“Antiviral” laws: an inrush of home-based workers and force majeure for all (Part 2)
There is also the need for total legalization of digital processes, liberalization of labor law and its adaptation to quarantine conditions as well as postponement of secondary corporate compliance requirements.
At its extraordinary meeting held on 17 March 2020, the Verkhovna Rada of Ukraine amended certain legislative acts of Ukraine by effecting changes aimed to prevent the emergence and spread of coronavirus disease (COVID-19) and to liberalize tax legislation. On the same day, President Volodymyr Zelensky signed relevant Laws of Ukraine No. 530-IX and No. 533-IX.
Quarantine ‘turbo’ mode in Parliament has proved effective and should be switched on again
We embrace all steps taken by the state to support business at this time and appreciate their speed – the necessary decisions were made and implemented within days and even hours. The Parliament has proven its capability to bring all its strength into play when needed; henceforth, we will refer to this precedent in demanding more substantial support for business. Let us think for a moment about what the legislative framework for entrepreneurial activities in Ukraine might be like if the people's deputies worked in this field with such zeal and at such pace not only last week, but all the time. The quarantine manifestly exposes the absence of certain reforms, particularly those that have been expected by business for years or even decades. To illustrate, the draft Law “On Inland Water Transport”—the drafting of which involved the authors of this material—has not yet superseded the similar charter of the USSR of 1955 (still effective!), thus liberalizing the river transportation. It is needless to additionally stress the importance of stability and diversification of supply chains as an element of the state security amid pandemic; unfortunately, there is no time for relevant structural changes.
The adopted laws have provided for some relief in taxes and audits, as well as in administrative, employment, and contractual legal relationships (to be further discussed in detail in the next article). These changes seem useful; however, they are in fact fragmentary and insufficient. The second wave of “antivirus” measures taken by the regulators to support business should be more decisive.
І. New rules
At first, we are going to explore the new rules adopted by Anti-Crisis Law of Ukraine No.530-IX and evaluate their impact on current activities of companies.
Global force majeure
The law has extended the formal list of force majeure circumstances by adding “the introduction of quarantine established by the Cabinet of Ministers of Ukraine”. This novelty adds clarity on the subject, though it has not resulted in a force majeure revolution.
First, as we have already mentioned in one of our articles, there already were reasons to refer to a quarantine (in an aggregate of circumstances) as force majeure. According to Article 1 of the Law “On Protection of the Population Against Infectious Diseases”, the quarantine is a set of administrative and health protection sanitary measures that are used to prevent the spread of particularly dangerous infectious diseases. Given that quarantine was imposed by CMU Resolution No.211 of 11 March 2020, such administrative measures may reasonably be qualified as the abovementioned “restrictive actions of the authorities” or “normative acts, decisions, requirements of state authorities” that are included in the force majeure clauses. This position remains relevant, since Law No.530-IX came into force on the date of its publication (on 17 March, six days after the quarantine was imposed), and it has no retroactive effect.
Second, the change (introduced to the definition of force majeure in Article 14-1 of the Law of Ukraine “On Chambers of Commerce and Industry in Ukraine“) will be crucial, especially for cases where, according to the agreement of the Ukrainian Chamber of Commerce and Industry (the UCCI), a party must prove the force majeure circumstances. The UCCI itself considers the novelty as such that “simplifies reference to force majeure circumstances of business entities”.
It raises concern that by offering the CCI option to everyone interested, the Ukrainian Parliament has not simplified the procedure for obtaining the desired certificates. Hopefully, the avalanche of requests does not become a force majeure for the UCCI itself. Nevertheless, the UCCI reacts reasonably and, under the impact of current developments (and not earlier) makes a decision towards the procedure digitalization. “Given the challenging situation currently faced by most business entities in Ukraine amid quarantine, the UCCI's management bodies adopted a decision that simplifies the procedure for submitting applications, thus allowing to submit a minimum package of documents (a copy of contract, a copy of order (ordinance) and send notifications (notifications of the other party) in electronic form to the official email addresses of respective CCIs.” Albeit the impact of a “challenging situation”, we are slowly moving towards the digitalization.
By the said order/ordinance we understand documents that, according to another advice from the UCCI, should be used to formalize documentary suspension of activities in the relevant areas with respect to business entities unable to fulfill their obligations due to the force majeure circumstances, including quarantine.
Although the force majeure rules have become clearer, our basic advice remains the same: do not allow for force majeure to happen. The parties need to agree on reasonable changes to the agreement terms that will provide for more flexible options and allow to fulfill the underlying obligations with a delay or in any other way. Generally, force majeure affects only one party to the agreement that cannot fulfill its part of obligations, and thus it has to protect itself from the claims by the other party. However, today all businesses across the globe are facing force majeure issues. The situation requires joint efforts to fight the common global enemy, instead of focusing on resolving contractual conflicts.
Remote work, continuously since 1981
Law No.530-IX stipulates that “an employer may instruct an employee, including government official and local government employee, to carry out work specified in an employment contract remotely during a particular period of time.” This provision, in fact, is an important change that formalizes the actual situation in many companies that practice remote work, especially during the quarantine. It has exposed the backwardness of our post-Soviet labor legislation: the situational work from home that many of us have to do today has not been provided for by the law! In the “pre-quarantine” era, it was required to sign an archaic employment contract with a home-based worker (we still encounter such cases in practice, while the State Labor Service of Ukraine continues to “advertise” this type of contract as the only way to formalize remote work). Another option is a civil law agreement (did the IT sphere employees turn out to be the most prepared for quarantine?).
This means that, from a conservative point of view, the mass transition of employees to remote work had to be formalized by introducing changes to the existing employment contracts or signing of new remote work contracts. However, this “lawlessness”, if it did occur, lasted only several days. The above change has directly legitimized the current situation with remote work. However, it is still unclear to what extent the employer’s “instructions” will be binding on employees. If the new Law had included a more imperative term “order/ordinance” (as the rest of the Labor Code provisions), it would have allowed to dismiss and take disciplinary actions against employees more decisively (Articles 139 and 147 of the Labor Code) for possible action, which has already become an Internet meme: unauthorized appearance at work. As regards the “instructions”, an imposition of disciplinary liability for failure to perform the assigned tasks remains an open question.
If you have decided to give a try to the employment contract with home-based workers, it is legal and thoroughly regulated by the Provision on labor conditions for home-based workers, approved by Decree No.275/17-99 of the USSR State Committee on Labor and Social Affairs dated 29 August 1981. We have checked that this regulation (it has been in force in Ukraine since 1981) in no way restricts employees from choosing the means of communication with their employers (in fact it equates a popular WhatsApp with a more formal Skype for Business) and does not contain any prohibitions on social networks.
No one will find out: prohibition of planned audits of businesses
An imposed moratorium on state audits can “cancel out” any possible formal errors made by businesses when making urgent decisions in the early days of quarantine, especially in the field of labor relations. It is prohibited for the state supervisory (oversight) authorities to carry out scheduled activities on the state supervision (oversight) of economic activities for the period of quarantine.
Some authorities decided “not to act” decisively. Thus, most of the regional offices of the State Labor Service have announced a temporary suspension of both scheduled and ad hoc audits for the period of quarantine. However, there was no formal prohibition on conducting ad hoc audits. Although, the capacity of controllers to actually perform such audits during the quarantine is questionable, since they also have to stay home.
Quarantine has had a significant impact on global talent mobility. Currently, the foreigners who were unable to travel outside Ukraine or to apply for an extension of their stay in Ukraine and/or for a change of their temporary/permanent residence permit are not subject to the administrative liability if such violations occurred during the period of or as a result of quarantine.
This refers to fines and penalties established by Art. 203 of the Code of Ukraine on Administrative Offenses, as well as to liability envisaged under Articles 26 and 30 of the Law “On the Legal Status of Foreigners and Stateless Persons” – forcible return and removal.
The running of the period for applying for the administrative services and timelines for delivering such services will be suspended from the date of quarantine. This refers to obtaining/extending certificates, visas, work permits, etc. The time limits for obtaining such documents are now being extended for the duration of quarantine.
ІІ. What may be additional regulatory support that business needs?
Law No.530-IX has provided some relief for businesses; however, they are in fact fragmentary and insufficient. The second wave of “antivirus” measures taken by the regulators to support business should be more decisive. These measures include the total legalization of digital processes, liberalization of labor law and its adaptation to quarantine conditions, and postponement of secondary corporate compliance requirements. Let's talk about it in more detail.
Total legalization of digital processes
Firstly, the state should develop a comprehensive action plan to digitalize the economy and encourage electronic document management (EDM) in all legal relationships where possible. The legal groundwork for this transformation has already been laid by a set of laws. Thus, the whole matter depends only on enacting relevant by-laws and awaits its practical implementation. In the first instance, it concerns B2B interaction (contracts and source documentation available online), all B2G reporting, digital notary, and e-court. In today's reality, the role of the ‘easy-to-miss’ Ministry of Digital Transformation may become crucial.
In our comprehensive B2B and B2G offerings, we strongly recommend:
- Simplifying the procedure for issuing EDS remotely 24/7 without the recipient being physically present
- Conferring on all types of electronic keys the same legal status to simplify the submission of reporting to all regulatory bodies and exchange of documents between entities, on a temporary basis
- Creating conditions for interoperability and roaming between EDM providers to unify the document sharing
- Extending the B2G functionality of EDM (for example, submission of factsheets with electronic acknowledgment of receipt)
- Without delay: if, during the quarantine period, contracts and source documents were prepared electronically in compliance with the requirements of current legislation, this will not give separate grounds either for declaring business transactions as sham transactions, improperly executed or for their reclassification during further tax audits
In addition, the international B2B EDM is not in place, since the Law “On Electronic Trust Services” has not yet entered into full force. Both Ukrainian and foreign public key certificates and electronic signatures are not recognized, which does not allow Ukrainian and foreign counterparties to use their local means of e-identification through mutual recognition that could replace international mail with paper-based agreements and their ‘ineffective’ scanned copies. Besides, this requires that international agreements on recognition of electronic identification schemes be concluded. It is most unfortunate that the self-isolation of entire states may close the door on this process; however, it would be very symbolic if these international agreements were prepared and signed online.
Employment Law Reform
The regulation of employment relationships requires radical liberalization (the current draft Labor Code, which is so much expected by all investors and which has long been shelved, is unpopular among the electorate) and adaptation to the possible long-lasting period of remote work regime for many groups of the workforce. Businesses needs to be able to flexibly and quickly change the employment terms, reduce work hours, put employees on compulsory leave, and allow for downtime; the employees need to have an appropriate guarantee that their pay and workplace will be reserved for them.
Ill time for secondary compliance
Numerous corporate compliance requirements and relevant deadlines must be revised and appropriately postponed. The Verkhovna Rada provided for one relief; however, it concerns the implementation by public figures of anti-corruption measures: in 2020, persons authorized to perform state or local government functions, who were to file their tax returns for the previous year before 1 April 2020, may submit it by 1 June 2020. In addition, the liability will be released from those who fails to do so before 1 June 2020. If there is a precedent of such concern about officials, it should be immediately extended to cover business.
In the Internet, there is a quickly shared photograph of doctors saying, “We have stayed at work for you. Please stay at home for us.” We can observe a high consolidation of community in support of this profession that has become critically important today. While doctors save lives in hospitals, who can help save business that can, in its turn, provide crucial support to our long-suffering medicine? The successful survival of business amid quarantine now depends on a number of factors, including the proper performance of contracts and financial discipline, the effective restructuring of business processes done remotely, as well as the making of timely and legitimate decisions. This challenge is dealt with by senior managers, financiers, and lawyers of companies.
However, there are numerous regulatory requirements set by the government before the quarantine that have not been lifted and that require so valuable human resource – the abovementioned experts.
These requirements include, for example, updated financial monitoring rules that will be applied as from 28 April 2020 (the Law “On prevention and counteraction to legalization (laundering) of the proceeds from crime...”). Banks, financial companies, notaries, law firms, and other entities subject to mandatory financial monitoring must fulfill a number of additional regulatory requirements. Along with the new rules, the legislator has also introduced new penalties.
In addition, the new requirements of the Law “On accounting and financial reporting in Ukraine” oblige many companies to publish their annual financial statements and audit reports on their website no later than 1 June of the current year, again with penalties for non-compliance. The law also requires that some entities submit financial statements in a single electronic format; however, the technical condition of the system has not been taken into account. In December 2019, the Committee on Financial Reporting System Management recommended that the regulators amend their acts and not penalize companies in 2020, for they are physically unable to fulfill this obligation for 2019. Amid quarantine, the unpreparedness of the system for collecting financial statements seems even less promising. In our view, the best and immediate solution could be to envisage such deferral at the legislative level.
There is much tension around the issue of convening annual general meetings of joint-stock companies that are to be held before 30 April 2020. The NSSMC is developing a set of “anti-crisis measures” ensuring that no deadlines for submission of annual financial statements will be applied in 2020 and that the annual general meetings may be held until 31 December 2020 or remotely. The option enabling joint-stock companies to hold electronic general meetings was already envisaged in draft law No. 2493 “On Joint Stock Companies”; unfortunately, it still remains yet another unrealized digital reform.
This list could be extended. Numerous requirements imposed on business, just as well as the case of officials' deferred tax returns, have one thing in common: they can be deferred / given a relief / canceled in order to save resources for survival, stabilization, the fight against coronavirus and the economic crisis.
The author would like to thank the entire Deloitte Ukraine's Legal Team, in particular Viktoriia Sydorenko, Mykhailo Koliadintsev, Oleksii Voichyshyn, Vladyslav Kyrychenko, Roman Makarchuk, Anastasiia Chutka, Nikita Varshavets, Mariia Skyba, Valentina Berezkina, and Kyrylo Lobach for their invaluable contribution and joint remote work on the article amid quarantine.