European guide to support employers: Employment of managing directors. Ukraine
Status
In Ukraine legal entities are typically incorporated as limited liability companies (“LLCs“). The corporate governance structure of an LLC consists of the general meeting of participants (or a sole participant), which is the supreme governing body of the LLC, and an executive body, which manages the day-to-day operations of the LLC and has the authority to resolve all issues related to the LLC’s activities, except for issues that fall within the exclusive competence of the general meeting of participants. The executive body of an LLC can be of two types: a sole executive body, usually called the director, or a collective executive body (the composition of which is determined by the LLC’s charter) with its head, usually called the general director. For the purposes of this article only, the sole executive body and the head of the collective executive body of an LLC are hereinafter referred to as the “managing director”.
There are no requirements or restrictions as to who may be elected (appointed) as managing director, except that it must be an individual. The employment of foreign citizens, who do not hold a permanent residence permit in Ukraine, to the position of the managing director is subject to a work permit to be obtained by the LLC- employer from the employment center, which is similar to the employment of foreign citizens to any other position within a company. Foreign citizens working in Ukraine should also comply with migration legislation requirements (i.e., obtain a work visa and a temporary residence permit, register a place of residence).
Employment
Until the recent amendments to the Law of Ukraine “On Limited Liability and Additional Liability Companies”, managing directors were considered employees of the LLC. Currently, the law also permits engaging the managing director on the basis of a civil law agreement on provision of services. However, due to the vague wording of the provision in question and inconsistencies with related provisions of other laws, it is not clear how this new engagement option can be implemented in practice, especially for foreigners.
In case of employment of a managing director of an LLC, the employment relationship must be established on the basis of an employment contract. According to Ukrainian labor legislation, the employment contract is a special form of the employment agreement, in which the term, the rights, duties and liabilities of the parties (including property liability), the conditions for providing the employee with material needs and organizing his/her work, and the conditions for terminating the employment contract, including early termination, may be determined by mutual consent of the parties. An employment contract may be entered into only in cases expressly determined by the law.
Accordingly, in contrast to an employment agreement entered into with regular employees, an employment contract must be entered into only with certain categories of employees for which entering into the employment contract is provided for by Ukrainian laws and regulations, in writing, and for a specified term (i.e., it is a fixed- term agreement).
Although Ukrainian labor legislation allows to provide in the employment contract different as compared to statutory, terms and conditions of employment and work, these may concern only the above-mentioned terms and conditions (rights and duties, liability, grounds for termination, material and organizational conditions of work). Any other provisions of the employment contract may not impair the statutory rights and interests of employees working under an employment contract. For example, while an employment contract may establish different rules related to the material liability of the managing director, which may cover both actual damages and loss of profits, it may not shorten the length of the statutory annual leave or establish different rules on monthly salary payment. Any terms and conditions of employment contract that worsen the status of the employee by reference to any applicable laws and a collective bargaining agreement are null and void by operation of law.
Tax & Social Security
Other than as described above and except for the specific grounds for termination described below, the employment of managing directors is subject to the same labor, tax and social security laws and requirements as of any other regular employee.
Liability
Under labor laws applicable to ordinary employees, their liability is limited to compensation for actual damages caused by the employee’s wrongful guilty act (omission). Also, liability is capped to the amount of the average monthly salary of the employee. However, the scope of liability of a managing director is subject to different rules. Managing directors are generally liable for losses caused to their employer by their wrongful guilty actions or omissions, which may include actual damages and loss of profits, unless the managing director is able to prove that such losses were not caused by his/her fault. However, as stated above, the parties to the employment contract may alter such general liability rule of the managing director.
Termination
A managing director, like any other employee of a LLC, may be dismissed at any of the general grounds for dismissal established by the Labor Code of Ukraine (i.e., on his/her own initiative, at so called “neutral” dismissal ground like mutual agreement of the parties or expiration of the term of a fixed-term employment contract, and on the employer’s initiative). In addition to such general grounds for dismissal, a managing director may be dismissed at some specific grounds related to the particularities of this position, for example: on the grounds provided for in the employment contract; on the grounds provided for in the Law of Ukraine “On Limited Liability and Additional Liability Companies”, for example in case of violation of the rules applicable to the disclosure of conflicts of interest and related persons, violation of the obligation to call the meeting of the executive body of the LLC; in case of a single gross violation of professional duties; in case of committing guilty actions resulting in untimely payment of the salary or payment of the salary in an amount lower than the statutory minimum; in case of committing mobbing of an employee, which fact is established by a court decision; at the request of a trade union in case of violation of the labor legislation by the managing director; in case of termination of the powers of an official of the LLC.
This latter ground for dismissal allows terminating the employment relationship with the managing director in connection with termination of his/her corporate powers, i.e., his/her removal from office by the general meeting of participants. Since the participants of a LLC have the right to remove the managing director from this position at any time without prior notice and for any reason, Ukrainian labor laws establish the obligation to pay the managing director a severance payment in the amount equivalent to six times his/her average monthly salary.
