this case, relations between employer and a freelancer are regulated by Civil Code of Ukraine (not Labor Code of Ukraine), so all the terms of employment (such as term of employment, renumeration of the employee, leave notice, sick leave and holidays and others should be included in the services agreement with a freelancer).
On practice, companies often choose a combination of these two forms of employment (when part of employees work as salaries employees and part of them – as freelancers), which, however, requires careful tax and legal planning in order to avoid getting on the wrong side of the law.