BUSINESS LEAGUE: LAW, June 25, 2019
Illya Kostin, attorney-at-law, partner at Legal Alliance Company
Yaroslav Furiaka, associate at Legal Alliance Company
For more than 24 years Legal Alliance Company has been providing full package of services for clients running a business in the realm of pharmaceutics, medicine, veterinary medicine, cosmetics, chemistry, biotechnologies and food products. The point of proper staffing, including its organization, within the giving industries range is always urgent for our clients. Since outstaffing is extensively used by business, our team of lawyers has formed a multifaceted approach, taking into account the considerable experience of work in the area of labour law. This approach allows to minimize the potential risks of adverse consequences ensuing by way of authorities sanctions for our clients as a result of outstaffing services use.
Outstaffing phenomenon
By the day, use of outstaffing as a special way of ensuring work performance by non-staff personnel is permanently increasing. Essentially, outstaffing means a service of employment into provider’s staff (service provider) employees and further sending them for work performance to an employer, who is unwilling to retain such staff in its company for some reason.
These days, many publications on outstaffing advantages can be found, in particular in the context of optimizing staff management and personnel work, possibly reducing the financial (tax) business rates, and minimizing the risks arising from cooperation with employees on the basis of labour agreements. However, the increased use of this instrument often results in heightened interest of the authorities, including law enforcement agencies.
In our view, the reason for that is the primitiveness of legislation that regulates relevant processes. Nowadays, therefore, the whole amount of regulation is covered by only three acts – the Tax Code of Ukraine, the Law of Ukraine "On Employment of the Population" and the Resolution of the Cabinet of Ministers of Ukraine No. 400 dated 05 May 2013. In fact, the legislation provides us with a brief definition of this process, a short description of its features and restrictions, and the need for specific approvals for the service provider (now it is amended for making an entry into the special list).
As it is known, the more simply a certain process is described in the legislation, the more opportunities for the entities to use it for their own goals realization. Certainly, the authorities draw special attention to this fact, therefore all users of such services fall under total suspicion. Actually, the State Labour inspectors and revenue officers pay considerable attention to outstaffing relations.
Equation of outstaffing with labour relations
The principal instrument in the fight of the State Labour inspectors against outstaffing is the recognition of labour relations between an employer and an outstaffer.
Such manipulation is carried out according to the following criteria: the individually determined labour function, subordination between a customer and an outstaffer, subordination of an outstaffer to the work rules at a customer’s company. These features usually indicate the nature of the employment relationship.
In this case, not the best the situation appears for the participants of such relations, because the labour function of an employee is determined by a provider at the request of a customer and performed for him. The subordination is expressly provided for in legislation as the staff placement. The subordination to the rules of work is also a requirement of the legislation according to which the time of work and rest for outstaffers is established in the same way as for customer’s employees.
The inspection authorities and courts can consider the responsibility and encouragement of the staff (imposing sanctions by an employer and payment of additional remuneration directly to an outstaffer), interaction of an employer with the staff within the qualification requirements formation (certification and knowledge improving of an outstaffer) as additional markers of employment relationship. Moreover, an employee should also realize the outstaffing process, in particular the organization of such relations, and in case of taking his explanations on the issue to voice the correct position.
The position regarding the necessity of using the indicated features to establish labour relations has been repeatedly confirmed by the court practice, in particular by the Decision No. 814/1015/17 dated 20 December 2018, the Resolution No. 820/1432/17 dated 04 July 2018, Decision No. 2140/1340/18 dated 08 November 2018.
In fact, a customer of the outstaffing services according to the described criteria for distinguishing labour relations from civilian ones can be considered as an employer of outstaffers, resulting in the inspection authorities may start more detailed documentary examination of such entity, that further can bring to responsibility.
Individual view of revenue officers on outstaffing
The fiscal authorities have their own approach to transforming outstaffing relations. According to the results of such manipulations, a customer and a provider can often attribute the fictitiousness of business transactions, which, in the opinion of revenue officers is aimed at reducing tax burden or money laundering. The main criteria on the basis of which the authorities make conclusions about the nature of the relationship is the lack of proper documentation of the services provided, the lack of appropriate resources on the part of a provider, and the lack of economic sense of such operation implementation.
Thus, the work fixation of an outstaffer as a service under an outstaffing agreement should be carried out with the help of Services Completion certificates, the data on which should match the provider's internal labour documents, as well as documents confirming the amount of time actually used by each employee (Decision No. 2140/1340/18 dated 20 March 2019). Moreover, it is argued that the certificates should contain personalized data of outstaffers (Decision No. 821/1103/17 dated 13 December 2017). However, this position is not final, as the court decision is appeal at the time of this material preparation.
The resource availability in the provider implies that only provider’s own employees can be given, otherwise it will contradict the content of outstaffing (Decision No. 804/7238/17 dated 27 June 2018). The information should also be considered under the available resources. The customer needs to provide information on the peculiarities of the work for proper charging and payment unified social tax (UST) by the provider, in particular the information on occupational risk category regarding outstaffers (Decision No. 814/1015/17 dated 20 December 2018).
The economic reality implies an objective impossibility of work by the forces of the customer's employees and the economic viability to apply outstaffing. The lack of economic viability of business transactions, except for obtaining a tax benefit, is the basis for reducing the amounts of such tax benefits (Decision No. 816/4226/13-a dated 24 January 2018).
The above criteria for considering outstaffing services as a fictitious business transaction may also be accompanied by a study of the connection between a customer and a provider (a provider offers services to only one customer), the lack of specialization (the registered type of activity according to the Code of Commercial Activities in a provider) and the evidence of establishing business connections between a customer and a provider. The described additional criteria are mentioned in the Methodological Recommendations No. 40795/7 / 99-99-11-04-04-17 dated December 26, 2016, Decision No. 815/3666/16 dated 22 March 2018 and Court Order No. 816/937/14 dated 09 June 2016
Thus, revenue officers, first of all, will assess the economic component of the outstaffing to determine the reality of the services on the basis of the documentary provision of relevant processes.
Sanctions against defaulters and ways to minimize risks
If a violation is established a customer of services will be ordered to pay a fine of 30 minimum wages for the employee's permission to work without the employment agreement. For a provider the amount of fine will be 20 minimum wages provided no record of the service provider at the relevant list.
In the scope of taxation a fine is 25-50% of the amount of a defined tax liability. In addition, the amount of tax to be issued will be charged.
Furthermore, the actions of participants in such legal relations can be qualified as criminal offenses stipulated by Art. 212 of the Criminal Code of Ukraine – evasion of payment of taxes, fees (mandatory charges), art. 209 of the Criminal Code of Ukraine – legalization (laundering) of the proceeds of crime, art. 205 of the Criminal Code of Ukraine – fictitious entrepreneurship and other activities.
In order to minimize the occurrence of the above-mentioned risks and confirm the integrity of the outstaffing relations, we recommend taking into consideration the requirements of the legislation regarding mandatory attributes and restrictions of outstaffing stipulated by the Law of Ukraine "On Employment of the Population", to verify the status of the provider (the Ukrainian Classificator of types of economic activity, availability in the list of service providers, in the future having permission), to conduct a preliminary verification of a provider's internal labour documentation, to ensure proper level of attention to the primary documentation and accompanying documents, do not forget about the criteria for "authorities’ attention".
The implementation of individual sections in this list without providing a connection between them cannot fully protect your business and guarantee a positive result.
Thus, the most intensive preparation of documents and their independent evaluation by experienced lawyers who can look in an integrated way at the relevant problem, while organizing outstaffing will reduce the attention level of the authorities and serve in the future an appropriate evidence base in court to confirm the existence of just outstaffing relations.
Contact the authors: Illya Kostin
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