Legitimacy of outstaffing services endangered
І. Legislative formalization of outstaffing in Ukraine
Currently the only definition of outstaffing is a provision of the Tax Code of Ukraine according to which outstaffing is a commercial or civil law agreement under which a person who provides a service sends to another person one or several individuals to perform functions determined in that agreement.
Based on Article 39 of the Law of Ukraine “On Employment of the Population” (the only legislative norm somehow describing this process), the following characteristics of outstaffing can be determined:
- This is a special type of commercial activities requiring a special license.
- Outstaffer hires employees for further performance of work for another employee (customer).
- Relations between outstaffer and employee are formalized in employment agreements.
- Relations between customer and outstaffer must be formalized in an agreement for use of employee’s work (if customer is an individual – services agreement).
- Outstaffer should ensure working schedule analogous to that of the customer.
Such narrow definition of outstaffing in legislation is compensated with the right to conclude an agreement not provided by the legislation which is in line with general principles of legislation and right of free determination of agreement conditions.
Thus, the meaning of outstaffing is to withdraw employees from the customer’s personnel and further include them to the outstaffer’s staff. There employees continue working in their previous positions and performing their previous duties (if they were employed at the time of withdrawal), however outstaffer becomes their employer. Outstaffing peculiarity is that it lets use work when it is needed.
Here outstaffing should be distinguished from outsourcing which is transfer of some customer’s function for performance to another company specializing in those activities (in fact – provision of services within a specific area or matter). Therefore, outstaffing and outsourcing services are different by their content and manner of organization, however similar by their purpose – withdrawal of a certain function outside the customer’s personnel.
Analysing outstaffing norms and practices in the legislation of Ukraine, the following its advantages can be distinguished:
- In labour relations: employee’s conclusion of a labour agreement with outstaffer rather than with a customer, which can further relieve the latter from participation in labour disputes regarding this employee and, correspondingly, responsibility for possible violations of legislation to the employee.
- As concerns staffing issues: staff documents keeping by outstaffer (including personal cases, labour records, staff orders, etc.); minimization of resource spending to search the necessary personnel; outstaffer administers business trips and formalization of advance reports; outstaffer provides employees all certificates at their request.
- As concerns financial matters: outstaffer calculates and pays wages, compensations, taxes and duties to the budget, including social security duties; tax optimization (customer does not pay individual income tax, military tax and single social contribution, customer forms tax credit).
- As concerns personnel management: outstaffer registers vacations and sick leaves, minimizes customer’s personnel number which lets the customer avoid provision of some social guarantees.
However, lack of sufficient legislation can further lead to transformation of some advantages of outstaffing into problems with state authorities for both outstaffer and customer of such services.
ІІ. Equation of outstaffing with labour relations and its consequences.
Since there is no clear distinction in the legislation among grounds for labour agreements, civil agreements and outstaffing agreements, at any stage of the relations organization with the help of the described process they can be questioned as to be recognized as labour. Analysing court practice we can outline the following criteria of distinguishing labour relations from civil ones (including outstaffing services):
- Regulating employment activities and their organization (following internal labour and discipline rules).
- Individually determined labour function (for example, in line with job duties or labour agreement in accordance with staff schedule of the enterprise).
- Subordination (hierarchy) in relations.
- Professional requirements to the employee.
- Wage payment procedure.
- Formalization of employee’s work fixation results.
- Distribution of risks (negative consequences which can occur at work) and responsibility of parties.
- Other criteria (work performance, economic feasibility, etc.)
1. Regulation and organization of labour activities mean subordination of employees to internal labour rules, working schedule, rules of working with material values, safety rules, etc.
This peculiarity can point on hidden labour relations, however cannot be avoided in the context of outstaffing, in particular, legislative requirements to its formalization.
In our opinion, it is possible to minimize risk of its consideration while trying to recognize relations as labour with the help of customer’s internal rules distribution by obliging employees to follow them when attaching an employee to the customer.
2. Such characteristic as individually determined labour function means that the customer has a clear list of labour functions which must be performed by the outstaffer’s employee. As in the first case, for proper performance by the employee of his duties, it is impossible to avoid it, however, having provided the corresponding order to the employee which the latter will have to follow while performing his duties, outstaffer can avoid direct links with customer’s company head. Clear labour function of the employee whose work will be used should be specified in the agreement between customer and outstaffer.
3. Subordination (hierarchy) in relations is maybe the most important characteristic which can attract unwanted attention of state authorities with the purpose of detailed review of such relations, or in case of a labour dispute is an additional evidence of hidden labour relations between customer and employee.
We should not forget that the customer to obtain personnel concludes an agreement with outstaffer which presupposes their equality in legal relations. Due to this, it is not recommended in legal relations between outstaffer and employee to directly mention the customer’s head to who the employee is immediately subordinated under the labour agreement.
To ensure performance of customer’s orders it is possible to prescribe the corresponding conditions in labour agreement between outstaffer and employee, and in the documents which attach the employee to the customer. However, enshrining of such conditions requires quite detailed legal regulation in the corresponding internal outsourcer’s documents.
In this regard, customer is deprived of the possibility to impose any labour sanctions. All violations of the agreement concluded with outstaffer should be considered by outstaffer as the employee’s employer, which will decide upon imposition of disciplinary sanctions.
Otherwise, direct customer’s possibility to give labour orders to the employee and bring him to liability will be qualified by state authorities and courts as traits of hidden labour relations between employee and customer.
4. Professional requirements to the employee are an integral part of outstaffing organization with a purpose of maximum quality performance by the employee of his tasks.
Such requirements must be determined (if necessary) at conclusion of the agreement between customer and outstaffer. Customer cannot determine level of professional knowledge or skills of employee alone. It would be reasonable to prescribe in the outstaffing agreement the possibility for customer to appeal to outstaffer in case of grounded doubts in employee’s knowledge, upon which outstaffer could influence the employee.
5. Since employee has labour relations only with outstaffer, customer cannot pay wages, bonuses, compensations or other pecuniary amounts to employee whose work it hires from outstaffer. In case customer wishes to pay the above to the employee, it should be provided in the outstaffing agreement, under which outstaffer could obtain additional money, for example, for tasks well-performed by the employee whose work is hired.
6. Formalization of employee’s work fixation results as a service under outstaffing agreement should be carried under agreement with the outstaffer, which is with the help of service provision certificates. Thus, even if internal rules of the customer prescribe other reporting peculiarities, if they apply to the employee by the outstaffer’s order, it does not exclude the need to record the services provided as a part of civil relations between customer and outstaffer.
7. Distribution of risks (negative consequences which can occur at work) and responsibility of parties. Customer is deprived of any right to claim damages or compensation for harm caused by employee. All pecuniary claims are sent to outstaffer which will decide on their satisfaction. Further, outstaffer as the employer will have the right to claim compensation for harm caused to third parties (customer) by its employee in court.
8. Other characteristics can be:
- Work performance results: besides provision of a service is recorded in the corresponding act, its provision should be proved in kind, for example in a report of provided services which could describe the performed tasks.
- Economic feasibility or business aim: it should be objectively impossible to perform the corresponding work with own forces of customer’s personnel, and its performance should be economically feasible (for example, it is not necessary to have some categories of employees due to irregular labour tasks in certain area).
- In case outstaffer’s employee permanently performs works/provides services for customer, preliminary labour relation between employee and customer (recent outstaffing) can also attract additional attention of authorities.
- Employee’s understanding of outstaffing process: knowing real employer – outstaffer, its status and customer’s status.
- Connection between customer and outstaffer: if outstaffer provides its services only to one customer, or all (majority) of outstaffer’s employees work for one customer, it can be a ground for recognizing such activities as fictitious entrepreneurial activities.
It should be known that this list of characteristics which allow considering performance of works or provision of services under outstaffing agreement as hidden labour relations can be extended. Furthermore, it is impossible to determine the necessary number of characteristics based on which court or another supervisory or law enforcement agency can conclude that there are labour relations between customer and employee.
Therefore, preventive measures such as accurate preparation of documents related to outstaffing organization must be always taken. If there are already formalized outstaffing relations, analysis of the above provisions together with other document conditions at early stage should ensure minimization of risks for the parties to outstaffing in future.
In particular, customer can avoid the following consequences:
- Fining for admitting the employee to work without labour agreement;
- Adding individual income tax amount;
- Adding military duty amount;
- Adding unpaid single social contribution amount;
- Depriving of tax credit;
- Compelled official employment of the employee with customer.
If in the first case the fine amount will be 30 minimum wages for each employee as set by the law at the moment violation was detected (for 2019 is UAH 4,173 *30=UAH 125,190), depending on the amount of taxes and duties unpaid to the state budget, criminal proceedings for tax evasion can be opened (Article 212 of the Criminal Code of Ukraine).
Besides, the offences can be qualified by law enforcement agencies as serious violation of labour legislation (Article 172 of the Criminal Code), fictitious entrepreneurial activities (Article 205 of the Criminal Code of Ukraine), legalization (laundering) of proceeds (Article 209 of the Criminal Code of Ukraine), official forgery (Article 366 of the Criminal Code of Ukraine).
Talking about conditions to be followed by outstaffer, it should be mentioned that besides the need to observe the above characteristics based on which relations between customer and employee can be recognized labour, outstaffer should obtain permission to carry out activities and have the corresponding code of commercial activities and follow legislative limitations on employment.
Limitations for outstaffer are the following obligations:
- Not to prevent conclusion of labour agreement between employee and customer;
- Not to send employees to customer which within a year reduced its personnel;
- Not to send employees to customer which did not observe rule on the number of employees of main professions engaged in technological processes of main manufacture;
- Not to send employees to customer which engages employees for works in harmful, dangerous and hard working conditions, an also works of main professions engaged in technological processes of main manufacture.
However, if entering the record to the register of legal entities and tax payers with the corresponding code of commercial activities does not cause further questions, the procedure for permission obtainment is quite problematic due to the following. As it has already been mentioned, to organize outstaffing, outstaffer should obtain permission. Activities of outstaffers without permission in Ukraine are not allowed.
Resolution of the Cabinet of Ministers No. 359 as of May 20th, 2013 approved the Procedure for Issuing Permission to Hire Employees for Further Performance of Work for Another Employer (hereinafter – Resolution No. 359). According to para 2 of Resolution No. 359 it becomes effective from the day the Law of Ukraine “On Amendments to Some Laws of Ukraine on Issuing Permission to Hire Employees for Further Performance of Work for Another Employer” comes into effect. After being adopted in the first reading in 2013, the draft law has not been further considered.
According to Article 1(3) of the Law of Ukraine “On the List of Permissions in Commercial Activities Sector” No. 3392-VІ as of May 19th, 2011 (hereinafter – Law No. 3392), it is prohibited to require that commercial entities obtain permissions not included in the List approved by the Law.
Besides, Resolution of the Cabinet of Ministers of Ukraine No. 400 as of June 5th, 2013 approves the Procedure for Formation and Keeping Register of Commercial Entities Providing Employment Intermediary Services and Commercial Entities Hiring Employees for Further Performance of Work in Ukraine for Other Employers (hereinafter – Procedure No. 400). According to para 5 of Procedure No. 400, intermediaries to be included to the list submit to the State Employment Service by a registered mail, receipt acknowledged, an application in the form established by the Ministry of Social Policy of Ukraine. Form of this application is approved by Order of the Ministry of Social Policy of Ukraine No. 471 as of August 1st, 2013.
Thus, obtainment of permission to hire employees for further performance of work in Ukraine for another employer is possible exclusively upon making the corresponding amendments to Law No. 3392. However, until the mentioned amendments become effective, outstaffer should be guided by Resolution of the Cabinet of Ministers of Ukraine No. 400 as of June 5th, 2013 and send to the State Employment Service application to be entered to the list of subjects hiring employees for further performance of work in Ukraine for other employers.
Absence of permission (record in the register) is punishable with fine in the amount of 20 minimum wages (for 2019: UAH 4,173 * 20 = UAH 83,460).
Thus, to minimize risks for the customer and outstaffer to be brought to liability, it is necessary while organizing outstaffing relations to pay attention to agreements they are based on, duly maintain primary documents, properly and in detail draft contractor documents (customer and outstaffer), including those confirming provided services or works, and internal contractor documents, provide explanations to the personnel for them to understand outstaffing and follow legislation as concerns limitations for outstaffing (obtainment of permissions/records in the list, limitations for customers to which employee can be sent to perform works/provide services).
Illya Kostin, partner at Legal Alliance Company, head of Labour Law practice
Yaroslav Furiaka, associate at Legal Alliance Company