Starting from January 1, 2016 employee leasing is prohibited in Russia

On May 7, 2014 the Federal Law as of 05.05.2014 N 116-FZ "On Amendments to Certain Legislative Acts of the Russian Federation" regulating employee leasing in Russia was published on the website of the Rossiyskaya newspaper.

Confidence Group is pleased to offer you the overview of the law. This will also apply to foreign citizens.

The new law comes into force only on January 1, 2016, that’s why we decided to make an overview of the current situation with the leasing of employees first and to give you a couple of advises how to avoid difficulties before the new law comes into force.

The current situation on the market of employee leasing and temporary staff in Russia

A lot of Russian employers have begun to use employee leasing recently. This also applies to foreign citizens.

The term “employee leasing” has always been used all over the world but always in the meaning of temporary employment and as a temporary replacement of certain positions in companies.

At the moment, employee leasing is also used by Russian employers mostly as temporary replacement of staff. But a great number of employers began to use the mechanism of employee leasing in the way of outstaffing (conclusion of contracts with legal entities and individual entrepreneurs, providing personnel services), despite the fact that labor activity is often carried out on the customer’s side.

The main reason for using employee leasing is a desire of an employer to reduce personnel costs. Employee leasing is also used by those employees who fail to get quota on foreign labor hire and sometimes because of the desperate inability to hire Russian citizens for temporary replacement on certain positions in organizations. Due to this of lot of organizations providing outstaffing services, covered by foreign citizens as well as Russian, have appeared.

Taking into account the lack of legislative regulationson employee leasing, dishonest and unprofessional companies get used to the situation, offering the illegal outstaffing schemes.

We have reviewed judicial practice on this case. We are also pleased to offer you a couple of recommendations that will help to avoid difficulties with the law before January 1, 2016, when the Federal Law as of 05.05.2014 N 116-FZ "On Amendments to Certain Legislative Acts of the Russian Federation" regulated employee leasing in Russia, comes into force.

Thus, the personnel leasing contracts with individuals do not contradict the Russian labor law. But Russian courts consider the legitimacy of contracts on employee leasing only if there are no labor relations between the legal entity (Customer of services) and the actual performer (Leasing employee).

Moreover, the Supreme Arbitration Court of Russia confirmed that in such cases the civil relations between Leasing employee and a Customer and labor relations between Leasing employee and an Agency providing employee leasing occur.

The risk of qualification of relationship between a Customer and Leasing employee as labor ones depends on the essence of the relations between them. In accordance with Article 56 LC of Russia an employment contract is characterized by the following features:

• personal work fulfillment by an employee in accordance with the employment contract;
• timely and full payment of employee’s salary by the employer;
• keeping work rules of an employer by an employee.

Investigating the presence of the labor relations between a Customer and Leasing employee the courts usually take into consideration also the essence of the relations between a Leasing employee and the Agency.

Among other conditions, the following of them are of the highest importance for the courts:

• absence of the concrete work scope in the agreement between an Agency and Leasing employee;
• value of work process rather than the result for a Customer;
• inclusion of Leasing employee into productive activities of a Customer;
• monthly salary of Leasing employee paid by a Customer;
• systematic conclusion of contracts with the same Leasing employee for a long term period for one Customer;
• providing by a Customer guarantees and compensations stipulated in labor legislation to Leasing employee;
• participation of Customer’s representatives in selection of candidates on the position of Leasing employee by an Agency before their hiring.

However, neither the legislation nor judicial practice doesn’t not exactly define the number of such circumstances enough for considering the case as labor relations. Thus, in practice, the evaluation of the presence or absence of labor relations between a Customer and an Agency and Leasing employee is made by the courts individually.

In case the court considers the relations between a Leasing employee and a Customer as labor ones, the Customer will take the full responsibility for the violation of the Russian labor law. In case Leasing employees are covered by foreign citizens, the administrative responsibility for violation of the migration legislation will also be applied to a Customer.

Considering of such cases with Russian citizens in courts are quite rare. Most of them are usually connected with the direct reference of a citizen to a court when the rights of a citizen were restrained. In case an employer has concluded a contract with an employee and refuses to consider their relationships as labor ones, the following administrative fines can be imposed on employer:

• for officials –up to 20.000 RUR;
• for individual entrepreneurs – up to 10.000 RUR;
• for legal entities – up to 100.000 RUR.

As a rule, inspection authorities do not often check presence or absence of labor relations’ features of Russian citizens working under employee leasing contracts. Cases with foreign citizens are rather difficult.

Firstly, the inspection authority is the FMSD whose employees have not ever heard such term as employee leasing at all.

The physical presence of a foreign citizen at the work place, in most cases is considered by the FMSD officials as labor activity on the Customer. The following fines can be imposed on a Customer for the absence of the documents, confirming legal stay and work of the Leasing employee on the territory of Russia:

• for individuals – from 2.000 to 5.000 RUR (from 5.000 to 7.000 RURin Moscow, Moscow region, Saint-Petersburg and Leningrad region);
• for officials – 25.000 to 50.000 RUR (from 35.000 to 70.000 RUR in Moscow, Moscow region, Saint-Petersburg and Leningrad region );
• for legal entities – fines from 400.000 to 800.000 RUR (from 400.000 to 1.000.000 RUR in Moscow, Moscow region, Saint-Petersburg and Leningrad region).

Secondly, there are a lot of dishonest and unprofessional companies specializing in employee leasing. The main fraud method of them is providing fake documents, including fake work permits for foreign citizens offered to Customers as Leasing employees. In case FMSD officials find out fake documents, the administrative offences can also be imposed to a Customer.

Confidence Group is absolutely sure that most of the companies providing leasing employees will not take the full responsibility on them in case the FMSD officials find out migration violations within the foreign leasing personal. Moreover, as a rule, most of the documents, including contracts with foreign citizens are made on one-day firms, so it is quite difficult for inspection authorities to find them out.

If you have hired or have decided to hire leasing personal before the new law comes into force, Confidence Group is pleased to give you several advices:

• carefully check up a Supplier of the leasing personnel;
• specify carefully the responsibility of an employee and a Supplier;
• use the services of professional lawyers on the possibility of the proposed ways of hiring leasing personal;
• solve problems with the FMSD officials employees in the place.

Changes on employee leasing market after January 1, 2016

On May 7, 2014 on the website of the Russian newspaper the Federal Law as of 05.05.2014 N 116-FZ "On Amendments to Certain Legislative Acts of the Russian Federation" regulating employee leasing in Russia, was published.

The new law introduces the definition of employee leasing into the Tax Code. Employee leasing is a work performed by an employee on the order of an employer, on behalf of and under the management and control of the individual or legal entity who is not the employer of the employee. The same article of the Tax Code prohibits such relations in Russia, i.e. starting from January 1, 2016 employee leasing in Russia will be prohibited.

All other amendments to the new law are aimed on regulating of labor activity of employees who are sent to individuals or legal entities under the temporarily contracts on staff providing.

The definition of the activity on staff providing has also been introduced. Staff providing activity - means sending of an employee by an employer (hereinafter referred to as the Sending Party) to an individual or legal entity (hereinafter referred to as the Host Party) who is not the employer of the employee to carry out work activity determined by his/her labor contract on behalf of and under the management and control of the Host Party.

The key word of the new law is “temporary”. So the Russian government finally put an end to disputes between employers and trade unions about the possibility of the use of permanent employee leasing.

Confidence Group is pleased to offer you the overview of the features of labor activity of employees temporarily sent to individuals or legal entities under the staff providing contracts.

Who has the right to execute activity on staff providing

According to the new law, only two categories of legal entities will have the right to execute activity on staff providing, they are:

1. Private employment (recruiting) agencies - legal entities registered in Russia. Such agencies are obliged to go through the special accreditation procedure;
2. Other legal entities, including foreign legal entities and their affiliates (excluding individuals), if their employees temporarily sent to:

• legal entity (affiliate to the SendingParty);
• legal entity (joint-stock company), if the Sending Party is a party of the shareholders' agreement on  rights certified by shares of such company;
• legal entity (a party of a shareholders' agreement with the sendingParty).

The second category of legal entities refers to the so called secondments.

Requirements to private employment (recruitment) agencies

Private employment agencies will have the right to execute activity on staff providing only within the following cases:

1. employees under their consent are sent to an individual or legal entity who is not their employer by organization which has the right to execute activity on staff providing;
2. employment contract with an employee sent to an individual or legal entity who is not his/ her employer, includes terms and conditions on execution of work activity on individual or legal entity;
3. employees are sent for temporary work for:

• individual, who is not an entrepreneur, in order to provide private services or assistance in householding;
• individual entrepreneur or legal entity for temporary replacement of absent employees. Work places of the absent employees have to be retained;
• individual entrepreneur or legal entity for temporary work (up to 9 months) connected with expansion of production or increase of sales volume.

In case an employee is sent for temporary work on a Host Party, an employee and an employer have to conclude additional agreement with information about the Host Party, place and date of the contract conclusion, number and period of validity of the staff providing agreement.

Information about the work on a Host Party shall be entered into the work-book of the employee.

Private employment agencies must also meet the following requirements:

1. charter capital of the legal entity must be not less than 1.000.000 RUR;
2. no taxes, duties and other obligatory payments’ debts to the budget system of the Russian Federation shall exist;
3. the head of the private employment agency must have higher education as well as work experience in the field of employment or employment assistance in the Russia for at least 2 years during the last 3 years;
4. the head of a private employment agency must not have previous convictions of committing crimes against the person or economic crimes.

Those legal entitiesacting within special tax regimes can’t execute the activity on staff providing.

Cases in which staff providing activity is not allowed

Staff providing activity is not allowed in the following cases:

1. replacement of striking workers of the Host Party;
2. work in case of downtime (temporary delay of work of the Host Party),bankruptcy of the Host Party, the introduction by the Host party of part-time work in order to keep workplaces at threat of mass dismissals of workers;
3. replacement of workers of the Host Party, refusing to work in the cases statutory by the labor legislation, as well as replacement of workers temporarily stopped their work due to salary delay for a period exceeding 15 days;
4. execution of appropriate types of works at dangerous industrial object (EIO) of I and II risk classes;
5. work implementation at the workplace with harmful working conditions of III and IV risk classes or other dangerous working conditions;
6. replacement of certain positions in accordance with the staff schedule of the Host Party, if the presence of such employees is the condition of receiving license or other permit for activity implementation and the condition of membership in a self-regulatory organization or receiving a certificate permitting activity implementation by a self-regulatory organization;
7. work as crew members of ships and mixed vessels (river - sea).

If the number of workers hired under the staff providing contracts to fulfill the temporary work (up to 9 months) connected with expansion of production or increase of sales volume, exceeds 10 % of the average number of employees, the Host Party will have to take into account the opinion of the elected body of the primary trade union of the organization while making a decision on hiring employees.

Insurance

Insurers who temporarily sent their employees under the stuff providing contracts shall pay insurance premiums in accordance with tariffs for main economic activity of the Host Party, as well as extra charges and discounts to insurance tariff determined by special assessment of working conditions in the workplaces, where employees actually temporary work.

Features of labor activity and contracting

Payment conditions under an employment contract with an employee, sent to work for the Host Party, shall not be worse than the payment conditions of workers of the Host Party, performing the same work functions and having the same qualifications.

Employment contract, concluded between a private employment agency and an employee sent for temporary work, shall include the condition of his work execution under the management and control of an individual or legal entity who is not the employer of the employee.

The Host Party takes the full subsidiary responsibility for the following issues: salary payments and other compensations, for violation of terms of salary’s payment, vacation payments, discharge or other payments.

Foreign citizens under the staff providing contracts

Entry stay and work on the territory of Russia of foreign citizens under the staff providing contracts are determined by the following federal laws:

• The Federal law as of August 15, 1996 N 114-FZ "On the Procedure of exit from the Russian Federation and entry to the Russian Federation";
• The Federal law as of July 25, 2002 N 115-FZ "On the Legal status of Foreign Citizens in the Russian Federation";
• The Federal law as of July 18, 2006 N 109-FZ "On Migration Registration of Foreign Citizens and noncitizens in the Russian Federation".

Comments

Confidence Group has been observing the development of the situation connected with this law for several years.

Let us tell you a couple of words about the background to the adoption of the law. Firstly, creators of the law took into account the opinion of two parties only. They are: big industrial enterprises and trade unions. Trade unions could no longer put up with the fact that the largest Russian companies began to withdraw their personnel out of staff and use the leasing personnel on a constant basis duу to the imperfection of the legislation.

As soon as the draft law has been published, it became clear that leasing of employees in Russia would be prohibited at all. At this moment Russian business community, presented mostly by big international recruitment agencies, whose business on providing temporary employees amounts up to 40% of the total income, started to defend their interests.

With the assistance of the American Chamber of Commerce in Russia, as well as lawyers of the largest auditing company, several suggestions on improving the law have been introduced. Most of them have been approved by the legislature and included into the final version of the law.

So we’ve seen how the business community can defend their interests and influence on legislature.

Confidence Group gives the positive assessment to the adoption of the new law. We are sure that it will contribute to the cleaning of the market from dishonest and unprofessional companies providing employee leasing in one way or another. It will also lead to the improvement of working conditions for employees already engaged in employee leasing.

Author: Sprinchan Andrew.