Tuesday, December 16, 2014

Ukraine - Dismissal of Executive Officers

By Pavlo Khodakovsky and Alesya Pavlynska, Arzinger, Ukraine

The status of executive officers is as a rule regulated by special legislative norms in various jurisdictions, since it undoubtedly differs from the status of ordinary employees in terms of appointment and termination procedures, scope of duties and level of liability.

But the Ukrainian legislation, though granting such categories additional (corporate) authorities and envisaging special (higher) level of liability for executive officers, generally refers to them as to ordinary employees in terms of employment rights, benefits and guarantees.

Unfortunately Ukrainian Labor Code is still de facto a Soviet inheritance which limits the owners’ right to dismiss executive officers under their own initiative while granting far-reaching powers to trade unions (e.g. to demand dismissal of the CEO under certain circumstances).

It must be emphasized that the Labor Code contains an exhaustive list of reasons for dismissal of employees, most of which are dismissals for misconduct and require sufficient substantiation.

As for executive officers, whose status is similar to the status of ordinary employees under Ukrainian labor legislation, the following grounds for dismissal are used most frequently in practice:

- agreement between employer and employee;
- termination upon the initiative of the employee;
- termination of the fixed-term labor contract;
- grounds envisaged by the labor contract;
- gross violation of labor obligations by the CEO, his/her deputies or chief accountant;
- guilty actions of the CEO entailing untimely payment of salaries or payment in amounts lower than the minimum salary established by law.

Other grounds (e.g. systematic violation of duties, truancy, appearance at work under the influence of alcohol, drugs or any other toxic substances, violation of some requirements of anticorruption legislation etc.) are also possible, but are seldom applied to executive officers.

Each ground, applied on the initiative of the owner, requires substantiation as well as adherence to procedures and terms.

Therefore, in view of the legislation in force, until recently it was not possible to dismiss an executive officer anytime without any reason at the employer's initiative, unless there the labor contract contained such special ground for dismissal, and provided such special ground was not recognized by court as one which is less favorable to the employee than the labor legislation in force.

Under Ukrainian labor legislation a labor contract is a special form of a labor agreement which may be concluded with special categories of employees, including members of the management body (board of directors) in joint-stock companies, and CEOs in other companies.

Ukrainian courts are not in unity regarding the regulation that applies to such labor contracts, since pursuant to the general rule (Article 9 of the Labor Code), terms of labor agreements that worsen the state of the employee compared to the labor legislation in force are null and void. A dispute therefore often arises as to whether the labor contract can be considered separately, thereby allowing deviations from the legislative requirements.

However, recently in line with the policy of Ukraine on improvement of the investment climate some revolutionary changes were introduced. On June 1, 2014, Law 1255-VII amending Part 1 of Article 41 of the Labor Code came into effect. In particular, an additional ground for dismissal has been added (Para 5 Part 1 Article 41 of the Labor Code): revocation of authorities of executive officers.

Compared to other dismissal procedures, the amended labor legislation does not require separate notice or justification for dismissal on this ground. Thus, dismissal may be "same-day" without any grounds specified.

As a kind of compensation, Article 44 of the Labor Code prescribes the severance pay in the amount of at least six months’ average earnings.

Unfortunately, provisions of the Labor Code contain no definition of an “officer”, so there is still a problem identifying the categories of employees which may be subject to such dismissal.

In its clarification "The Class "Officer" in Labor Legislation" dated July 24, 2014, the State Labor Inspectorate of Ukraine attempts to find such a definition in the legislation relating to state officials, in criminal and corporate laws as well as in the relevant court resolutions.

In particular, the State Labor Inspectorate states that the note to Article 364 of the Criminal Code of Ukraine defines executive officers as persons who act as representatives of state authorities or local self-governments permanently, temporarily or under special authority as well as permanently or temporarily hold positions associated with organizational and management or administrative and business functions at state authorities, local self-governments, public or municipal enterprises, institutions or organizations or perform such functions under special authority, which are granted to a person by a competent state authority, local self-government, central state executive authority enjoying a special status, competent authority or authorized person of an enterprise, institution or organization.

An executive officer is endowed with a certain scope of authority, and within the same, has the right to take actions that generate, modify or suspend specific legal relations (e.g. the right to appoint or dismiss employees, to apply disciplinary or administrative penalties etc).

According to the Resolution of the Plenum of the Supreme Court of Ukraine , the organizational and management responsibilities (which are indispensable for the concept "executive officer") are responsibilities of managing an industry, staff members, task area or production activities of certain employees at enterprises, institutions or organizations regardless of ownership. Such functions are performed, in particular, by heads of ministries, other central executive authorities, state, collective or private enterprises, institutions and organizations, their deputies, heads of structural subdivisions (workshop managers, heads of departments, laboratories or chairs), their deputies, and persons managing task areas (masters, supervisors, foremen, etc).

However, in our opinion, application of the concept of criminal law to labor relations is controversial and such a broad definition is unlikely to be supported by the courts.

In our view, "revocation of authority" is basically a corporate law term, which assumes officers are elected, appointed and empowered by the higher authority (general meeting of owners, supervisory board).

Given the above and the fact that the Law 1255-VII also amended the Civil Code , the Commercial Code and the Law on JSC (i.e. the corporate legislation proper), we suggest considering the term under corporate law to define "officers" in this case.
According to Para 2 of Article 89 of the Commercial Code officers of a company are:

- Chairman and members of the Management Board,
- Chairman of the Audit Committee,
- in companies where a Supervisory Board is established – Chairman and members of the company’s Supervisory Board.

The Law on JSC (Para 15 Part 1 Article 2) additionally includes members of the Audit Committee, Head and members of another body of a joint stock company, if that body is provided for under the articles of association, as officers.

Thus, the corporate legislation defines only those persons as executive officers who are elected by the vote of the higher management bodies (general meeting of shareholders or supervisory boards) and are in corporate relations with the company, whereas mid- and low-level managers (heads of departments) are just appointed by the management board or CEOs without any corporate authorities and are therefore excluded from the list.

At the same time, such dismissal is included in Article 41 of the Labor Code (bearing the title "Additional grounds for termination of labor agreement on the initiative of the owner or its authorized body with separate categories of employees under certain conditions") and is thus a dismissal on the employer’s initiative. Therefore, all of the relevant safeguards apply to employees dismissed due to revocation of authorities, including, for instance, the following:

• Prohibition against dismissing pregnant women and women having children under three years of age (under six years of age in some cases provided for by Part 6 of Article 179 of the Labor Code) – Article 184 of the Labor Code;
• Prohibition against dismissing single mothers having a child under fourteen years of age or a disabled child – Article 184 of the Labor Code;
• This prohibition also extends to fathers raising their children without a mother (in particular, in case of the mother’s long-term treatment at a healthcare institution) as well as to guardians (trustees) and foster parents – Article 186 of the Labor Code;
• Employees under eighteen years of age may be dismissed only with the consent of the district (city) services for children’s affairs (Article 198 of the Labor Code);
• Employees may not be dismissed during a period of temporary disability or during their vacation (Part 3 Article 40 of the Labor Code).

To summarize, in our opinion the new ground for dismissal introduced into the Labor Code and dealing with dismissal of executive officers is undoubtedly a progressive regulation, protecting the rights of employers, foreign investors among them. The new regulation also smoothes out discrepancies between the corporate and labor legislation: whereas it was obvious that the owner may revoke the authorities of the executive any time, due to the rigid labor law prescriptions the labor relations didn't terminate simultaneously with such revocation. Therefore formally the officer was still in employment though due to revocation of his/her authorities he/she was not able to work.

At the same time the new legislation also provides the officer to be dismissed under this ground with the minimum guarantee (severance pay) in the amount of at least 6 average monthly salaries - the price the employee has to pay for its corporate decision. Previously the sum of compensation was regulated between the parties (with the dismissal formalized as mutual agreement) and in practice varying from zero to any sum, as agreed under the circumstances.

In our opinion, to define the term "officer" for dismissal purposes under Para 5 Part 1 Article 41 of the Labor Code, it is more correct to use the definitions under corporate law. Also in our view dismissals of CEOs and members of management boards will be the most frequent ones performed under this ground.

We believe that controversies in the interpretation of the term "officers" by employees and employers as well as by courts are likely to arise in practice, unless additional definitions appear in the legislation or official position of state bodies and courts.