Sources of rules and practiceOverview
Provide an overview of the primary sources of law, regulation and practice that govern or affect executive compensation arrangements or employee benefits.
The principal law regulating executive compensation and employee benefits is the Labour Code of the Russian Federation No. 197-FZ, dated 30 December 2001 (the Labour Code). It regulates remuneration, paid leave, termination payments and benefits provided to certain categories of employees, etc. The Tax Code of the Russian Federation (Parts I and II) No. 146-FZ and No. 117-FZ, dated 31 July 1998 and 5 August 2000, respectively (the Tax Code) regulates the taxation of compensation and benefits. The other main laws relevant to the regulation of compensation and benefits are:
- Russian Law No. 1032-1 on Employment of the Population in the Russian Federation, dated 19 April 1991, regulating unemployment benefits;
- Federal Law No. 167-FZ on Compulsory Pension Insurance in the Russian Federation, dated 15 December 2001 (the Law on Compulsory Pension Insurance), regulating pensions in the Russian Federation;
- Federal Law No. 255-FZ on Compulsory Social Insurance for Temporary Incapacity to Work and in Connection with Maternity, dated 29 December 2006, regulating mandatory social insurance for temporary incapacity to work owing to illness or injury and in connection with the birth of a child;
- Russian Law No. 4520-1 on State Guarantees and Compensation for Persons Working and Residing in the Regions of the Far North and Comparable Areas, dated 19 February 1993, regulating benefits provided to employees working or relocating to work in the regions of the far north or areas comparable to them;
- Federal Law No. 39-FZ on the Securities Market, dated 22 April 1996, regulating the placement of securities, which is relevant for various stock-based incentive plans; and
- Federal Law No. 173-FZ on Currency Regulation and Currency Control, dated 10 December 2003 (the Currency Control Law), regulating the currency of benefits payments.
Russia does not have a precedential system of law, so court decisions do not establish precedent for similar cases; however, decisions of the Russian Constitutional Court and Russian Supreme Court are of considerable importance for lower-level courts, which may use these decisions as guidance in the resolution of similar issues. Among such decisions, the following decisions are of importance in the area of executive compensation or employee benefits:
- Constitutional Court Ruling No. 3-P, dated 15 March 2005, interprets the purposes of executive termination payments and sets forth criteria for their determination. This reasoning is used by lower courts for assessment of amounts of compensation;
- Plenum of the Supreme Court Resolution No. 2 on Enforcement of the Labour Code by Courts, dated 17 March 2004, gives important clarifications of Labour Code provisions, including termination and salary issues;
- Plenum of the Supreme Court Resolution No. 27 on Challenging of Major Transactions and Interested Party Transactions dated 26 June 2018, gives clarifications for the cases when employment agreement is considered as major transaction and, respectively, requires approval either by a board of directors or by a general shareholders’ or participants’ meeting (see question 3 for more details);
- Supreme Court Ruling No. 307-14-8853, dated 30 March 2015, invalidates a termination payment that is not based on the company’s economic performance during the term of an executive’s office; and
- Plenum of the Supreme Court Resolution No. 21 on Certain Issues of Enforcement of the Legislation on Employment of the Chief Executive Officer and Members of the Management Board, dated 2 June 2015, provides guidance on the status of executives as employees and, inter alia, allows courts to deny or limit termination payments claimed by executives if such payments constitute abuse of rights or otherwise violate the interests of a company, its other employees or other persons.
What are the primary government agencies or other entities responsible for enforcing these rules?
The primary government agencies responsible for enforcement of regulations applicable to executive compensation and employee benefits are:
- labour inspection offices, responsible for compliance with employment regulations;
- the Bank of Russia, responsible for regulation of the securities market and compliance with currency control laws;
- the tax authorities, responsible for compliance with taxpayers’ obligations; and
- prosecutor’s office, responsible for oversight of compliance with laws and observance of employee rights.
Disputes related to executive compensation and employee benefits are heard by Russian courts of general jurisdiction unless the dispute is qualified as a corporate dispute (eg, if connected with challenging corporate resolutions), in which case it will be considered by the commercial courts.
GovernanceGovernance requirements and shareholder approval
Are any types of compensation or benefits generally subject to specific corporate governance requirements or approval by shareholders or government agencies? What is the general process for obtaining approval?
Compensation or benefits that qualify as a major transaction are subject to approval either by a board of directors or by a general shareholders’ or participants’ meeting. Compensation or benefits that qualify as an interested-party transaction are subject to approval either by a board of directors or by a general shareholders’ or participants’ meeting provided that respective approval is requested by a company’s chief executive officer (CEO), member of management board, member of board of directors or shareholder or participant that owns more than 1 per cent of voting shares (charter capital) of the company.
A major transaction is a transaction or a series of inter-related transactions that is not committed within the boundaries of ordinary business activities and that is related to the direct or indirect acquisition, disposal or potential disposal of property equal to or exceeding 25 per cent of the balance sheet value of a company’s assets as of the latest reporting date or to the company’s obligation to lease or to license property equal to or exceeding 25 per cent of the balance sheet value of the company’s assets as of the latest reporting date. For example, an employment agreement will be qualified as a major transaction if it provides for termination payments or payment of salary that are equal to or exceed 25 per cent of the balance sheet value of a company’s assets and it is not qualified as a transaction within the boundaries of the company’s ordinary business activities.
An interested-party transaction is one involving:
- a party in which a member of a board of directors, CEO, member of a management board, controlling person or a person entitled to direct the activities of a company; or
- his or her spouse, parent, children, brother, sister or person under their control:
- is a party, beneficiary or intermediary;
- controls a legal entity that is a party, beneficiary or intermediary; or
- holds office in the governing bodies of a party, beneficiary or intermediary.
For example, an employment agreement with a CEO setting out additional compensation benefiting the CEO will qualify as an interested-party transaction, as the CEO will be one of the parties, and this will require approval as an interested-party transaction provided that respective approval is requested by a company’s CEO, member of management board, member of board of directors or shareholder or participant that owns more than 1 per cent of voting shares (charter capital) of the company. The interested party will be excluded from voting.
Remuneration and compensation of expenses of members of boards of directors should be approved by a company’s general shareholders’ meeting.
Compensation or benefits of certain types of companies are subject to additional statutory approvals. For example, a bank’s board of directors must approve the bank’s internal regulations on the salary of the CEO, and compensatory and incentive payments to the CEO and directors of certain departments (eg, risk management and internal audit). The owner of the property of a state or municipal entity represented by an authorised state body must approve the compensation and benefits provided to the CEO of such entity.
Additionally, compensation or benefits may be subject to specific corporate governance requirements (eg, requiring approvals) set by the internal regulations or the charter of a company.Consultation
Under what circumstances does the establishment or change of an executive compensation or benefit arrangement generally require consultation with a union, works council or similar body?
The establishment or change (including termination) of an executive compensation or benefit arrangement generally requires consultation with a union if such arrangement is adopted as a local normative act of a company (ie, the company’s internal regulations (policy) on compensation or benefits), or where provided for in a collective bargaining agreement.Prohibited arrangements
Are any types of compensation or benefit arrangements prohibited either generally or with respect to senior management?
No types of compensation or benefit arrangements are prohibited, either generally or with respect to senior management.Rules for non-executives
What rules apply to compensation and benefits of non-executive directors?
There are no specific rules governing compensation and benefits of non-executive (ie, non-employee) directors. However, the Code of Corporate Governance approved by Letter No. 06-52/2463 of the Bank of Russia, dated 10 April 2014, does not recommend including non-executive directors in pension, insurance and investment programmes (especially option or other programmes leading to obtaining shares of a company), as well as providing them with other benefits and bonuses (see question 9). The Code of Corporate Governance also warns companies against setting forth severance payments for non-executive directors in case of early termination of their service. The provisions of the Code of Corporate Governance are not mandatory for companies, but compliance with it is considered as good practice, especially for listed companies.
DisclosureMandatory disclosure of executive compensation
Must any aspects of an executive’s compensation be publicly disclosed or disclosed to the government? How?
According to the Bank of Russia Regulations on Disclosure of Information by Issuers of Securities No. 454, dated 30 December 2014, the details of an executive’s compensation should be disclosed in the following documents:
- annual and quarterly reports;
- securities prospectus; and
- corporate action notices (eg, on entering into material, major and interested-party transactions).
An annual report is published by public joint stock companies, and non-public joint stock companies that have gone public with bonds or other securities or that have more than 50 shareholders. The annual report must disclose the remuneration and compensation policies for members of governing bodies and the total payments for each governing body for a reporting year (excluding the CEO).
A securities prospectus is published if a company issues securities by subscription in certain circumstances set out by the Russian securities markets legislation. It makes the same disclosure on amounts of executives’ compensation as the annual report for the latest completed reporting year and the latest completed reporting period. Additionally, an issuer discloses information on all corporate resolutions or arrangements regarding levels of remuneration and compensation.
Quarterly reports generally are published by issuers who have registered securities prospectus or submitted it to a stock exchange. It makes the same disclosure on amounts of executives’ compensation as the securities prospectus for the latest completed reporting year and first three months of the current reporting year, and then six, nine and 12 months of the current year.
Corporate action notices are published by issuers obliged to disclose quarterly reports. They disclose information on executive compensation and employee benefits if they qualify as material or interested-party transactions (see question 3) or otherwise influence the value of securities. Corporate action notices are published after the occurrence of each event required to be reported.
Special disclosure requirements apply to directors of state and municipal institutions. They must annually disclose information on their and their spouse’s and minor children’s income, property and liabilities to authorised state and municipal bodies. Income includes salary, pensions and other compensation. This duty also applies to certain employees of state corporations and companies. In addition, information on the average monthly salary of CEOs, their deputies and chief financial officers of state and municipal institutions and enterprises for a calendar year is disclosed on official websites of respective entities.
Employment agreementsCommon provisions
Are employment agreements required or prevalent? If so, what provisions are common? Are any terms prohibited or unenforceable?
Under article 16 of the Labour Code employment agreements are required. The employer must prepare a written employment agreement and offer it to the prospective employee, and two original employment agreements (one for the employer and one for the employee) must be signed by both parties within three business days of the first day of employment. If a person starts working with the express or implied consent of the employer but without a written employment agreement, articles 19.1 and 67 of the Labour Code recognise the existence of an employment agreement between the parties, even though it has not yet been made in writing. In the absence of a written employment agreement, Russian law does not, however, recognise certain restrictions that may have been intended for the employment arrangement, such as a fixed term of employment or a probationary period.
The written employment agreement should include all of the terms set out in article 57 of the Labour Code, including the names of the employer and the employee, the position to which the employee has been appointed, the required qualifications, the terms of payment, individual benefits and compensation.
Neither the employer nor the employee may amend the material terms and conditions of an employment agreement without the other’s consent, unless otherwise provided by law. Furthermore, the provisions of an employment agreement are invalid if they attempt to exclude or restrict the employee’s rights guaranteed by the Labour Code.
Incentive compensationTypical structures
What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?
The prevalent types and structures of incentive compensation are as follows.Short-term incentive programmes
The payment of these bonuses is calculated on the basis of a company’s operational results for a month, quarter, half-year or year. Such arrangements are managed directly by the Russian employer under Russian law.Long-term incentive programmes (usually lasting for three to five years)Long-term bonus programmes
Employees are granted a bonus payment calculated on the basis of long-term key performance indicators (KPI); the set of KPI depends on management level and position. Such arrangements are managed directly by the Russian employer under Russian law.Option programmes
Employees are granted call options for a certain number of the company’s shares to be exercised after the expiry of a certain period; when the option is due, employees are entitled either to receive the shares or conclude a share purchase agreement under which shares will then be transferred. Since 1 June 2015, option programmes can be managed directly by the Russian employer under Russian law as options are now set forth by Russian legislation. However, they still have to be tested by courts (in particular, the Supreme Court). Previously, option programmes were either structured using a foreign special purpose vehicle (SPV) or managed through the employer’s foreign parent and governed by foreign (usually English) law. Such structure can still be used but Russian law restrictions applicable to circulation of foreign securities in Russia will need to be considered upon its establishment (see below).Restricted stock purchase programmes
Employees are granted a certain number of the company’s shares that they cannot transfer or otherwise dispose of. Each employee becomes the absolute owner of the shares after the expiry of a certain period. Apart from the shares, employees receive dividends paid during the term of the programme. Alternatively, the company may redeem the shares from the employee at the end of the programme term. Restricted stock purchase programmes are governed by foreign law and operated through a foreign company as Russian law does not permit contractual limitations of shareholders’ rights other than under shareholders’ or participants’ agreements. Russian law restrictions applicable to circulation of foreign securities in Russia will need to be considered upon establishment of the restricted stock purchase programme and its extension to employees in Russia (see below).Phantom option or shares programmes
Employees are assigned a certain number of ‘phantom’ shares of the company that give no shareholders’ rights. After the expiry of a certain period employees receive an adjustment between the current value of the company’s shares and the value of the ‘phantom shares’. Being cash-based, phantom programmes may be operated by Russian employers directly under Russian law.
The programmes vary by level or type of organisation. Small or medium-sized companies usually implement short-term incentive programmes that provide monetary awards or a long-term bonus programme, while major companies usually implement long-term incentive programmes based on profits from shareholder capital (comparing with competitors’ results). In addition, the Code of Corporate Governance recommends that all public companies adopt option programmes for their executives and key managing employees.
In non-public companies the operation of real share option plans is exceedingly difficult because of shareholders’ or participants’ pre-emption rights, which means that participants and shareholders have the right to purchase shares that are offered for sale or newly issued by a company before any other persons.
Restricted stock purchase programmes do not work under Russian law. It is prohibited to restrict the disposition of shareholder rights (other than under shareholders’ or participants’ agreements), thus an executive’s ownership rights to shares cannot be contractually limited (eg, by consent of the board to the disposition of shares).
Option programmes structured via a foreign entity are subject to regulatory restrictions. For public placement and circulation in Russia foreign securities and their issuer must satisfy certain requirements and a prospectus must be registered by the Bank of Russia or submitted to a Russian stock exchange. Foreign securities that have not been admitted to public placement or circulation in Russia may only be transferred to a limited number of employees that are ‘qualified investors’. If foreign shares are recognised as securities from a Russian law perspective they may also be transferred via a Russian licensed broker, unless the investment in the foreign entity is structured as an integral part of an employment agreement.
A person is either directly referred to as a qualified investor by the Russian legislation (eg, banks, insurance companies, brokers or the Bank of Russia) or may be classed as a qualified investor if any of the following requirements are met:
- the individual holds securities or financial instruments of a total value of at least 6 million roubles;
- the individual has professional experience performing transactions with securities or other financial instruments by virtue of his or her employment with a Russian or foreign organisation as a general rule for at least three years;
- the individual has performed on the whole at least 10 transactions with securities or other financial instruments per quarter over the past four quarters and at least once in a month, for a total value of at least 6 million roubles;
- the individual owns certain property of aggregate value not less than 6 million roubles; or
- the individual has received higher education in economics or has certain certificates (eg, a chartered financial analyst).
There are exceptions to the limitations, for example, if such sale or acquisition is made by:
- a foreign citizen; or
- a Russian citizen under his or her employment agreement (including fulfilment of his or her duties thereunder) or in connection with his or her membership of the board of directors or supervisory board of a legal entity.
These restrictions do not apply to phantom programmes.Restrictions
Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?
Generally, the amount or structure of incentive compensation is not subject to maximum limits, with certain exceptions. According to Russian court practice an employer is not limited in the options or structure of incentive compensation and determination of the amount of benefits unless otherwise provided by law.
The Labour Code stipulates certain exceptions for executives of state corporations, state companies, state and municipal enterprises and institutions and entities that are at least 50 per cent owned by the state or municipal bodies. According to article 349.3 of the Labour Code, compensation for termination of an employment contract with the CEO, his or her deputies or the chief financial officer in the event of change of control (or termination of an employment agreement with the CEO without cause), and cumulative remuneration in the event of dismissal of executives for any reason must not exceed the amount of three average monthly salaries. In addition, according to article 145 of the Labour Code, the amount of the average monthly salary of CEOs, their deputies and chief financial officers of state and municipal institutions and enterprises is calculated on the basis of the level of the average monthly salary of other employees of respective organisations. Respective maximum ratios are set forth by legal acts of authorised state bodies. Breach of these ratios will lead to early termination of an officer.
There are also limits on the amount of compensation for executives of Russian credit organisations. At least 40 per cent of the total amount of remuneration must be flexible, and payment of at least 40 per cent of the flexible part must depend on the financial performance of the credit organisation (including deferral or instalment). A combination of monetary and non-monetary forms of compensation may be provided for in the internal regulations of a credit organisation. Monetary forms of the flexible part of the compensation must be linked to changes in share price.
Apart from this, an employer has the right to limit the amount of its incentive compensation at its discretion by its rules and programmes and in collective bargaining or employment agreements.
Compensation stipulated by labour contracts and internal company regulations is treated as employees’ income and is taxed on the same basis and with the same rates applied regardless of the amount of the compensation. Compensation paid to executives in Russia is treated as income received in Russia regardless of the actual place from which the programme is managed. There are no statutory limits on sums of incentive compensation, but in cases where large sums of compensation are paid to executives (who have the right to act on behalf of the company) the risk may arise of such payments being considered as having no reasonable basis.Deferral
Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?
Deferral and vesting of incentive awards is permissible. There are no limits on the length or type of vesting provisions (or any minimum vesting periods for types of awards). Deferral that restricts the shareholder rights of an employee who is granted shares is, however, illegal (see question 9).
Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?
There are no limitations on the individuals or groups eligible to receive the compensation. Arrangements that can only be extended to certain groups of employees may exist in respect of executives of specifically regulated entities (eg, credit institutions as described in question 10).Recurrent discretionary incentives
Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?
It cannot be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement; however, if internal regulations provide that incentive compensation will not be paid in only limited cases, such as violations of work discipline or other particular grounds, and forms a part of salary, an employee who has not received such compensation may file a suit with the court. In this case the employer must provide evidence to the court that there were grounds for refusal to pay compensation.Effect on other employees
Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?
The type or amount of incentive compensation awarded to an executive potentially affects the compensation that must be awarded to other executives or employees. Article 132 of the Labour Code prohibits any discrimination in remuneration, and the remuneration of an employee must be based on his or her qualifications, complexity of work, and quality and quantity of work, and is not subject to maximum limits. If employees hold the same positions, carry out the same type of work, have the same qualifications and achieve the same work results, the incentive compensation awarded to one employee and not provided to another employee may potentially give rise to claims against their employer.Mandatory payment
Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?
It is permissible to require repayment of incentive compensation if such compensation does not form part of an employee’s salary according to his or her employment agreement. If incentive compensation forms part of an employee’s salary, an employer can request its repayment only in cases provided by the law (ie, error in calculations, the employer’s guilt in failure to meet labour standards or time off confirmed by an authorised body, or unlawful actions of an employee that lead to payment of the incentive compensation confirmed by the court). The law does not set forth the circumstances under which repayment of incentive compensation is mandatory.
Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?
An arrangement may provide that payment is conditioned on continuing employment until the payment date if respective compensation does not form part of an employee’s salary according to his or her employment agreement. The substance of such arrangements depends on the agreement reached between the parties.
Equity-based compensationTypical forms
What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?
These days equity compensation is being replaced by other forms; however, it is still used and the prevalent form of equity compensation is a share option plan operated by SPVs abroad or in Russia (subject to certain restrictions) (see question 9). Options are structured either as option agreements, under which the SPV grants shares to employees, or as options for conclusion of a share purchase agreement in the future, under which the SPV sells shares to employees (see question 9). The typical vesting period is between three and five years. The employer can select the participants, but must take into account the prohibition on discrimination as described in question 14.
Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?
The corporate body that is entitled to grant equity-based compensation depends on the structuring of the respective award (whether the award is granted in Russia or by SPV abroad) and on distribution of competence between governing bodies of the company. Requirements to major and interested party transactions described in question 3 should also be taken into account.Tax treatment
Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?
The Tax Code does not envisage specific rules for taxation of participants of option programmes. Tax liability arises if the employee exercises option and obtains shares from a company. The tax base is calculated as the difference between the share price set forth in the option programme and the fair market value of the shares. Equity compensation is taxed at a rate of 13 per cent for residents, and at a rate of 30 per cent for non-residents unless a double taxation treaty provides for a lower rate, exemption or relief.Registration
Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?
The transfer of shares of a Russian issuer must be registered in the shareholders’ register, which is held by a registrar. A new issuance of shares must be registered with the Bank of Russia (for foreign securities, see question 9).Withholding tax
Are there tax withholding requirements for equity-based awards?
Russian employers are normally required by law to withhold and transfer income tax in the event of payment of any kind of taxable income from employment. The withholding of tax does not depend on the type of award. If the employer cannot withhold the tax by the end of the tax period, a notification is to be sent to the tax office and the employee. Thus, the responsibility for calculating and withholding income tax may be passed to the employee.Inter-company chargeback
Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?
Inter-company chargeback agreements are not common in Russia, since under Russian tax law a company must provide justification for the deduction of any expenses. The deduction of expenses related to an inter-company chargeback from a Russian company’s profit may be deemed illegal by the tax authorities. Owing to the tax risk, companies more often use an arrangement in which a Russian company pays management or services fees to a non-local parent company; however, this arrangement is also not tax risk-free and applying such a model may be considered illegal if the company fails to prove the necessity and authenticity of such services. The amounts of such fees are subject to tax control.Stock purchase plans
Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?
Employee stock purchase plans are available, but not prevalent. Frequently encountered issues related to such arrangements are:
- structuring and enforcement of options (see question 9);
- regulatory restrictions on placement of foreign securities (see question 9); and
- unlawfulness of deferral provisions (see questions 9 and 11).
Employee benefitsMandatory and voluntary employee benefits
Are there any mandatory benefits? Are there limits on changing or discontinuing voluntary benefits that have been provided?
There are mandatory benefits, including the following.Paid annual leave and additional paid annual leave
Each employee is entitled to 28 days of paid annual leave. In addition, certain categories of employee are granted additional paid leave in excess of this (eg, employees with unlimited working hours have at least three additional holiday days; and employees working in harmful or dangerous working conditions have at least seven additional holiday days).Paid sick leave
An employee who has fallen ill is entitled to receive a temporary incapacity allowance from the Social Insurance Fund out of insurance payments made by an employer. This amount depends on length of service and varies from 60 to 100 per cent of an employee’s average salary for the past two years, but may not exceed 2,150.68 roubles per day.Maternity and parental leave
Under article 255 of the Labour Code, women are entitled to leave of 70 days prior to, and 70 days after, the birth of a child (maternity leave) and until the child reaches the age of three (parental leave). Parental leave is also granted to fathers, grandmothers, grandfathers and other relatives or guardians of a child. During maternity leave an allowance is paid from the Social Insurance Fund out of insurance payments made by an employer. The allowance constitutes 100 per cent of an employee’s average salary for the past two years, but not more than 2,150.68 roubles per day. The allowance during parental leave is paid monthly until the child reaches one-and-a-half years of age and constitutes 40 per cent of an employee’s average salary for the past two years, but not more than 26,152.27 roubles per month.Salary indexation
An employer must adjust salaries to ensure that they correlate with increases in consumer prices for goods and services. The terms and procedure for indexation must be set out in local normative acts and the collective bargaining agreement.Unemployment allowance
Persons officially recognised as unemployed (ie, registered with employment agencies) may receive an unemployment allowance paid out of the state budget, as a general rule, for a year. The amount depends on whether the unemployed person previously held a job and why this job was terminated.Compensation for work in harmful and dangerous working conditions
Employees working in harmful and dangerous working conditions have shorter working hours and a shorter working week, and their salaries increased by at least 4 per cent above the salary for this type of work in normal conditions.Termination payments
See question 24.Compensation for work in the far north or comparable regions
Increased salary as well as additional days off, holiday days and shorter working hours are provided to employees working in the far north and comparable regions. There are no limits, other than contractual (if any), on discontinuing voluntary benefits that have been provided to an employee.Typical employee benefits and incentives
What types of employee benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?
The following types of employee benefits are prevalent for executives:
- termination payments;
- provision of a company car with driver;
- provision of additional paid annual leave; and
- increased level of coverage of various expenses, including business trips, accommodation and relocation.
In general, taxable compensation includes compensation received in cash or in kind (housing, meal allowance, etc), or in the form of imputed income (eg, under stock-based incentive plans). Income received in kind is valued at fair market value.
Some areas of income are exempt from taxation, such as the following:
- reimbursement of employees’ business trip expenses within certain limits;
- fees paid by an employer for employees’ medical treatment;
- employer-paid education expenses; or
- fees paid by an organisation for study by an individual in a licensed educational institution.
The tax rate depends on the tax residence status of the employee. An individual is considered a Russian tax resident if he or she has spent at least 183 calendar days in Russia within the past 12 calendar months.
Resident individuals are subject to personal income tax on their worldwide income at a general flat rate of 13 per cent on most types of income. Non-resident individuals pay tax on their Russian-sourced income at a general flat rate of 30 per cent. Lower rates, exemption or relief may be available under a double taxation treaty between Russia and the country of the employee’s tax residence. Employment income is treated as Russian-sourced income where it relates to activities performed in Russia, except for remuneration of directors of Russian companies, which is subject to Russian income tax irrespective of the place of their work.
Foreign nationals employed in Russia under a ‘highly qualified specialist’ regime enjoy a 13 per cent tax rate that applies to salary set out in an employment contract and other income directly related to their labour activity, while other types of taxable income are subject to a 30 per cent rate. Highly qualified specialists are generally defined as employees who are foreign citizens with a monthly salary exceeding at least 167,000 roubles (the exact amount depends on the occupation and business field). The status of highly qualified specialist is granted to an employee by the migration authorities by issuing special permission to work.
Termination of employmentRules for termination
Are there prohibitions on terminating executives? Are there required notice periods? May executives be dismissed without cause?
There are no prohibitions on terminating executives. The notice period depends on the grounds for termination. For example, in the event of the liquidation of a company or redundancy the notice period constitutes two months prior to termination.
Russian law provides for special regulation of the employment of a company’s CEO and members of a company’s management board, if provided for in the company’s charter. Under article 278 of the Labour Code, the CEO of a company and the management board may be dismissed without cause by a decision of the authorised body of the company.
Executives who do not belong in this category cannot be dismissed without cause by the employer unless the dismissal is owing to the liquidation of the employer or redundancy, or if full-time employees are hired to the positions that they have occupied on a part-time basis.Mandatory severance pay
Are there statutory or mandatory minimum severance requirements? Are there any other mandatory, post-employment benefits?
Employees whose employment is terminated owing to liquidation or reduction in the number of employees are entitled to a severance allowance equal to their average monthly wage. If the employee is still unemployed two months after the date of discharge, he or she may retain his or her average monthly earnings for a second month; if they have applied to an employment agency within two weeks of discharge, and such agency has not found them a job three months after the date of discharge, employees may also retain their average monthly earnings for a third month. The average monthly salary of a particular employee used for the calculation of such severance payment is calculated based on payments provided by an employer’s remuneration plan (including salaries and bonuses) by taking all payments accrued for the previous 12 calendar months and dividing them by the number of actual working days in this period and then multiplying by the number of days in the respective month.
Employees are entitled to a severance allowance equal to their average earnings for two weeks if, inter alia, employees are called up for military service or assigned to equivalent alternative civilian service, or reject a transfer in connection with relocation of the employer to another locality. The average daily wage of a particular employee used for the calculation of this severance payment is calculated by taking all payments accrued for the previous 12 calendar months and dividing them by the number of actual working days in this period.
The CEO of the company and the members of the management board dismissed without cause by a decision of the authorised body of the company are entitled to a severance payment in the amount of at least three average monthly salaries.
Statutory severance payments cannot be waived because the provisions of local normative acts, collective bargaining agreements and employment agreements may not worsen the legal position of an employee. The following types of incentive compensation affect the amount of severance payable if they are included in an employer’s remuneration plan:
- monthly bonuses;
- bonuses for periods of over a month;
- annual bonuses; and
- non-recurrent bonuses for length of service.
There are no other post-employment benefits.Typical severance pay
What executive severance payment level is typical?
The statutory severance payment amount depends on the reasons for the termination and varies from two weeks’ to three months’ average earnings. In the event of termination by mutual agreement, the amount of the severance payment is usually established in the termination agreement. Such severance payment amount typically ranges from three to six months’ salary and includes bonuses.
There is no statutory limitation on the maximum payment level that can be provided to executives (except for credit organisations, state corporations, state companies, state and municipal enterprises and institutions and entities that are at least 50 per cent-owned by the state or municipal bodies) (see question 10).
It is typical to pay an annual bonus for the financial year on a pro-rata basis for the period worked.
In the event of a change in control, the amount increases only if provided for by the employment contract or internal regulations, while a minimum compensation payment for the CEO (three times the average monthly salary) is provided for by the Labour Code.Reasons for dismissal
Are there limits on dismissal for ‘cause’? Are there any statutory limits on ‘constructive dismissal’ or ‘good reason’? How are ‘cause’ or ‘constructive dismissal’ defined? Are there legal or customary rules relating to effecting a termination for ‘cause’ or ‘constructive dismissal’?
An employer may terminate an employee’s employment for cause only on the grounds provided for by article 81 of the Labour Code:
- the employee’s repeated failure to perform duties without cause, if he or she has already been the subject of disciplinary measures;
- a single severe violation of the employee’s duties (eg, absenteeism, disclosure of commercial secrets, pilferage, embezzlement, wilful destruction or damage or certain violations of safety requirements);
- acts resulting in the employer’s loss of confidence in the employee working directly with monetary or material assets;
- committing an immoral deed in educational functions;
- presenting false documents for conclusion of the employment contract;
- an unjustified decision made by the head of the company or branch, or representative office or his or her deputies or chief financial officer, resulting in a breach of the safety of property, its illicit use or other damage to the property of the company;
- a single gross breach by the head of the company or branch or representative offices or his or her deputies of their official duties; and
- grounds provided for under an employment agreement with the CEO of the company or members of the company’s management bodies.
There are no such concepts as ‘constructive’ dismissal or ‘good reason’ dismissal under Russian law.
Although there is no such concept as ‘good reason’ dismissal under Russian law, the following may be similar:
- an employer may terminate an employee for insufficient skills, as confirmed by the results of ‘attestation’, but only if it is not possible to transfer the employee, with his or her consent, to another position within the company; and
- an employee’s employment may be terminated for repeated failure to perform duties without cause if he or she has already been the subject of disciplinary measures, requiring compliance with the following procedure: after revealing a disciplinary misdeed the employer should request a clarification (written statement describing the reasons for, or circumstances of, the misdeed) from the employee and if the clarification is not satisfactory, the employer issues a termination order, which the employee signs to confirm having read.
Are ‘gardening leave’ provisions typically used in employment terminations? Do they have any special effect on benefits?
‘Gardening leave’ provisions are not used in employment terminations. Russian law does not have such a concept and, moreover, lists the cases in which an employee may be suspended (eg, alcohol or drug intoxication, failure to fulfil work safety training or a compulsory medical check-up). The effect of gardening leave might be achieved if the employer and the employee agree that the employee take holiday until his or her finishing date. This will, however, require the employee’s consent and further payment of salary. Moreover, the employer cannot terminate the employee’s employment during such holiday (except in the event of liquidation of the employer).Waiver of claims
Is a general waiver or release of claims on termination of an executive’s employment normally permitted? Are there any restrictions or requirements for the waiver or release to be enforceable?
A general waiver or release of claims on termination of an executive’s employment is used in practice; however, under articles 45 and 46 of the Russian Constitution, court protection of civil rights is guaranteed and no one can be deprived of such right. Moreover, article 22 of the Civil Code prohibits agreements aimed at full or partial waiver of legal capacity or capability. Thus, a general waiver or release of claims on termination of an executive is not enforceable under Russian law. This allows the employer or the employee to apply to the court with claims arising from or connected with termination regardless of the provisions of the termination agreement.
When considering a claim brought in court for violation of a waiver, however, an employer may refer to the principle of good faith and abuse of rights by an employee. If successful, the court may reject any remedies sought by an employee as a sanction for unfair actions. Furthermore, the employer may use any defence relevant to challenging the employee’s claim.
Post-employment restrictive covenantsTypical covenants
What post-employment restrictive covenants are prevalent? What are the typical restricted periods?
Non-compete and non-solicitation clauses regarding key employees and executives are used in practice, but as the Constitution of the Russian Federation declares an individual’s right to engage in work, these provisions are generally not enforceable. Consequently, an employer may not bar its employees from seeking employment or accepting the offer of a competitor. Moreover, if the employee meets its competence and qualification requirements, the competitor cannot legally reject his or her application.
An employer has certain similar options to consider after termination of an employee:
- former employees are obliged to preserve the confidentiality of information qualified as a commercial secret or know-how of an employer during the whole term of existence of the respective confidentiality regimes; and
- joint venture arrangements may include non-solicitation clauses in respect of customers and employees, but such arrangements must comply with antitrust law provisions.
Are there limits on, or requirements for, post-employment restrictive covenants to be enforceable? Will a court typically modify a covenant to make it enforceable?
Not applicable.Remedies for breach
What remedies can the employer seek for breach of post-employment restrictive covenants?
An employer may sue an employee who has violated post-termination arrangements for breach of contract and claim withdrawal of paid compensation and compensation of other losses. Violation of an employee’s post-termination obligations may also entitle an employer to suspend or reject any further payments provided for by the termination agreement.
Pension and other retirement benefitsRequired retirement benefits and incentives
Are there any required pension or other retirement benefits? Are there limits on discontinuing or modifying voluntary benefits that have been provided?
According to the Law on Compulsory Pension Insurance an employer must participate in the compulsory pension insurance scheme in respect of all employees by making insurance payments to the Pension Fund of the Russian Federation. Employees registered in the pension insurance system are entitled to receive a retirement pension granted to men who have reached the age of 65 and women who have reached the age of 60.
Government pensions consist of an insurance component and a funded component. Their amounts depend on the length of service of the retired employee and on their investment by pension funds.
Besides compulsory state pension insurance, employers may participate in private pension programmes. Such programmes may provide for additional benefits for employees (eg, in facilitating pension payments before the legally stipulated retirement age or in granting supplementary payments).
There are no limits on discontinuing or modifying voluntary benefits that have been provided to employees.Typical retirement benefits and incentives
What types of pension or other retirement benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?
Russian law does not provide for any additional pension or retirement benefits for executives in comparison with other employees. Private pension insurance is not a widespread practice among Russian companies, but private insurance programmes, if adopted, provide for any additional support only to executives and other key employees. Such benefits usually consist of increased pension payments.
Pensions formed by the contributions of employers to non-state pension funds are taxed at the personal income tax rate of 13 per cent for residents and 30 per cent for non-residents, while state pensions and pensions formed by the employee’s contributions to a non-state pension fund are exempt from personal income tax.Supplemental retirement benefits
May executives receive supplemental retirement benefits?
The executives of Russian companies that participate in private pension insurance programmes may receive supplemental retirement benefits. Supplemental retirement benefits usually provide for increased pension payments.
Generally, Russian law prohibits discrimination in labour and post-employment relations, but the provision of benefits under private pension programmes is an issue at the sole discretion of an employer and an employer is fully authorised to select participants for a particular programme. Thus, it is difficult to support claims arising from the provision of discriminatory benefits, and such claims are very rare in Russian practice.
IndemnificationDirectors and officers
May an executive be indemnified or insured for claims related to actions taken as an executive, officer or director?
Under Russian law, executives may be insured for claims related to actions taken as an executive, officer or director (D&O insurance).
A company’s ability to provide D&O insurance is limited to civil claims against executives. It may include only the types of insurance expressly provided for by insurance legislation, thus a Russian D&O insurance policy may cover damages caused by an executive in his or her capacity as such to a third party, and defence costs and other costs and expenses incurred by an executive. In addition, a D&O insurance policy covering executives of a Russian company in their capacity as such may be issued only by a Russian insurer holding all the necessary licences.
Change in controlTransfer of benefits
Under what circumstances will an asset sale in your jurisdiction result in an automatic transfer of benefit obligations to the acquirer?
Under Russian law an asset sale will result in an automatic transfer of benefit obligations to the acquirer only in the event of the sale or purchase of stock in a company. In all other cases employees will be transferred to the new employer; thus, its own benefits will apply.Executive retention
Is it customary to provide for executive retention or related arrangements in connection with a change in control?
Executive retention or related arrangements after a change in control depend on the character of the acquisition:
- if a company or asset is acquired by a competitor, it is customary for the management team to be replaced; or
- if stock or an asset is sold to a financial investor, the parties will usually agree upon executive retention arrangements. Such arrangements are usually structured as granting additional retention bonuses to the management team with deferred payment.
Are there limits or prohibitions on the acceleration of vesting or exercisability of compensation in a change in control? Are there restrictions on ‘cashing-out’ equity awards?
Russian law does not provide for any limits or prohibitions on the acceleration of vesting or exercisability of compensation in a change in control, but this is possible if provided by an employer’s internal regulations or employment agreement. There are also no restrictions on ‘cashing out’ equity awards.
Are there adverse tax consequences for the employer or the executive relating to benefits or payments provided pursuant to a change in control?
Provision of benefits or compensation pursuant a change in control are subject to general requirements of the tax law, in particular, to the necessity for the employer to provide economic justification of respective expenses.
Multi-jurisdictional mattersExchange controls
Do foreign exchange controls rules apply to the remittance of funds, or the transfer of employer equity or equity-based awards to executives?
Under the Currency Control Law, foreign exchange control rules will apply to the remittance of funds, and the transfer of employer equity or equity-based awards to executives if they are qualified as currency transactions. So, for example, the transfer of currency from the account of a Russian resident (Russian entities and Russian citizens) opened abroad to the account of another Russian resident opened in the Russian Federation, and vice versa, is a currency transaction; however, currently article 9 of the Currency Control Law permits such transactions without limitations.Local language requirement
Must employment agreements, employee compensation or benefit plans, or award agreements be translated into the local language?
Employment agreements, employee compensation or benefit plans, or award agreements should be translated into Russian, as, according to Federal Law No. 53-FZ on the State Language of the Russian Federation, dated 1 June 2005, the Russian language must be used in the activities of all entities located on the territory of the Russian Federation, including documentary turnover. If a compensation or benefit plan is provided solely by a foreign parent company to an employee of its Russian subsidiary and is not part of the employee’s employment arrangements with the Russian subsidiary, such document does not have to be translated into Russian.Net salary arrangements
Are there prohibitions on tax gross-up, tax indemnity or tax equalisation payments?
Tax gross-up, tax indemnity or tax equalisation payments are not directly prohibited. However, Russian law does not recognise the concept of tax gross-up, tax indemnity or tax equalisation and they are not common and workable in Russia.Choice of law
Are choice-of-law provisions in executive employment contracts generally respected?
Choice-of-law provisions in executive employment contracts are not respected. Under articles 5 and 9 of the Labour Code, employment relations and, consequently, employment agreements are Russian law-governed. Moreover, under article 22 of the Civil Procedure Code of the Russian Federation, any employment-related disputes must be resolved by Russian courts of general jurisdiction.
Update and trendsKey developments of the past year
What were the key cases, decisions, judgments and policy and legislative developments of the past year?Key developments of the past year47 What were the key cases, decisions, judgments and policy and legislative developments of the past year?