Compliantly Engage Contractors in Ukraine

Any business hiring in Ukraine should understand the important legal distinction between who classifies as an independent contractor and who can be hired as an employee. Fines or penalties may be issued to businesses that are hiring independent contractors under the guise of employment. 

Understanding the distinctions between employees and independent contractors is critical to compliantly engaging workers in Ukraine. It is important to work with a partner like Worksuite to ensure you put in place an engagement framework that accurately classifies freelancers as independent contractors for you and lets you know when freelance talent must be engaged as a payrolled independent contractor or employed directly. This is critical to compliantly engaging workers in Ukraine and thereby avoiding severe legal, financial, and other penalties. 

After the initial impact of the war, the demand for specialized workers in Ukraine has now increased, with the most popular occupations being installers, loaders, assemblers, and packers of goods, as well as salespeople, cashiers, pharmacists, farmers, and IT professionals. The latter actually suffered the least because of the remote working opportunities. The war has left many talented IT and creative specialists without a job or income, which means they are more likely than ever to collaborate with foreign businesses.

Ukrainian law distinguishes between employees and independent contractors (who are often called “private entrepreneurs”). In essence, an employee is paid for undertaking a process or a set of processes in exchange for a salary, while an independent contractor is hired and paid for achieving a stated result as per their contract. Employees are also legally subordinated to the employer, while contractors have far greater freedom in how they achieve the results stipulated in their contract.

If the real substance of the company-contractor relationship proves to effectively be an employment relationship, the hiring company may suffer legal and financial penalties (including payment of back payroll taxes). It is therefore important to leverage an employment service partner like Worksuite when hiring in Ukraine to ensure that independent contractors fall under the correct working relationship with your business.

• Who is an independent contractor?

The factors that differentiate an independent contractor from an employee are largely the same as in other European countries. In essence, individuals are generally considered to be independent contractors if they:

• Are subject to relatively little control by the hiring company, which means they are free to decide when, where, and how they complete their tasks.
  
• Perform the work at their own risk, meaning they may incur personal costs (time and/or financial expenses) for re-doing the work that was performed poorly.Do not have fixed hours of work determined by the hiring company.
• Can choose the location from which to work.
• Provide their own equipment, rather than receive it from the hiring company.
• Can be (or are expected to be) dismissed once the contracted work is complete. 
• Are not integrated into the hiring company’s organizational structure
• Are paid for a specific project or task rather than on a recurring basis.
• Can refuse to perform a task (unless that task is part of their contract).
• Are not entitled to a minimum amount of work or a minimum amount of pay.
• Are not listed on the hiring company’s normal payroll.

There are two main categories under which independent contractors operate in Ukraine: 

• Sole trader (“fizichna osoba-pidpriyemets” or FOP): A sole trader, sometimes called a “natural person entrepreneur” or “private entrepreneur”, is the most common category for individual independent contractors in Ukraine. It is a type of sole proprietorship that does not involve establishing a legal entity. Sole traders can undertake most kinds of businesses and provide most kinds of services; they can also hire local and foreign employees. They naturally have unlimited liability for all business debts they incur. Sole traders must file and pay their own tax returns and pay their own social security contributions. They can choose to use the ‘profit tax’ system (involving paying 18% on annual profits) or ‘revenue tax’ system (involving paying 5% on all quarterly income). To register as a sole trader, individuals need a Ukrainian tax ID number and must register with the Ukrainian Companies Registrar.
• Limited company: Independent contractors can also set up a limited company. The most common types in Ukraine are: Limited Liability Company (LLC), which is the most common legal business entity in Ukraine; Private Enterprise (“Privatne pidpriyemstvo” or PP), which is a type of sole proprietorship established as a legal entity.
• Joint stock company: This requires a higher threshold of capital and its establishment must be approved by the National Securities and Stock Market Commission, Ukraine’s financial authority. 

There are two main types of contracting models for working with independent contractors in Ukraine.

A. Direct engagement of the contractor as a self-employed sole trader or registered via their own company. Under this model, the hiring company engages directly with the independent contractor – either as an individual entrepreneur or as a limited company (see above) – and establishes a civil law “contract for services”. The hiring company then pays the independent contractor directly, following the terms of the contract.

B. Third party. These companies come in two forms and both are specially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

1. Temp agency: Here, the hiring company engages with a staffing agency, which in turn supplies one of its own independent contractors to deliver the contracted services. The hiring company pays the staffing agency directly, in accordance with the terms of the contract. The contract is, therefore, between the hiring company and the staffing agency, while the agency pays the independent contractor through a separate contractual arrangement.
2. Umbrella company: Independent contractors can also work through an umbrella company. This turns a ‘self-employed’ individual into a legal ‘employee’ of the umbrella company itself. The contractual relationship is between the umbrella company and the client, with the umbrella company running payroll and administration for the independent contractor. The umbrella company invoices the client directly while paying the contractor via PAYE as a standard employee. Umbrella companies levy a fee on the contractor to cover their costs.
3. Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential independent contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and make payments to them. 

Companies hiring independent contractors in Ukraine should avoid making payments directly through their payroll system. Beyond these guidelines, there are no specific legal requirements related to paying contractors in Ukraine. The contract should stipulate the preferred payment method agreed upon by both parties.

The tax year aligns with the calendar year (1 January to 31 December). Ukraine has a flat personal income tax (PIT) rate of 18% which applies to most employees. Employees’ income tax is deducted from their salary at source by their employer, and employers must submit quarterly reports on the employees’ income tax deductions. Independent contracts must file and pay their own tax returns. Tax returns must be filed by 30 April for the previous year, and relevant taxes must be paid by 31 July.

The tax rates for contractors depend on which taxation scheme the contractor is registered for. Contractors who are registered for the ‘General Tax Regime’ pay the standard 18% tax on all income, plus 22% social security tax on profits. Under the ‘Simplified Tax Regime’, contractors pay a single ‘Unified Tax’ which depends on factors such as their income, type of business, and number of employees. Unified Tax rates extend up to 20% (above the living wage). Additionally, all contractors operating as Private Entrepreneurs (see above) must keep a Book of Income which is registered with the tax authority.

Regarding social security, employers are obliged to pay an additional 22% of each employee’s salary to the Unified Social Contribution (USC) fund; this is not deducted from employees’ salaries. Independent contractors, on the other hand, must pay their own social security contributions.