After almost 4 years of deliberation, the concept of a secondment has finally been introduced into the Russian Labour Code by Federal Law No. 116-FZ dated 5 May 2014 (the "Law") entering into force on 1 January 2016. Amendments have also been made to the Russian Tax Code and the Employment Law.

Although the Law will not come into effect for another year and a half, we recommend that it should be taken into account when structuring secondments arrangements in Russia.

Under a typical secondment agreement, an employer provides (seconds) its personnel (secondees) to another company (customer) for a fee on a temporary basis. This allows the employee to remain on the payroll of the employer and benefit from the existing pension and other arrangements. During the secondment, secondees are supervised and instructed by the customer. The employer is liable for payment of salary, tax withholding obligations and social charges. The terms of the secondment are set out in an agreement concluded directly between the employer and the customer. Secondments are often used if the special skills and experience of an employee are required by another entity to perform work related to a specific project or by international companies operating global secondment arrangements.

The Russian Tax Code has recognised secondment arrangements for many years. Unfortunately, the Labour Code remained silent in respect of this concept raising concerns as to its compliance with Russia law, in particular, the concern that the customer would be deemed the de-facto employer directly liable for withholding, social charges and general compliance with employment laws. Furthermore, Russian migration legislation does not envisage these arrangements. Nevertheless, secondment arrangements have been commonly used, in particular by international companies.

The Law introduces the concept of a secondment (known as "provision of employee's labor") into the Russian Labour Code. The key distinctive feature of the arrangement is that an employee performs work temporarily in the interests and under the management and supervision of an individual or a company who is not their employer. This development should put an end to discussions as to whether secondments are consistent with Russian employment legislation. At the same time, the law imposes substantial limitations on the use of secondments.

Secondments are allowed only in the following cases:

  1. by private employment agencies. This possibility will be available only to accredited (procedure to be adopted) Russian companies. The Law contains a number of requirements in relation to the charter capital, good standing of the agencies and experience of their officials. Private employment agencies can second employees to both companies and individuals;

  2. between related persons, including (a) affiliates, (b) parties to shareholders' agreements and (c) by a shareholder bound by the shareholders' agreement (employer), to joint stock companies (strangely enough limited liability companies are not covered) in respect of which the agreement is concluded (customer). This ground applies to secondments by Russian and foreign companies. The customer, however, may only be a company and not an individual.

General rules applicable to secondment arrangements

The law provides certain protections for secondees, in particular:

  1. secondment is temporary, i.e. provided for a limited term;
  2. consent of secondee is required for secondment;
  3. during the secondment, secondees should perform employment functions in compliance with the employment agreement;
  4. secondees’ remuneration may not be worse than the remuneration of the employees performing the same employment functions at the customer and having the same qualification;
  5. compensation for work in harmful or hazardous conditions if the secondee is transferred to work in such conditions, is determined on the basis of working conditions at the customer's place of work;
  6. secondment agreement should impose an obligation on the customer to be responsible for providing safe working conditions to a secondee;
  7. the customer bears secondary liability for the employer’s obligation to pay salary and other payments due, as well as monetary compensation for any late payments by the employer. This rule cannot be contractually excluded.

The Law prohibits all employers from seconding employees for the purpose of replacing employees who are on strike and under other similar circumstances.

Further restrictions on secondment may be introduced by other federal laws.

Rules applicable to secondment by private employment agencies only

The Law contains detailed rules in relation to secondments by private employment agencies. It is not clear to what extent the rules applicable to other secondments will be similar to those set out for the employment agencies.

An employment agreement with a secondee should contain a provision stating that he or she should perform work in the interests and under the management and supervision of the customer at the instruction of the employer. Information about the customer and the term of secondment should be set out in an addendum to the employment agreement between the agency and the employee. Information on secondments must be entered into a labor book of the secondee. The agency should ensure that the customer does not force the secondee to do work beyond the job description in accordance with the secondee’s employment agreement, and that the customer complies with labor law rules.

Agencies are allowed to second employees only in a limited range of circumstances:

  • to individuals for personal service and housekeeping;
  • to individual entrepreneurs and legal entitles for the performance of duties of temporarily absent employees;
  • to individual entrepreneurs and legal entitles for the purpose of performing work which is connected with a temporary (up to 9 month) increase in production or operations). If the number of secondees exceeds 10 per cent of the average number of the customer’s employees, the customer should take into account the position of its labor union before the secondment agreement is entered into with an agency.

Certain employment agencies commented that the 9 month period seems quite short. In many circumstances where secondees are involved in long-term projects (installation of new equipment, production lines, etc.) this period may not be sufficient. Although there is no prohibition in the Law to prolong secondment agreements for another 9 months, this option may be challenged due to the temporary nature of secondments. Market participants are looking forward to clarifications from the lawmakers as to the possibility and process of prolongation of secondments beyond the 9 month period.

The Law clarifies that secondments do not lead to termination of employment relationships between the agency and its employee (secondee) and do not create employment relationships between the secondee and the customer. We believe that this rule should definitely apply to other allowed secondment arrangements as well.

In addition to the general cases set out above, the Law provides for a limited number of cases when agencies are not allowed to second employees (e.g. to facilities classified as hazardous, to replace employees whose presence is required for the customer to comply with licence requirements).

Tax regime available for secondment arrangements

Secondment fees are subject to VAT which may be offset by the customer in due course. If the employer is not registered for tax purposes in Russia, the Russian customer is required to withhold VAT at source.

Secondment fees payable by the customer are normally deductible subject to general requirements, including economic justification and proper documentation.

A foreign employer should normally not be deemed to have a permanent establishment in Russia solely as a result of secondment, provided that the employees during secondment act solely on behalf of and in the interests of the customer.

The employer is liable for social charges as in respect of other employees. The Law provides that an employer is obliged to make contributions for compulsory accident insurance based on the insurance rate for the customer's core business.

The Law provides that private employment agencies leasing personnel under secondment arrangements may no longer elect to apply special tax regimes available for small businesses. This restriction is driven by the past abusive practice when employees were artificially spun off into small businesses and seconded back to their former employers in order to claim exemptions from taxes and social charges available for small businesses.

General recommendations

Although the Law will not come into effect for another year and a half, we recommend that the Law should be taken into account when structuring secondments arrangements in Russia.

One of the key problems not clarified by the Law is Russian migration legislation that still does not recognise secondment arrangements.