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Counsel, Attorney at Law,
Ilyashev & Partners
Ilyashev & Partners
The IT Business in Ukraine and Labor Law
2018 was a significant year for Ukraine’s IT industry in many respects when, according to the data from IT Ukraine Association and Better Regulation Delivery Office, for the very first time it became the second largest export sector in Ukraine. As revealed by Stepan Kubiv, First Deputy Prime Minister and Minister of Economic Development and Trade of Ukraine, the share of the Ukrainian economy held by the IT industry is 4% of GDP. He also noted that while currently there are around 150,000 IT specialists working in Ukraine, this figure will rise to 200,000 in the next 18 months.
The above is a combination of high-level IT education in Ukraine, the high professional qualities of Ukrainian IT specialists, reasonable salary expectations and otherwise lower business-related expenditures than those in the USA, Canada or the majority of European countries. All of this in combination is the reason why many foreign IT businesses are opening their offices in Ukraine or moving their research and development centres to Ukraine.
In the IT sector, people are one of the most important assets (and, perhaps, even the most important one). That’s why labor law requirements and the possibilities allowed are of outmost importance for any IT business in Ukraine.
It should be noted that the Ukrainian labor law generally doesn’t offer any special treatment for IT industry (unlike, for example, tax law, where tax relief has been in place for the IT business since 2013, providing for preferential taxation with regard to VAT and income tax until at least 2023). At the same time, there are two peculiarities that are typical especially for employment relations in IT.
Firstly, there are many cases of informal employment, where employment relations between an IT company and an IT worker exist in all but name. Formally registered as private entrepreneur and cooperating with IT company under a service agreement (agreement governed by civil law rather than labor law), the IT specialist still comes to that company’s office every day from Monday to Friday, works there for at least 40 hours a week, receives equal payments each month (basically, a salary), goes on vacation and otherwise acts as a normal employee. According to certain data, private entrepreneurs account for almost 70% of all IT specialists working in Ukraine, and the above “informal employees” make up a significant (if not the major) part of them. The Ukrainian Government is not very happy about those figures, mostly because engagement by an IT company of a private entrepreneur instead of an employee results in less tax being paid to state coffers. However, the existing law doesn’t enable effective identification of “actual employment” where there is no formal one, and from time to time there are calls for changes to be made to the law and for a clear definition of what “employment” criteria actually are.
Secondly, a two or three page employment agreement, mostly repeating respective provisions of the Labor Code of Ukraine, is not enough for the IT sector, and a proper employment agreement of an IT company should be a highly-customized document dealing with IP issues, confidentiality and special benefits which an IT specialist would normally expect from his/her employer.
Therefore, formalizing the employment of an IT worker under terms and conditions that would both make all the parties involved happy and comply with the limitations of Ukrainian law can be quite a challenge, and that’s where turning to a lawyer for help is probably a good idea.
Just like any other employee, an employee of an IT company is subject to the requirements of the Labor Code of Ukraine. These include performance of an employment agreement (with the possibility of a fixed-term agreement only in limited cases), optional probation period, salary payment requirements, requirements for working hours, days-off and annual vacation, sick leave and grounds for termination of employment (in most cases these grounds would include only those specifically referred to in the Labor Code).
The specifics of the IT business quite often require work to be done and support to be provided to clients on a 24/7 basis (especially the case where foreign clients are involved). Unfortunately, many IT companies don’t really bother with finding a legal solution for this, relying instead on informal arrangements with employees. This may result in potential liability of the employer for violating legislation (with fines to be imposed by the State Employment Service of Ukraine), as well as limited opportunities for compelling the employee in question to follow the informal arrangement.
While the Labor Code provides for rather strict limitations in relation to working hours (the standard number is 40 hours per week) and possibility of overtime work (containing the explicit list of extraordinary cases where overtime work is allowed) there are, in fact, legal options for ensuring round-the-clock operation of an IT business, which include flexible working hours or shift work or irregular working hours.
Salary Based on Foreign Currency and Benefits
An IT specialist working in Ukraine would normally expect his or her salary to be fixed in a foreign currency (mainly US dollars or Euros). This results from the general perception of Ukrainian currency as not being stable, as its value fell from UAH 5 for USD 1 in 2008 to UAH 28 at the end of 2018 (although there have been no dramatic changes in value in the past few years). Ukrainian legislation does not generally allow the payment of salary in any currency other than UAH, therefore salary payments are made in UAH while the salary amount in the employment agreement is in USD or EUR, with reference to the specific exchange rate to be used for payments. Since the amount of actual payments in UAH may vary from month to month, this creates a certain clash with requirements of law for any salary change to be agreed with the employee in advance. Any risk can be managed by the appropriate additional wording in the employment agreement.
As the new law governing circulation of foreign currencies in Ukraine came into effect recently, some relief relating to foreign-currency-based salaries can be expected.
On top of the salary, the employer can also offer additional perks to IT workers, including health insurance, cell phone, car, etc. All of this can be inserted in employment agreements or the internal regulations of an employer. Such things as, for example, a signing bonus (i.e. an incentive to join the company) are also possible if properly worded.
Since the product that IT companies create is in most cases intellectual property, they have to make sure that they are the true owners of that property and the rights to it. While the general concept under the law is that anything created by an employee as part of his/her employment is the property of his/her employer, given the specifics of IP law it is still strongly advisable to have a special IP section or clause in the employment agreement with an IT worker, addressing the use of IP, rights to IP, their transfer and, where necessary, registration, as well as an author’s fee. Importantly, it is recommended that the employee ensures that while working for his/her employer he/she does not use the IP of any third parties (especially those of former employers or clients).
The Labor Code of Ukraine doesn’t make any reference to confidentiality in relation to employment, but relevant rules can be included in employment agreements or the internal regulations of IT companies. These rules can include limitations for collection, use, disclosure or transfer of confidential information or commercial secrets (with determination of that they are), guidance for whistle-blowing, requirements for handling any documents and materials containing confidential information or commercial secrets and their return when the employment is terminated. In that regard, the employer also has the opportunity to establish the rules for using equipment, electronic mail, storing information, etc., by its employees.
Employment of Foreigners
While transferring foreign IT workers to Ukraine may not be the most popular solution, relevant “foreign IT professionals” nevertheless fall within a special category of foreign employees who enjoy special treatment when applying for a Ukrainian work permit (and foreigners are required in most cases to have that permit prior to being employed in Ukraine). This includes the possibility to receive a work permit for three years (instead of the standard one-year permit) and the exemption of the minimum salary requirement applying to most other categories of foreign employees.
As discussed earlier, the state would probably try to somehow remedy the situation with too many IT specialists being employed informally under the cover of service agreements with private entrepreneurs. For that purpose, the Ministry of Social Policy of Ukraine recently came up with a rather peculiar draft bill suggesting clear criteria for employment. If this draft bill is adopted, employment would be deemed to be three or more circumstances listed in the law, including where remuneration for work (rendered services) is the sole source of income of a person, or where it comes to 75 percent or more of his/her income during 6 months, or where a person is doing work similar to the work being done by his/her client’s employees, etc.
There is a long way to go before the draft bill can become an actual law (and a number of drafts of the new Labor Code of Ukraine that haven’t been adopted over the last 20 years are proof of that), and this particular draft bill and the criteria it proposes are far from perfect. Nevertheless, the apparent disproportion between private entrepreneurs and employees in the IT sector and obvious desire of the state not to be deprived of taxes where there is actual employment, would likely eventually lead to certain amendments to the law, that would at least increase the number of official employees in the IT industry.
However, it seems that even if any such changes to legislation are made, this won’t reduce the attractiveness of Ukraine for the IT business, and Ukrainian labor legislation provides sufficient means to deal with any challenges relating to the employment of IT specialists.