Doing IT business in Russia / Labor laws
Russian labor law, while adhering to international standards in most key areas, differs from EU and US law in significant ways that may increase the burdens placed upon an employer. While the letter of the law is extremely exacting, in practice there are many ways in which employers can and do get around the laws. Not only is there a difference in the way that the laws are laid out but also in the way that they are enforced. Differing types of software businesses in Russia – including software outsourcing providers and ISVs – require differing levels of adherence to the labor code, from virtually none to the necessity for full compliance.
The most recent version of the Russian Labor Code was adopted in 2001 and went into effect in 2002. Like most Russian regulations, software industry legislation is significantly more complicated than similar legislation in the US or UK. This is because there are major differences not only in the specific legislation, but also in the way people think about employment, both of which are the legacy of the USSR. For instance, Russian employees think in terms of their net salary, the amount of take-home pay at the end of a pay period, rather than gross income. In addition, workers have a general expectation that the company will take care of them and consider supplementary medical insurance more of a right than a benefit.
Based on the assumption of a contractual agreement with all employees, something much less prevalent in the US, the Code states that any provision that exploits an employee in breach of the Labor Code will be deemed invalid and that the provisions of the Labor Code will prevail. Even where an employment agreement is governed by foreign law, the conclusion will typically be the same. In most cases, a Russian court will disregard the legality of a foreign clause and apply the minimum standards granted by the Russian Labor Code.
While an employee’s guarantees and protections enshrined in the Code are limited, they are mandatory, strictly enforced, and favor the employee. The legislation prohibits discrimination on any basis, ensures unemployment benefits, provides the unemployed with assistance in finding work, specifies minimum work safety and, in contrast to the US, minimum vacation and leisure time requirements, ensures prompt and accurate payment of wages, and standardizes career advancement. The legislation also permits union membership, the right to strike, and a minimum contribution to government funded pension programs, which are similar in concept, if not in scope, to US Social Security.
Full-time employment is considered to be 40 hours a week. The disabled, children under the age of sixteen, students under the age of eighteen, single parents and select other groups are permitted to take part-time or temporary employment. Generally, there is a difference in wages between full- and part-time workers. Part-time workers may receive supplementary funds paid directly from the state Social Insurance Fund at its discretion.
Generally, weekend work is compensated by an additional day off. If an employee doesn’t agree to such an arrangement, then, according to the Code, an employer is required to pay double-time for that day. In cases when an employee has fulfilled their contractual monthly working hours and works on a normal day off, wages must be paid at triple-time.
The Code sets the following rules for the payment of overtime:
- the first 2 hours of overtime work must be paid at time-and-a-half
- the following hours must be paid at no less than double-time.
Wages and Holidays
As with most other countries, Russia has legislation in place that defines the lowest wage that an employer may legally pay their workers. The statutory wage sets monthly minimums and applies to all business entities, irrespective of the form of ownership. The minimum monthly wage in Russia is currently 4330 rubles, which is roughly equivalent to $144.
This is significant, because the practice of paying unofficial salaries is still relatively widespread in Russia, although on the decline in recent years. What this means is that an employee’s contractual salary equals the minimum monthly wage while his take-home pay will often be significantly higher. In practice, the worker receives the difference between the official and unofficial salaries in cash. This method offers the employer certain advantages in that he not only pays less in social security contributions, but also saves on compensation when an employee is let go, having an obligation to pay only the official salary. This practice is gradually being phased out as more and more employees begin to see the advantages of declaring an accurate official salary in order to be able to apply for a mortgage or a car loan, etc.
Russia observes a number of annual paid holidays, the most important being the 10 days that make up the New Year (January 1–5) and Orthodox Christmas (January 7) holidays. In effect, this means that the entire country, apart from shops and public transport, virtually shuts down for all intents and purposes, with no meaningful work being done. Additional days off in Russia are associated with national holidays listed in a corresponding article of the Code.
In addition to New Year and Christmas, the following days are also paid holidays: Defender of the Fatherland Day, on February 23; International Women’s Day, on March 8; May Day (Labor Day), on May 1; Victory Day, on May 9; Day of Russia, on June 12; and People’s Unity Day, on November 4. All the abovementioned are paid holidays.
In addition, each Russian in full-time employment is entitled to twenty-eight paid vacation days per year, which must be requested in advance. To receive paid vacation, an employee must have worked for at least 6 months with a new employer. An employee can request vacation leave before becoming eligible but only with the agreement of an employer.
Vacations in Russia last for 28 calendar days. That amount may be divided into as many parts as required but a single, uninterrupted 14-day period is mandatory. An employee is entitled to vacation pay for all 28 days. The rate is computed by multiplying the average monthly salary for the past 12 months by the average number of calendar days per month. Some companies compensate their employees’ annual vacations with additional pay in place of vacation time, as the legislation does not prohibit this practice.
Employees who receive part of their salary unofficially might only receive the smaller, official salary as vacation pay.
Contract of Employment
An employment agreement between a Russian employer and its employees usually takes the form of a written contract, the terms of which must be agreed by both parties. Employees commonly begin work in the absence of a written agreement. In such cases, it is the employer’s obligation to provide a contract within three days of the employee's actual start date. During the period that an employee works without a contract in place, the Labor Code effectively constitutes the terms and conditions of employment.
Compliance with company policy is a key feature of an employment contract and distinguishes it from various civil law contracts (contractor agreements, service contacts, etc.). It is an employer’s responsibility to make employees aware of their duties and the company’s rules and regulations before a contract is signed. New employees are required to present a copy of their passport and their labor book (see below) for company records.
A trial period of up to three months may be required of any new employee. The terms of a trial period are generally set forth in an employment contract, and at the employer’s discretion. According to the Code, an employment contract must contain a condition for a trial period. If no such provision is made, the absence of a trial period is assumed to have been agreed to by both parties.
During the trial period the employee is permitted to resign their position with three days notice and without explanation.
Within the same period the employer may dismiss an employee, also giving three days notice. Unlike the employee, the employer is required to present a valid reason for the dismissal. During the probationary period, compensation may be as little as 50% of full-time payment for the same work.
Resignation and Dismissal
Russian labor law is firmly on the side of the employee and it is often extremely difficult for an employer to dismiss an employee from work. Satisfying the rules and regulations that govern this process can be both time-consuming and costly for the company.
As an example, an employee who decides to leave a job is expected to provide written notice of that intention at least two weeks in advance. In contrast, an employer wishing to dismiss an employee for misconduct, poor performance, or failing to complete his or her duties, has no choice but provide proof written of such misbehavior in the form of warnings followed by written notification of the pending dismissal two weeks in advance.
In Russia, most contracts stipulate the amount of a severance package with standard terms being the equivalent of two months’ salary, although this can vary widely in practice. Most employees often receive no severance at all. One way in which companies get around many of the laws governing severance and other benefits is to use temporary contracts, or to force the employee to resign rather than let them go.
Whenever an employee leaves a job, payment is due for unused vacation time. This sum is the employee’s average salary per day multiplied by the number of unused vacation days. The average daily salary is calculated by dividing the number of days worked by total accrued salary during the twelve months preceding dismissal.
Dismissal on the ground of redundancy, poor health, insufficient qualifications and competency entail differing burdens of proof and notification.
According to the Code, in order to discharge a worker on the grounds of staff reduction, not only must an employee be provided with two months notification in writing, but the employer must also attempt to place the worker in one of the company’s existing vacancies. In addition, despite the fact that highly qualified and adequate employees would normally take precedence in retaining a job, preference is typically given to a number of special categories of worker, i.e. those with families.
Removal on the grounds of poor health is only possible once an employee's physical condition has been verified by an authorized medical examination. Chronic absenteeism in and of itself is considered insufficient cause.
Where an employee’s level of qualification is found to be inadequate, the conclusion must be verified by the results of a competency assessment. The Code does not recommend general competency assessment regulations, but rather sets specific rules for different areas of expertise. Most importantly, competency assessments must be carried out on a regular basis to be considered valid rather than only at the point when a worker is to be dismissed. In addition, before an employee can be discharged the employer is required to offer a different job that suits the employee's experience and qualification.
Maternity and Sick Leave
According to the Code, it is mandatory for employers to pay for maternity leave that can last for up to 140 days. The payment is a social security benefit, and is calculated based on the average salary over the past twelve months. New mothers are entitled to unpaid leave until the child reaches three years of age and their previous post must be offered to them if and when they decide to return to work.
In case of illness, an employee must provide proof of that illness upon returning to work. This usually takes the form of a written note from a physician. If documentary evidence is provided, the employee will be paid for the missed days according to a complicated formula (from 60 to 100%, based upon monthly salary and the length of employment).
A foreign citizen wishing to take employment in Russia must present a passport containing a valid Russian visa. Most foreign citizens must also be in possession of a work permit although there are many occupations that are exempt from this rule including journalists, diplomats, religious leaders, scientists, lecturers, students, refugees, and permanent residents of the Russian Federation.
Work permits are issued in compliance with an annual quota system and then distributed between businesses which have applied for the right to employ foreigners. This time-consuming process requires that the company state the number of employees they plan to hire and to specify the nationality of that employee up to a year in advance. Once a company receives confirmation of the number of work permits that it has been allocated, it then needs to begin gathering documents connected with the employee’s education, health, etc. before it can file for the permit. Standard work permits require that the process be completed yearly, with the laws governing the process subject to frequent change.
Extending a previously issued permit for a 90-day period or obtaining a work permit for different categories of qualified specialists, employed in their area of expertise, which is included in the government’s list of eligible occupations and defined by federal law are exempt from quotas.
The software industry benefits from a law dated July 2010 that sates that all Russian commercial and non-commercial organizations may employ highly qualified foreign specialists for 3 years with the possibility of extending their contract. This category of employees is also exempt from government-imposed quotas. The only criterion is that the employee must be paid a gross salary of at least 2 million rubles per year.
Both foreign employees and their Russian employers are bound to adhere to a set of legislation that sets out the requirements for the employment of foreign workers with severe fines applied for any infringement.
Federal Labor Inspectorate
The Federal Labor Inspectorate (FLI) is a regulatory body that supervises employers as regards their compliance with Russian labor legislation.
The FLI is responsible for:
- the investigation of work-related accidents;
- the consideration of administrative offence;
- the violation of employee rights, etc.
FLI inspectors have the right to conduct inspections of an employer's premises at any time and without notice. The law also grants the FLI the right to request and receive from employers any documents or other pertinent information that enable it to conduct and monitor the inspection process. Employers are required to comply with the requests of FLI inspectors. If any violation of Russian labor law is found during an inspection or investigation, the FLI inspectors will issue an order requiring rectification of such breaches by the employer and/or imposing fines on the employer and/or its executives in order to restore employee rights.
As stated in the Code, FLI directives may be appealed through the courts.
These appeals deal with all kind of breeches of the Labor Code – from occupational safety violations to irregularities in the payment of salaries. The complete FLI activity report is available on its official site. http://www.rostrud.ru/.cmsc/upload/docs/RezultslabourI2010.xls
Following is a sample of the data available concerning the FLI’s activities over the past two years:
|Unjustified discharge orders withdrawn by demand of the FLI (number of cases)|
|Unjustified disciplinary sanctions withdrawn by demand of the FLI (number of cases)|
Issuance of employment contracts by demand of the FLI
|Number of official reports regarding temporary suspension of:|
|Divisions and subdivisions of various organizations|
|Equipment and facilities operation|
|Court orders for the termination of activity to meet labor protection requirements:||8|
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Russian labor law differs from EU and US law in significant ways that may increase the responsibility placed upon an employer. The labor law is based on the model of Soviet labor law, which provided workers with a wide range of protections. It is often extremely difficult for an employer to dismiss an employee from work.