Keeping employees motivated and engaged, and retaining the brightest talent can be an effortful task for businesses. Employers agree that fixed net income and mere compliance with basic employment standards are not sufficient and, thus, promote incentive programs as a recognized instrument to navigate this challenge. While worldwide trends in incentivizing employees are similar, each country has developed a set of its own legislative rules and market practices – and Ukraine is no exception.
Cash Versus Equity Incentives in Ukraine
In many jurisdictions, equity incentives are a very common instrument, especially in relation to top-tier employees and company officers. However, this type of incentive still remains rather new to the Ukrainian market. There are several reasons behind this fact. One of them is the general perception of potential recipients of the incentives. Ukraine is a young economy, thus an inherent shortage of businesses with a long track record, a quickly changing business environment, and a lack of financial and political stability make quick cash more popular among employees compared to participation in long-term equity incentive plans. In addition, the legislative and regulatory environment remains immature and overcomplicated, with numerous FX, securities, and banking control requirements impacting the complexity of the implementation of equity incentives in practice. This means that cash incentives are a dominant choice for practically all types of local businesses in Ukraine.
Parent Company Incentive Plans
From a Ukrainian law perspective, the employer-employee relationship is quite a straightforward one where only two participants – the employee and the employing entity – may have any rights and obligations. There is no concept of a parent entity, and the parent company as such is not supposed to directly participate in relations with employees of its Ukrainian subsidiary. Therefore, the provision of any incentives directly from a parent company remains a grey area in the Ukrainian legal environment. For this reason, receiving or exercising parent company incentives may be complicated for the Ukrainian workforce, and certain provisions of parent company incentive plans may be unenforceable toward them.
Limited Types of Incentives
In addition to regulatory restrictions related to equity incentives, Ukrainian law specifics may make some of the employee benefits that could be common in other jurisdictions unattainable. For example, there are rather detailed rules regarding employees’ leaves and their limitations. As a result, paid or unpaid leaves beyond a certain duration, as well as garden leaves, may be contrary to Ukrainian law. Furthermore, private pension schemes or early retirement arrangements are very uncommon in Ukraine due to the specifics of the regulatory environment. In addition, certain group mobility or secondment policies may not be workable for local staff in Ukraine due to a lack of regulation for intragroup relations in employment law.
Incentives Plans Adoption and Trade Union Approvals
As a direct employer is supposed to be solely responsible for relations with its employees, any incentive plan, including group ones, needs to be adopted and issued by the employing Ukrainian entity. Such policies normally must include a Ukrainian-language version. In addition, any incentives of a systematic nature may require the approval of a trade union or other representative body of the majority of employees if there is one within the Ukrainian employer.
Enforceability of Malus and Clawback Provisions
As a general rule, under Ukrainian law, employers are restricted from adopting decisions that worsen the remuneration conditions of their employees. Furthermore, the possibility to request from an employee reimbursement of any payments received by the employee in connection with an employment contract is highly limited. This may make most common malus and clawback provisions of incentive plans unenforceable in Ukraine.
Provision of Incentives to Non-Employees
It is becoming more and more common to offer participation in incentive plans to non-employees such as freelancers or contractors, especially in the IT sector. While Ukrainian labor law does not expressly prohibit similar arrangements, doing so may indicate that the contractors are actually employees, with the risk of reclassifying their contracts into employment ones. This may result in a number of regulatory and financial consequences for the entity that provides such incentives, including fines for undeclared labor.
Incentives in the State Sector
There are a number of rules that restrict types and amounts of incentives in the state sector. Particularly, these rules apply to joint stock companies that have the state among its shareholders. In similar companies, incentives of top managers are limited to certain types of cash bonuses, with the maximum amounts of these bonuses being linked to a number of factors, such as the size and profitability of the enterprise.
By Inesa Letych, Co-Head of Employment and Immigration, Asters
This article was originally published in Issue 11.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
