Inna Kudinska and George Sandul, Labor Initiatives legal experts

On April 13, a group of 62 MPs registered at the parliament a draft law No.5371 “On Amendments to Certain Legislative Acts regarding Simplification of Labor Relations Regulation for Small and Medium Business as well as Alleviation of Administrative Burden on Business”.

This document was elaborated by the NGO “Office of Simple Solutions and Results” chaired by Mikheil Saakashvili.

One of the main novelties of the draft law is the “introduction of the contractual regime of labor relations regulation for a certain category of employees and for SMEs”.

As it has been previously within the labor law reform process, the authors of the draft state that “the market economy in Ukraine is still governed by the outdated Labor Code adopted way back in 1971. This Code was developed in the Soviet administrative-command economy, where the sole employers were the state, including state-owned enterprises”. “Such outdated labor legislation creates extremely strict regulation of labor relations”.

However, this argument is not accurate, as the Code has since been altered numerous times, and its adoption year is the only Soviet aspect of it. The valid Labor Code was indeed adopted in 1971, but more than 100 amendments had been incorporated in the text throughout the 30 years of Ukraine’s independence. For instance, the Labor Code of Poland was adopted in 1974 and it is constantly being amended, in particular by strengthening of labor guarantees – introducing measures to prevent bullying, anti-discrimination clauses, etc.). The authors of the draft № 5371 refer to international experience, notably Japan. But labor relations in Japan are governed by the Labor Standards Acts of 1947 (with about 40 amendments during 1947-2003) as well as the Civil Code adopted in 1896.

Another reason for law drafting is the following one: “As human labor is one of the key resources for any business operation, the private sector in Ukraine and, above all, small and medium-sized businesses are still deprived of favorable legal conditions to develop their potential and become more competitive. Among other things, this results in low rates of quantitative and qualitative development of entrepreneurship, deepening of the crisis in the economy, in particular the reduction of employment, slow growth of budget revenues at all levels”.

It is worth highlighting that one of the fundamental ILO instruments is the Declaration of Philadelphia 1944 which directly establishes that “labor is not a commodity”. Thus, it is rather odd (and absolutely in violation of fundamental principles and standards) to read about the “resource character of labor” in the explanatory note to the law.

One of the urgent problems, which, according to the authors, the draft law is intended to solve is “the inconsistency of outdated methods of comprehensive state regulation of labor relations to the realities of a market economy based on individual (private) agreements based on contracts, and the ability of the market system to self-regulate a big part of public relations. in particular labor, at the level of “market capacity”. Thus part three of Art. 94 of the Labor Code of Ukraine in the wording of the 90’s provides both state regulation, and contractual regulation of labor relations, in particular in terms of wages, workers’ remuneration and their protection. However, this market method of labor regulation is only mentioned and further practically not reflected in the provisions of the outdated labor legislation ”.

It is worth noting that draft law authors do not fully understand the notion of contractual regulation of labor relations, especially with regards to workers’ compensation. Contractual regulation in its common definition means the utilization of mechanisms that are used by the majority of civilized countries – collective agreements, rather than the proposed regulation of labor relations at the employer-employee level.

Leader of the Confederation of Free Trade Unions being detained

According to chapter III of the Law of Ukraine “On wages and workers’ compensation”, contractual regulation of labor relations is defined as regulation of wages based on a system of agreements that are concluded on a national (general agreement), sectoral (sectoral or inter-sectoral agreement), territorial (territorial agreement), and local (collective bargaining agreement) levels according to the laws.

The same position on contractual regulation of labor relations is enshrined in numerous scholars` works.

Thus, such a comprehensive analysis of labor legislation proves that contractual regulation is rather common for Ukraine and is widely implemented in practice.

As was indicated in the explanatory note, the draft law has passed the procedural stage of public discussion with all relevant stakeholders. The said stakeholders turned out to be representatives of small and medium enterprises, and there are no notions of consultations with representative organizations of workers or employers. However, in the ILO R189, “Job Creation in Small and Medium-Sized Enterprises Recommendation”, adopted in 1998, it is noted that the most representative trade unions and employers’ associations must be consulted throughout any revision of labor legislation.

The particular amendments of the draft law involve the following:

Contractual regulation of labor relations

A separate new chapter of the Labor Code (Chapter III-B) will be dedicated to this issue – “the contractual regime of labor relations regulation for a certain category of employees and for SMEs’.

Article 49-5: “Contractual regulation applies to labor relations

  • between employee and employer which is a SME with no more than 250 employees during a year
  • between employer and employee the wage of the latter is more than 8 minimum wages per month (currently it is UAH 48000)

Such regime could be applied voluntarily between the entitled employees and employer”.

It is worth noting that, as of 2017, at least 73.1% of the economically active population of Ukraine were employed at small and medium-sized enterprises. Besides, considering the popular practice of “fragmenting” large enterprises into several medium and small ones, it becomes clear that the contractual regime will be applied to large corporations as well.

According to the data of Ukraine’s Chamber of Commerce, the breakdown of jobs created by business entities in 2019 is as follows: micro enterprises – 35%, small businesses – 13%, medium-sized enterprises – 34%, large enterprises – 18%. Thus, small businesses (micro + small enterprises) are responsible for 50% of job creation in Ukraine, and SMEs overall generate 82% of new jobs.

Ukraine’s data is not unique in that regard. SMEs are the foundation of developed economies, where they constitute on average 70% of all enterprises – however, as best international practices demonstrate, even the countries where SMEs are dominant adhere to a common labor code for all enterprises and all workers, regardless of enterprise size or its ownership model. SMEs are internationally recognized as crucial pillars of job creations, for example in the ILO R189, “Job Creation in Small and Medium-Sized Enterprises Recommendation”. ILO experts note that states should implement non-discriminatory application of labor law to support SMEs and promote higher job creation in the SME sector of the economy.

Deterioration of employment agreement conditions 

Under Art.9 of the current Labor Code conditions of employment agreements worsening workers` status compared with the labor legislation provisions are invalid.

The draft law cancels such a “fuse” for workers employed in SMEs – “Deterioration of workers` status is not considered in case of conclusion of employment agreements under Chapter III-B of the Code”.

“Equality” in an employment agreement

In addition, the draft law amends the Art.21 of the current Labor Code:

“Under the contractual regime of labor relations defined in Chapter III-B of this Code, the employment contract is the main means of regulating labor relations between employees and employers (owners of privately owned enterprises), in which the number of employees or wages meet the criteria set out in Article 49- 5 of this Code. If the contractual regime of labor relations is applied, by mutual consent of the parties, the employment contract may specify additional rights, obligations and responsibilities of the parties, conditions of material support and organization of work of the employee, conditions of termination or premature termination of the contract. The general provisions of the Civil Code of Ukraine on contractual relations shall apply to the relations between the employee and the employer arising from the employment contract in the part not regulated by this Code”.

Thus, de facto, it can be argued that under this draft law, an employment contract between an employee and an employer that is a small or medium-sized enterprise may include any provisions. For example, such provisions may establish additional responsibilities of the employee, grounds for his/her dismissal and liability. In practice this will mean the possibility of stripping all employees of SMEs of the rights and guarantees established by current labor legislation.

Ideologically, the draft law argues that the employer and the employee are two equal parties. However, given both the realities of the labor sphere in Ukraine and the formal inequality enshrined in current legislation (the employee is a subject to internal labor regulations, obeys management orders, may be subject to disciplinary liability, etc.), it is impossible to state any formally established legal equality of the parties, because the employer has much more leverage over the employee.

The famous dictum of Roman law – “in dubio pro operario” confirms the abovementioned. In dubio pro operario is the legal principle that states that, in case of doubt in the hermeneutics of the norm, the worker will be favored. This legal principle implies that both the judge and the interpreter of a legal text must, before a doubt of interpretation, choose the one that is most favorable to the interests of the worker. This dictum is considered fundamental for labor law by prominent labor experts and is stipulated in legislations of most countries of the world.

Moreover, the inclusion of workers employed for SMEs into a separate category and the introduction of a special regime for regulating their labor relations that differ from the norms applicable to other employees contains signs of discrimination. Under Article 2- 1 of the Labor Code, any discrimination is prohibited in the sphere of labor.

In addition, references to the general provisions of the Civil Code of Ukraine are not relevant as labor and civil legislation have different subjects of legal regulation.

New rules of dismissals

New article 49-8 specifies a dismissal procedure pursuant to contractual regime:

“Termination of the employment contract, termination of the employment contract on the initiative of the employee or employer shall be carried out on the grounds and in the manner prescribed by this Code, taking into account the provisions specified in this Chapter [i.e. new Chapter of contractual regime of regulation]. The employer, on his/her own initiative, is entitled to terminate the employment contract with the employee, unless otherwise specified in the employment contract. Unilateral termination of the employment contract at the initiative of the employer is carried out with the provision of compensation to the employee in the amount and in the manner prescribed by the employment contract, but not less than the amount of three minimum wages”.

Besides, par.5 of Art.49-8 of the draft provides that “in case of termination of the employment contract with a union member at the initiative of the employer, the prior approval of the elected body of the local trade union chapter is not required if such a condition is provided by the employment contract”.

Those articles establish the so-called “at will employment”. This practice is common in the USA and means termination of employment agreement with an employee based on an employer’s unilateral decision.

Taking this into account, we believe that such norm on dismissal of an employee at the sole unreasonable desire of the employer will nullify any guarantees of labor rights in Ukraine. In addition, at-will employment prevents effective trade union work (as trade unionists, especially active ones, or whistleblowers among them can be dismissed without any just causes) and anti-discrimination efforts in the workplace. Under the proposed law, it is sufficient for the employer only to pay compensation and to notify an employee without any other obligations. Should an employee choose to appeal his/her dismissal in court, it will be impossible to do that, as the employer is not obliged to provide any written or oral argumentations of their decision.

In the USA, such a ground of dismissal has been applied since the second part of the XIX century, but in the XX century, the majority of states made amendments to their legislation on this issue. In addition, at-will contracts were usually concluded with employees on managerial positions. Court practice also formulated several exceptions to mitigate sometimes harsh consequences for employees. For example, it is necessary to have just causes for termination of labor relations.

This would violate ILO Convention 158 which provides at Article 4 that “The employment of a worker shall not be terminated unless there is a valid reason for such termination connected with the capacity or conduct of the worker or based on the operational requirements of the undertaking, establishment or service”.

Moreover, it violates Art.24 of the European Social Charter (revised) (which mirrors the ILO Co. 158 language) – “with a view to ensuring the effective exercise of the right of workers to protection in cases of termination of employment, the Parties undertake to recognise the right of all workers not to have their employment terminated without valid reasons for such termination connected with their capacity or conduct or based on the operational requirements of the undertaking, establishment or service”.

Additionally, provisions on termination of contracts with union members without prior approval of a union is in breach of Art.1,2 of ILO Workers` Representative Convention No.135. Notably, Art.1 of the Convention stipulates that “workers’ representatives in the undertaking shall enjoy effective protection against any act prejudicial to them, including dismissal, based on their status or activities as a workers’ representative or on union membership or participation in union activities, in so far as they act in conformity with existing laws or collective agreements or other jointly agreed arrangements”.

Furthermore, par.6 of Art.49-8 of the draft law No.5371 provides that “employee and employer could in an employment agreement, at their mutual consent, specify other grounds of dismissal, except those established in the Code”.

Meanwhile, par.6 of Art.49-5 indicates that “labor relations between employees and employers under the terms of the contractual regime, which are not regulated by the provisions of this Chapter and / or the terms of the employment contract, are governed by the relevant provisions of this Code”.

It means that this specialized Chapter of the Labor Code as well as the individual employment contract have the primacy over the other provisions of the Labor Code. Pursuant to p.3 Art.184 of the Labor Code, pregnant women, women with children under 3 years, single mothers with children under 14 years old or a child with disabilities cannot be dismissed at the initiative of the employer, except total liquidation of an enterprise. The draft law proposes the following procedure – if an employment contract establishes other rules of contract termination for these categories, then the contract will have supremacy.

Inconsistency of other draft law clauses

The draft also contains norms that create different legal consequences in one part of the article. Thus, paragraph 3 of part 2 of Article 49-6 provides that “the conditions and procedure for renewal of a fixed-term employment contract shall be determined by the employee and the employer, taking into account the provisions defined by this Code.” That is, the provisions of Article 39-1 of the current Labor Code are actually meant.

However, paragraph 3 of the same part of the article enshrines a completely different principle, which contradicts the previous paragraph – “if the fixed-term employment contract does not specify the terms of its renewal, such employment contract is terminated within the period agreed and determined by the parties”.

Furthermore, in the essential conditions of the employment contract, which are specified in the draft law, the following inconsistency with current legislation is observed. Thus, it is assumed that the employment contract must specify the place of work or other place of work, if the performance of the task or functional responsibilities of the employee is carried out on the terms of remote (distant) work. However, the essence of remote work is that the employee independently determines their workplace and is responsible for ensuring safe working conditions there (Article 60-2 of the Labor Code). Also, the requirement to indicate the place of remote work is not required even in the recently published draft order of the Ministry of Economy “On approval of standard forms of employment contracts for home and remote work.”


The draft law №5371 contains a number of extremely threatening provisions that can lead to human rights violations due to the individualization of employment contracts in small and medium enterprises. The reference to the “freedom of contract” provides ample room for employers to prescribe literally any provisions to the contract, while workers, desperate for jobs during a pandemic, will be likely to accept such provisions.

Employee-employer relations do not provide for either formal or actual equality of parties as in the civil law. National labor law around the world is intended to balance this inequality in some way by providing a weaker party, both real and formal, with additional guarantees. The same tendency and practice is stipulated in international labor instruments – ILO sources and other generally accepted international norms.

Moreover, according to Art.296 of the EU-Ukraine Association Agreement, “[p]arty shall not fail to effectively enforce its environmental and labor laws, through a sustained or recurring course of action or inaction, in a manner affecting trade or investment between the Parties. A Party shall not weaken or reduce the environmental or labor protection afforded by its laws to encourage trade or investment, by waiving or otherwise derogating from, or offering to waive or otherwise derogate from, its laws, regulations or standards, in a manner affecting trade or investment between the Parties”.

Under Art.419 of the Agreement, the Parties shall strengthen their dialogue and cooperation on promoting the decent work agenda, employment policy, health and safety at work, social dialogue, social protection, social inclusion, gender equality and non-discrimination.

Art.420 establishes that cooperation in the area covered by Article 419 of this Agreement shall pursue the following goals: (a) improve the quality of human life; (b) meet common challenges, such as globalisation and demographic change; (c) aim at more and better jobs with decent working conditions; (d) promote social fairness and justice, while reforming labour markets; (e) promote conditions of labour markets that combine flexibility with security; (f) promote active labour market measures and improve efficiency of employment services to match the needs of the labour market; (g) foster more inclusive labour markets that integrate disadvantaged people; (h) reduce the informal economy by transforming undeclared work; (i) improve the level of protection of health and safety at work, including by education and training on health and safety issues, promotion of preventive measures, prevention of major accident hazards, management of toxic chemicals, and exchange of good practice and research in this area; (j) enhance the level of social protection and modernise social protection systems, in terms of quality, accessibility, and financial sustainability; (k) reduce poverty and enhance social cohesion; (l) aim at gender equality and ensure equal opportunities for women and men in employment, education, training, economy and society, and decision-making; (m) combat discrimination on all grounds; (n) enhance the capacity of social partners and promote social dialogue.

It is obvious that the abovementioned amendments to the legislation proposed by the draft No.5371 do not correspond to the European integration course of Ukraine and the international commitments of our state.

This bill contains both potential threats to the rights of all workers in Ukraine, and direct restrictions on the rights of trade unions to participate in the process of regulation and organization of labor. It is worth recalling that the initiatives to cut the rights of trade unions in the bill № 2681 have already received a very negative assessment of the UN Special Rapporteur on the rights to freedom of peaceful assembly and association.

The draft law №5371 aims to regulate one of the most important spheres of public life – the sphere of labor, yet its text is unsystematic and fragmented, which also indicates a lack of legal techniques in its preparation.

It is worth highlighting that we in no way reject the positive impetus of authentic SMEs, as the important role of SMEs in economic development is demonstrated in practice by the world’s leading countries. However, the given reform on modernization of labor relations “in the spirit of best foreign practices” could be carried out with the undercurrent of potential or actual narrowing of fundamental human rights – that is, of labor and trade union rights.

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