Ukraine: Optimization of Staff Expenses in an Environment of Economic Crisis

At present Ukrainian business people are facing economic difficulties which force them to take unpopular measures aimed at supporting their businesses during the crisis. To cut staff expenses employers can use two methods either separately or in combination. The first one is by to cut the number of staff and the other method is by actually reducing staff expenses. Before making the decision to fire an employee, it is worth considering that the currently valid Labor Code of Ukraine of 1 June 1972 contains a number of restrictions on the right to terminate an employment agreement at the employer's initiative. The employer must often obtain prior consent from a company's trade union to dismiss an employee who is a member thereof. It is prohibited to dismiss an employee during his/her vacation or sick leave. The employer has no right on no account to dismiss pregnant women, mothers of children under the age of three, as well as single mothers who bring up children under the age of fourteen, except for the case of company liquidation. The ground most commonly used to dismiss personnel in crisis environment is specified in Article 40(1) of the Labor Code. This is dismissal in connection with changes in production and labor structure, including change of the company type accompanied by staff shortening. This provision corresponds with Article 64(3) of the Commercial Code of Ukraine of 16 January 2003 providing that an enterprise independently sets the number of its employees and personnel arrangements.

However, dismissal of an employee due to staff reduction is quite complicated and requires a lot of formalities to be complied with. First of all, the employer must inform the company's trade union about the forthcoming dismissal at least 3 months before such a dismissal takes place and hold a series of talks to mitigate the negative consequences of this step. Secondly, the employer must give the employee who is to be dismissed personal 2 months prior notice in writing. At the same time, if there are any vacant positions at the employer's enterprise the employer is obliged to offer such employees these vacancies. Thirdly, within the said term the company must notify a local office of the State Employment Service about staff cuts, indicating herewith the employees' professions, specializations, salary rates, grounds and terms of dismissal. When selecting candidates for dismissal the employer should take into account the priority rights to continue work that are guaranteed for employees with higher qualification and labor efficiency. Under equal conditions the employer may give privilege to any employee specified in Article 42(2) of the Labor Code.

Dismissal on the basis of Article 40(1) of the Labor Code can take place only with the consent of the company's trade union to terminate the labor agreement with each of the employees. For that purpose the employer must present reasonable applications that are to be considered within a 15-day period. If the trade union refuses to grant such consent the dismissal cannot go ahead. And if it were to go ahead the employee will have the right to claim him/her to be reinstated in his/her former position.

After 2 months has lapsed the employees may be dismissed. In this case they have the right to receive severance pay in the amount of a monthly salary. During 10 days from the date of employee's dismissal the employer must notify the local office of the State Employment Service about all the dismissed employees. According to Article 36(1) of the Labor Code there are no restrictions for the parties to the labor agreement to decide mutually on its termination. Termination due to mutual consent of the parties is acceptable either at the employee's initiative or at the employer's. The initiator of dismissal needs to apply to the other party in writing with a proposal to make an arrangement on the termination of the labor agreement and set the date from which it will come into effect. Dismissal with the mutual consent of the parties is expedient for the employer as there is no need for long term procedures to be followed. The employer can arouse the interest of the employee in such an approach by offering him/her severance pay or other benefits.

If the employer is interested in keeping personnel, the strategy may include reduction of the salary rates for the period that is sufficient to meet the crisis. Pursuant to the Labor Code and On Remuneration of Labor Act of Ukraine of 24 March 1995, No. 108/95-ВР the issues of organization of labor remuneration at enterprises are set out in the collective agreement. Thus, it is advisable to provide for the possibility to decrease salary rates because of temporary financial difficulties in the collective agreement. Article 14(2) of the On Remuneration of Labor Act of Ukraine of 24 March 1995, No. 108/95-ВР is the legal basis for this and allows lower rates of labor remuneration to be applied than those prescribed by main, industrial or regional agreements.

However, they cannot be lower than the state norms and guarantees of labor remuneration. In accordance with Article 103 of the Labor Code and Article 29 of the On Remuneration of Labor Act of Ukraine of 24 March 1995, No. 108/95-ВР an employer must notify emplo yees about new conditions of labor remuneration or changes to existing ones not later than two months prior to the introduc- tion of these conditions or changes.

Economic difficulties may cause a company or its subdivi- sions downtime. In compliance with Article 113 of the Labor Code an employer is obliged to pay employees for the period of downtime if it resulted from production causes but not the guilty actions of employees. The payment is made in the amount of not less than two thirds of an employee's tariff rate (official salary). The employee has to inform his/her direct supervisor about the beginning of the downtime, except for the downtime i of a subdivision or the enterprise.

A decrease in production volume may serve as a reason for establishing part-time work that leads to a reduction in labor expenses. The peculiarity of part-time work is that the employees' salary is reduced in proportion to the hours worked. Part-time may be set out as part-time day, week or combination thereof. Legislation does not provide any limitations on duration of part-time work regime.

A part-time day may be established in two ways: a) under the agreement between the employer and the employee; b) un der the employer's decision unilaterally by changing substantial labor conditions. The first way is easier to implement but an employee may not always agree to accept such an offer.

The procedure for establishing part-time work starts with the employer's decision on changes in production and/or labor structure. Upon such a decision the employer gives an order which should contain a list of employees and subdivisions for whom and where part-time working will be introduced. That order may be issued no later than two months before the establishing of the said labor regime. In case of establishing part-time week according to Article 52 of the Labor Code this decision must be approved by the enterprise's trade union to come into effect.

Every employee, whom the part-time regime will be applied to, must be notified about its establishing in writing. The notification procedure implies that the employer is required within two months to obtain written consent from each employee to work in the new conditions or his/her refusal. After the expiry of the notification period the employees who refused to work under the part-time regime may be dismissed on the grounds of Article 36(6) of the Labor Code relating to changes of substantial labor conditions.

Subsequently, the part-time work regime can be cancelled under the same procedure.

In some cases it is possible to provide a vacation without pay with the consent of the parties. But according to Article 26 of the On Vacations Act of Ukraine of 15 November 1996, No. 504/96-BP an employee may be granted a vacation without pay for the period set by the agreement between the employee and the owner, but not more than 15 calendar days per year. Granting such a vacation for a longer period than established under the law or putting pressure upon an employee to ask for a vacation shall be deemed illegal.

Thus, the employer has the right to decide on how to deal with the economic difficulties on his own and to choose one of the possible ways of optimizing staff expenses:

1. Staff reduction;

2. Dismissal of an employee at the mutual consent of the parties;

3. Decrease of salary rates by amending the collective agreement;

4. Payments for downtime period;

5. Introduction of a part-time work regime; and

6. Granting vacations without pay.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.