Military tax is introduced

On 31 July 2014 the Ukrainian Parliament adopted an amendment to Ukrainian tax legislation. The amendment introduced a 1.5% military tax to be applied from August 2014 to salaries, other incentive and compensatory payments or employment-related remuneration, remuneration relating to commercial agreements and lottery and gambling winnings. The military tax will apply until 1 January 2015 and may be further extended (the Ministry of Finance has already suggested that this is extended into 2015).  

Military draft in action

As a result of continuing anti-terrorism operations in the east of Ukraine some male employees have been called to serve in the military or have volunteered to do so. The majority of employers in Ukraine have never come across a situation like this before and companies should, therefore, be aware of the employment rights of such employees and how to act properly in the event that an employee is drafted.

On 17 March 2014 the Ukrainian Parliament approved the president’s order which provided for additional required military service beyond the mandatory military draft. On 27 March 2014 the government adopted an amendment to the legislation on "Facilitating Military Drafts" which specifies the employment rights of employees who are drafted into the military.

The Ukrainian Labor Code does provide for severance pay of two months' of minimum wage (approximately UAH 2,500 = EUR 150) to those dismissed due to military service. This provision however was recognised as being anti-constitutional by the Constitutional Court in 2008 and employers are not bound to pay it unless otherwise provided for by a collective agreement. Some of the first employees who were called up before 1 April 2014 were therefore dismissed by their employers, as a result of their military service, with no severance pay.

With the new amendments effective as of 1 April 2014, those employees who have been called up to serve in the military are now entitled to retain their employment and average income (to be compensated from the state budget and exempt from personal income tax and social security contributions) for a period of one year. In addition, on 20 May 2014, the Ukrainian Parliament subsequently adopted an amendment to the legislation relating to military service to protect those who were unfairly dismissed prior to this amendment coming into force.

The State Inspectorate on Employment Issues has clarified that under current legislation those employees subject to military draft, who were dismissed from 18 March 2014, shall be reinstated to their former positions and paid the average income for the period when they were serving in the military and therefore not in employment (exempt from personal income tax and social security contributions). In this case any order of dismissal shall be cancelled and this must be noted in the employment records of the employee. If the employer fails to reinstate the dismissed employee and/or to pay the salary due, the employer's officers may be subject to administrative, criminal and/or disciplinary sanctions.

Consequently, an employee who is called to serve in the military or does so voluntarily may only be dismissed once they have been on leave for more than one year.

Crimea: Ukrainian or Russian law?

With the occupation of the Crimea (as confirmed by UN Resolution) and ongoing uncertainty in this region, the legal situation in Crimea remains unclear, which naturally has an impact on employment matters.

Crimean regional authorities currently adopt their own decisions and regulations which are neither published in the Ukranian mainland nor recognised by the Ukrainian authorities. According to the established regional practice, employment relationships in Crimea will be regulated by Ukrainian employment law until the end of the year. From 1 January, 2015 however, Russian employment law will replace Ukranian legisation as the only applicable law in the Crimean peninsula.

Currently, Crimean authorities introduce and enforce their own regional employment regulations, in addition to Ukrainian employment law requirements. For example, if an employer starts a redundancy process, the notification procedure and information to be provided to the Crimean employment authorities is significantly broader and more detailed than that required under Ukranian law. Employers are also required to provide statistical company information in relation to their employees and any terminations of employment in the relevant financial year.

Crimean officials, who previously used and applied Ukrainian law, have started to use Russian law as well.  This often leads to confusing situations when the Crimean interpretation of Russian regulations does not mirror the interpretation applied in practice in Russia. For example, the statutory severance payment in a redundancy situation under both Ukrainian and Russian regulations amounts to one month's average salary. However, Russian law provides for an additional payment equivalent to a further month's average salary under certain specified circumstances. Those employers operating in Crimea are often forced to comply with both Ukrainian and Russian law.

Salaries in Crimea are calculated and paid in Russian roubles, not freely convertible foreign currency, whereas deductions and taxes are withheld applying Ukrainian legislation and rates.  The military tax of 1.5% introduced in mainland Ukraine is not applicable in Crimea.  The withheld amounts are paid to the Crimean regional authorities. Those employers who actively operate in Crimea and have not transferred their legal address to mainland Ukraine may find themselves in breach of either Ukranian law on one hand and/or local requirements on the other.

We expect the introduction of legislation in the Ukraine designating Crimea as a free trade zone and regulating the outstanding commercial issues. From an employment perspective, we would assume the draft legislation adopted by the Ukranian Parliament would cover and secure employment rights for the region. We would expect this to include the possibility of trade union registration, registration for unions of those employers located outside Crimea, and the introduction of rights of employees and employers in Crimea.

Currently, local trade unions in Crimea are obliged to re-register with the Russian Federation, and to continue their work in Crimea in compliance with and applying Russian law. The Crimean courts are in any event already applying Russian law to settlement of cases.

Many of the Ukrainian nationals who live in Crimea have refused to take Russian citizenship. From 1 January, 2015 under Russian law, those Ukrainian employees working in Crimea will be considered as foreigners and therefore are likely to need Russian employment and residence permits. The procedure and regulations for this has not yet been determined. Russian regulation and policies impose employment quotas and restrictions on the employment of foreign nationals, and this could be extended to Crimea, so it could become difficult for local employees to remain employed in Crimea. 

The legal uncertainty in Crimea, and the lack of the specific regulations to manage this uncertainty, is likely to require or lead to further developments in order to regulate and manage employment matters in the peninsula.