Valeriia Linevych
Head of Staff Administration
and Payroll Services Department
Due to the Russian aggression, many men and women in Ukraine have stood up to defend the state since February 24, 2022. In this regard, employers have had (and still have) many questions about accounting for labor relations with such employees. But it is one thing when an employee is mobilized, and quite another when a company’s director is mobilized. After all, it is the director, who is responsible for the company's activities in all aspects. So, let's take a closer look at how a company should act to ensure business continuity.
HR issues related to release from duty
Regardless of how a director joined the Armed Forces of Ukraine, — through mobilization, conscription, as a reservist, or voluntarily entering into a contract for military service, — this person shall provide the relevant confirmation document of enlistment, namely:
- military ID, containing a record of a person’s mobilization subject to the current general mobilization;
- summons;
- mobilization order, issued by the relevant Territorial Recruiting and Social Support Centres (TRSSC), where the person liable for military service is registered;
- for reservists — an extract from the order or a certificate of enrollment in the military unit, issued by the military unit;
- contract;
- certificate from the military unit under the form No. 5 confirming that a person is mobilized on the basis of the Decree of the President of Ukraine dated February 24, 2022 No. 69/2022;
- extract from the Order of the Ministry of Defense on enrollment in the lists of the unit and assignment to the management of the Terrorist Defense Brigade of the Regional Directorate of the Terrorist Defense Forces (military TD).
After receiving the documents, an HR officer (or a person responsible for keeping the company’s personnel records) shall prepare and submit to the director for signature an order to release the employee (in this case, the director) from duties due to a conscription during the mobilization.
The company's staffing table determines the number of employees based on staff units for each position (profession) provided for in the staffing table, which must also be determined in accordance with the Classification of Professions. It is impossible to exclude the position of a director from the staffing table, since he/she is not dismissed, but only released from duties due to the mobilization for a certain period. For the entire release of duties, the director has a job and position guarantee. In addition, another person may be appointed for the period of the director’s absence, for example, on the basis of a fixed-term employment contract or a temporary acting director may be appointed, etc.
It is required to remove a mobilized employee from the timesheet with the entire period of the military service, including weekends, to be recorded. For the timekeeping of a mobilized employee, the conventional designation “OU” (digital code “22”), as provided for in the Standard Form No. P-5, is usually used — other unworked time provided for by law (performance of state and public duties, pre-conscription training, military training, donor, time off, etc.) in accordance with the Order of the State Statistics Committee of Ukraine No. 489 “On Approval of Standard Forms of Primary Accounting Documentation for Labor Statistics” dated December 5, 2008. However, given that the Order No. 489 stipulates that Standard Form No. P-5 is advisory and consists of the minimum indicators required to fill out state statistical observation forms, the company may, at its discretion, introduce additional conditional marks for accounting for mobilized employees by approving such marks locally, for example, in the Regulations on the Working Time Accounting at the Enterprise.
Please note that starting from 19.07.2022, the date of entry into force of the Law of Ukraine dated 01.07.2022 No. 2352-IX “On Amendments to Certain Legislative Acts of Ukraine on Optimization of Labor Relations” (hereinafter — the Law No. 2352-IX), the period of mobilization and other military service is not included in the period of service entitling to annual basic leave. This right remains in force until 18.07.2022, i.e., all unused vacation days earned by an employee before 18.07.2022 shall be saved for further use or for payment of monetary compensation upon dismissal.
Payroll
It should be noted that the Law No. 2352-IX amended part three of Article 119 of the Labor Code of Ukraine dated 10.12.71 No. 322-VIII (hereinafter — the Labor Code of Ukraine (LCU)), whereby employees called up for regular military service, military service under mobilization, for a special period or recruited for military service under a contract in the event of a crisis situation threatening national security, the announcement of a decision to mobilize and (or) impose martial law for a period until the end of the special period or until the day of actual demobilization, are entitled to retain their employment, the place of work and position at the company, institution, organization, farm, agro-industrial production cooperative, regardless of subordination and form of ownership. In other words, the Law No. 2352-IX exempts the employer from the obligation to maintain the average salary of employees called up for military service starting from 19.07.2022. Such employees are paid remuneration at the expense of the State Budget of Ukraine.
If an employer independently decides after 19.07.2022 to accrue and pay payments to mobilized employees in the form of average earnings or allowances, a personal income tax, military duty and the Unified Social Tax on such payments should be accrued and paid on the same basis as on regular wages.
Transfer of director’s powers
See below some practical cases to resolve the issue of transferring the powers of a director, dismissed due to mobilization.
1. Company’s owner performs duties of director
Pursuant to the Article 65 (part 2) of the Commercial Code of Ukraine No. 436-IV dated 16.01.2003 (the “CCU”), the owner may exercise the rights to manage the company directly or through the authorized bodies in accordance with the charter or other constituent documents. The owner has the right to act in the interests of the company without a power of attorney and internal orders. If the functions of a mobilized director will be performed by the company’s owner and information about him/her is available in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations (hereinafter — the USR), there is no need to submit information to the register separately.
It's not required to enter into an employment contract with the owner-director, as the relations that arise when a founder acts as a company’s director without entering into an employment contract, are corporate relations. Legally, the founder does not perform the duties of the company’s director, but only certain managerial functions assigned to him/her. If there is no employment contract, there is no need to pay salaries and pay unified social tax, personal income tax and military duty. Moreover, no legal provision obliges the owner of a company to enter into agreements with himself/herself, including an employment contract.
To legally formalize the founder's performance of the director's functions, the following should be considered:
- the company's charter should specify the procedure for managing the company by the founder (without formalizing an employment relationship with him/her). Such a right of the founder must be formalized by a decision of the general meeting (or by a decision of the sole founder, if he/she is the only one), which must include a clause allowing one of its participants to manage the company;
- it is not required to issue an order (instruction) appointing the founder as a director, make an entry in the employment record book, or enter data in the staffing table;
- it is not required to develop a job description director-founder, arrange business trips, vacations, pay salaries, reimburse expenses, pay sick leave, etc.
Often, the State Labor Service and the State Tax Service believe that the founder is in an employment relationship with the company, and therefore must receive a salary and pay personal income tax, unified social tax and military duty. However, we already have a decision of the Constitutional Court of Ukraine No. 1-rp/2010 dated January 12, 2010, which recognized the possibility of a manager, who is a participant or founder of a company, to manage a business entity without entering into an employment contract and receiving a salary. As such, proper execution is the most important thing.
2. Director transfers his/her powers to another employee
A director may delegate his or her powers in full to another person during the absence if he or she is granted such a right by the company's constituent documents. If such rights are not granted, then only the founder can do so by formalizing such a decision in a protocol.
In the event of the director mobilization, the best option is to have the company's constituent documents regulate and include in the USR not only the information about the director, but also about the person who exercises the relevant powers in the absence of the signatory director. In this case, the powers are transferred by an order (the director is released for military service and at the same time appoints a person to perform the duties of the director until his/her return / during his/her absence (until the end of the special period or until the day of actual dismissal from military service)).
If the USR does not contain information about another signatory other than the director, then, together with the order appointing the person to act as director, a power of attorney must be issued to represent the company's interests in legal relations with third parties. Without a power of attorney, only the person indicated as a signatory in the Unified State Register can act on behalf of the company.
Any other employee of the company, who has the appropriate professional training and certain education necessary to perform such work, may be assigned to temporarily perform the director’s duties. When performing the duties of a temporarily absent employee, the employee, along with his or her duties, simultaneously performs the duties of another position. For the additional workload of performing the duties of a temporarily absent employee, an employee of the company, based on the Article 105 of the Labor Code of Ukraine, is paid an appropriate additional payment. Amounts of additional payments are set by self-sustaining enterprises independently in a collective agreement in compliance with the norms and guarantees provided for by the law, general and sectoral agreements (the Article 15 of the Law of Ukraine “On Remuneration of Labor”). If the job descriptions or employment contracts of employees, who may temporarily perform the functions of a director, provide for such a situation (performing the duties of a director in his/her absence), additional payment for performing the duties of a director is not mandatory and the employee's consent is not required.
If the director’s order assigns a temporary deputy (substitution) for the position of an absent employee, the employee performs duties in another position and is released from the duties of his/her position. For the period of temporary deputation, the employee is paid the difference between his/her actual salary and the salary of the employee he/she is replacing.
Both temporary performance of duties and temporary deputation (substitution), if not specified in the job description or employment contract, are changes in the essential terms and conditions of employment. The employee must provide written consent to such changes, and the employer must notify the employee of these changes no later than 2 months in advance (if the change in conditions is initiated by the employer). However, during the martial law, there are certain peculiarities of applying the provisions of Article 32 of the Labor Code of Ukraine: the employee must be notified of changes in essential working conditions and changes in remuneration conditions no later than before such conditions are introduced (the Article 3 of the Law No. 2136 “On the Organization of Labor Relations under Martial Law”), i.e., there is no longer a need to notify the employee that he/she will temporarily act as a director 2 months before.
3. Hiring new employee as director
A company may hire a new employee as a director under a fixed-term employment contract. The employment order and the employment contract should state that the employee is hired “for the period of the director's absence due to mobilization” so that, after the director's demobilization, the substitute can be dismissed under clause 2 of the Article 36 of the Labor Code.
In the case of limited liability companies or additional liability companies, it is possible to enter into a civil law contract with a person who is hired as a director thereof. However, we advise avoiding this, as the Supreme Court of Ukraine has repeatedly drawn the attention of interested parties to the fact that an employment contract regulates the process of organizing labor activity, while the purpose of a civil law contract is not to organize the performance of activities thereunder, but to obtain a certain final result. The State Labor Service is also particularly active in combating the substitution of labor relations with civil law ones.
In each of the three cases, it is not necessary to make changes to the information about the director (temporarily dismissed for the period of mobilization) in the USR, since the powers of the dismissed director are not terminated, but only exercised by another person for a certain period.
New QES and cooperation with bank
Changing the signatory requires a change of the qualified electronic signature (hereinafter referred to as the QES). The person, who will be entrusted with the temporary performance of the director’s duties, may not use the QES of the mobilized director. Transferring the QES to another person is unacceptable and means that the QES has been compromised the same as all documents signed with it. If the user's private key is compromised (the fact or reasonable suspicion that the private key has become known to other persons), the client must immediately contact a qualified electronic trust services provider to revoke the qualified certificate or change the private key password independently.
When changing the signatory, the company must also inform the bank by providing a new list of persons authorized to manage accounts and sign payment instructions in hard or electronic form. Such a list may be provided by the client in any form, unless otherwise provided for in the bank's internal documents governing the account opening procedure.
Therefore, we can conclude that the company can both prepare in advance for a possible temporary replacement of the mobilized director and act on the situation in compliance with all necessary procedures. If you need additional advice, please contact BDO in Ukraine's HR experts.