Plan B for Employers in Crisis: Redundancy Plan

Unfortunately, switching from full-time to part-time or decreasing salaries hasn’t been an ideal option for some companies. Thus, under such circumstances they have to think about plan B. Although a redundancy plan is a good option to optimize staff during the business downturn, the process requires long preparatory work and can’t be implemented instantly.

What does staff reduction mean for business? First, it’s an opportunity to regroup employees within similar positions and professions in order to keep the most qualified team members in place. Secondly, it is payroll and expenses optimization for the company.

According to Article 64 of the Commercial Code of Ukraine, a company independently determines its organizational structure, sets the number of employees and staff schedule. The reduction of the number of employees and staff size is a type of changes in the organization and labour which serves as a standalone ground for the termination of employment at the initiative of an employer under the Labour Code of Ukraine (namely, Section 1 of Paragraph 1). This means that, in case of a dispute, courts should verify if there actually was staff reduction, but cannot discuss rationale for that.

A standard procedure for staff reduction in a company where there is no trade union includes the following steps:

1. Taking a decision on staff reduction
2. Identifying employees subject to dismissal
3. Notifying the employees on staff reduction
4. Offering alternative vacant positions to the employees
5. Dismissing the employees

The following aspects require special attention during implementation of staff reduction: 

• Identifying employees which are subject to staff reduction. When deciding on the list of employees to be laid off, an employer should keep in mind the protected categories of employees and employees having a priority right to retain the job.

In particular, the following categories of employees cannot be dismissed due to staff redundancy, unless the company is completely liquidated: 

• pregnant women, women having children under 3 (6) years old, single mothers having a child under 14 years old or a disabled child;
• fathers growing up children without mother, a custodial, and a foster or a carer parent;
• employees called for or enrolled in the military service for a special period, called for military training or military reserve service;
• members of a trade union’s elected body within one year upon termination of their mission within the trade union;
• employees under 18 years old – such employees can be dismissed only in exceptional cases and are subjects to prior consent of a local children’s service;
• young specialists.

If employees hold the same position, the priority to retain the job is given to the employee with higher qualification and efficiency. If qualification and efficiency of employees are equal, then criteria established by Article 42 of the Labour Code of Ukraine and special laws regulating the status of certain categories of employees should be taken into account.

• Notifying the employees and offering alternative vacant positions. According to Article 49² of the Labour Code of Ukraine, an employee must be personally notified on the contemplated layoff at least two months in advance. Although the term “layoff” (in Ukrainian – вивільнення) is not defined, analysis of the law shows that it is used in the meaning of dismissal under Section 1 of Paragraph 1 of Article 40 of the Labour Code of Ukraine.

The following considerations should be taken into account by an employer while notifying the employees on staff reduction:

• The notice must be executed in writing, signed by an authorized person of the employer and properly delivered to the employee respecting the notice period. A period of vacation, sick leave or another employee’s absence at work is included in the mentioned two months’ period.

The delivery by registered mail (including that with acknowledgement of receipt) is usually considered an appropriate method of notification. In practice, employees often try to avoid the receipt of the notice and refuse to sign it. In such case, the employer may ask at least two other employees to act as witnesses and execute a statement recording the employee’s refusal to sign the notice. Although not directly required by the law, the above precautions will minimize risks of challenging the lawfulness of dismissal in the future.

• Together with the notification about the layoff, the employer must offer the employee other vacant positions within the company. The employee should be offered available vacancies corresponding to their profession and specialization, or, if such vacancies are absent, another job which the employee will be able to perform based on qualification and health condition (including positions requiring lower qualification or providing lower salary). Importantly, emerging vacant positions must be offered during the whole notice period, i.e. until the dismissal of the employee.

The employee’s dismissal as a result of staff reduction is allowed only if the transfer to another position is impossible: if there are no relevant vacant positions or if the employee refused to be transferred to another offered position. It is recommended to record the employee’s refusal in writing.

The Ukrainian law does not clearly regulate the situation when several employees who are subject to staff reduction apply for the same vacant position. No preemptive right is provided by the law for the transfer to another position. This means that the final decision should rest with the employer. Thus, vacancies may be filled on a first-come-first-serve basis (with the first employee applying for the transfer to the relevant position) or depending on greater adequacy of the employee to the position’s requirements.

Severance packages

In case of the staff reduction, an employer is obliged to pay to the redundant employee a severance payment in the amount equal to at least one average monthly salary of such employee (Article 44 of the Labour Code of Ukraine). А collective bargaining agreement or the employment agreement may envisage higher amount of the severance payment.

In addition, according to the Law of Ukraine On the Status and Social Protection of Citizens Affected by the Chernobyl Disaster employees who suffered from Chornobyl accident of categories I and II, and participants of liquidations of consequences of Chornobyl accident of category III are entitled to additional dismissal aid (compensation) in the amount of three average monthly salaries. Such compensation is paid by the employer in addition to the severance payment mentioned above and is afterwards compensated to the employer from the state budget.

The severance payment and additional dismissal compensation to Chornobyl victims should be paid on the dismissal date on top of the salary for the current month, compensation for unused days of vacation and other payments due to the employee. 

Mass layoff

If the planned staff reduction falls under definition of mass layoff, it will require additional actions from the employer.

According to the Ukrainian legislation, the mass layoff is one-time occurrence or during

1. a) one month: release of 10 or more employees at an enterprise with 20 to 100 employees / release of 10% and more of employees at an enterprise with 101 to 300 employees, or

(b) three months: release of 20% or more of employees at the enterprise regardless of the number of employees.

If the planned staff reduction is qualified as a mass layoff, the employer is obligated to notify a territorial body of the State Employment Service of Ukraine. Such notification shall be submitted no later than two months before the staff reduction. It is necessary to notify the State Employment Service of Ukraine not only before beginning of staff reduction.     

Trade union

The trade union of the company shall be informed about the planned staff reduction no later than 3 months in advance. The employer should provide the trade union with the written information about reasons of planned dismissals, as well as about number and categories of employees to whom it may apply and terms of dismissals (deadlines). Moreover, the employer should have consultation with a trade union regarding measures for preventing or minimizing dismissals or mitigating the negative effects for employees.

If the employee who is going to be dismissed under staff reduction is a member of a trade union, obtaining a prior consent of the elected body of the trade union is binding. The Ukrainian legislation prescribes a special procedure and timelines of obtaining such consent. It is essential for the employer to follow all prescribed procedures in timelines provided by the legislation. If the employee is a member of several trade unions within one company, the consent of the one addressed by the employer is sufficient.   

Rights and guarantees of redundant employees

The legislation provides for the following guarantees and rights to dismissed employees:

• An employee cannot be dismissed during the period of sick leave or vacation, except for in case of complete liquidation of the company. The dismissal should be scheduled for the first working day of the employee after the sick leave or vacation
• Upon employee’s request he or she should be provided with unused days of vacations before the dismissal. If the vacation lasts after the planned dismissal date, such date should be transferred to the last day of vacation 

• An employee has the right to receive unemployment benefits by applying for employment to the State Employment Service of Ukraine 

• An employee within one year after the termination of the employment has the right to enter into an employment contract in the case of return employment, if the company hires employees of similar qualifications (positions)

In addition, employers at their own discretion may increase the amount of severance payment or add some additional benefits. In view of the mentioned above, the staff reduction is a quite a long process which needs to be well-planned in advance in order to avoid any difficulties and disputes in the future.

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Quarantine restrictions did have negative implications for many businesses and may potentially push some of them into restructurings in the future. The proper anticipation and projection of various options is an important element for minimization of negative impact. This we see as a main purpose of the redundancy plan which shall be considered as hard but necessary measures for saving the business.

By Inna Kostrytska, Senior Associate, and Yuliya Bleshmudt, Associate, Integrites

Editorial Note (July 8): At the request of the authoring firm, the article was subsequently edited to update reporting requirements towards the territorial body of the State Employment Service of Ukraine.