Flexible Working Contracts: More Rights for Service Employees

17 September 2021

The American “You’re fired” is sometimes shouted in Ukrainian. A recent scandal with the dismissal of an employee of Khlibniy, a popular Kyiv coffee shop chain, once again demonstrated how vulnerable are the employees that work informally or in the traditional for the Ukrainian economy model, where staff register as individual entrepreneurs (a.k.a. FOPs) and carry out work through ‘civic contracts’.

Flexible employment contracts could become a decent alternative to such arrangements. They will offer benefits to both Ukrainian employers and employees.

As a service worker, it is now cheaper to get a job as an individual entrepreneur (and become a regular employee, in fact) than to sign a proper employment contract.

Employers save not only on taxes, but also on social protection costs. Thus, for an official employee, an employer pays 18% personal income tax (PIT), 1.5% military tax and on top of that 22% social contribution which is used to pay pensions (when employees retire, their pensions will be calculated on the basis of how much social contributions they paid). Besides, official employees get paid for annual leave, sick leave, and it’s rather hard to fire them (e.g. there are multiple cases when public sector  employees were fired because of corruption and reinstated themselves via court decisions).

Working as a FOP is cheaper: a person pays only 5% PIT, 1.5% military tax and a minimal social contribution, which is 22% of the minimum wage. All taxes are paid by an individual, not the firm.   Employment relations with individual entrepreneurs on civic contracts are much like free relationships. No strings attached. No dismissals with two-months prior notice, no severance and sick pay and, of course, no leave allowances.

Moreover, when a person is hired via a civic contract, an employer can simply not renew it when the employee is not needed anymore — and it is perfectly legal.  Despite this, employees often opt for civic contracts because in this way they can get a higher take home pay.

In developed countries, flexible employment contracts have long been serving their purpose. They are designed for employees who perform non-regular tasks for the same employer. The idea of a flexible employment contract is simple: an employer does not guarantee that work will be provided permanently, and an employee does not guarantee that he/she will work exclusively for one employer. It looks a bit like a free relationship, yet both sides are protected by the labor code. With holiday and childcare compensations, sick and severance pay. If an employee’s rights are violated, the case can be challenged in court.

This is how media, language schools, business courses, holiday agencies, beauty salons, cleaning companies and many other businesses  employ staff. In the UK, for example, 2.6% of all employees in the economy — 860,000 people, mainly service workers, have flexible employment contracts (so-called zero-hour contracts). Such contracts are common in the hospitality sector (22% of all employees work on demand), healthcare and social sector (19%), transport (14%) and trade (10%).

I also had such a contract when I worked as a teaching assistant at the University of Glasgow while studying. My friends worked as bartenders, translators, creative editors – all on an hourly basis and on  zero-hour contracts.

Flexible employment contracts have benefits for both sides

Such contracts are beneficial for employees since they allow them to perform paid irregular tasks in a convenient schedule without depriving  them of basic social guarantees. A flexible worker  can independently control her employment and perform work simultaneously for several employers that offer the best conditions. Labor law will take care of leave, severance pay, timely wage payments, pension contributions and social insurance.

In addition, such a contract often comes with a minimum guaranteed number of hours for which the employer must pay even when there is no work available. It is a monetary “bonus” to the employee for uncertainty in the scope and timing of work.

Flexible employment contracts could become a decent alternative not only for freelancers but also for interns who work while studying. Seasonal workers, who are often not registered as employees at all, would also win.

The benefits for employers are substantial too.  Businesses that  cannot guarantee a permanent job but wish to retain a skilled employee might want to ‘tie the knot’ by offering a contract with no fixed hours. Thus an employer will not be paying the cost of a full-time employee when there is no work for her to perform.

Importantly, flexible employment contracts increase competition for professionals. This makes the labour market fairer for both workers and employers.

Flexible employment contracts could work in Ukraine

The Verkhovna Rada, Ukraine’s parliament, has now registered the draft law No. 5161 that creates a legal framework for flexible labor relations. The goal is clear: to increase the percentage of formal employment and protect people.

Currently the draft law tries to mitigate the risk of workers from volatile working hours: the minimum guaranteed (and paid) number of hours is set to 32 per month. If flexible contracts become as common as in the UK, over 400 thousand people (mostly service workers) will be able to benefit.

Moreover, the bill aims to protect employees from abuses of extra flexibility on the employer’s side. The maximum number of flexible employment contracts per one employer cannot exceed 10% of all employment contracts.

Lawmakers still have work to do

Although the bill creates a good framework, there are two points that need to be changed before adoption.

First, signing a flexible employment contract should be as cheap as working with an individual entrepreneur through civic contracts. To do this, the Rada should equate the amount of social insurance contributions per flexible employee to that of individual entrepreneurs. Currently, the issue remains open in the draft law and is left to the decision of the Cabinet of Ministers.

Second, the parliamentary committee should initiate a revision of the maximum percentage of employees on flexible employment contracts per employer. If the bound is left at 10%, the sectors for which the bill is primarily being designed will not be able to benefit from extra flexibility. For example, in a cleaning company or translation agency most of the staff are hourly paid workers. The current threshold of 10% will bypass such companies.

Flexible employment contracts have the chance to naturally replace the traditional ‘FOP on a civic contract’ model that prevails in the Ukraninan service sector. This form of employment relations offers substantial benefits to both sides. Employees will get proper social guarantees envisioned by labour law, whereas employers will be able to save on full-time workers while keeping a qualified workforce. The introduction of flexible employment contracts will result in a fairer labour market outcome.

Employment contracts are never cheap. However, the additional cost of maintaining them is a reasonable price to pay for protecting the rights of ‘flexible’ workers. Workers themselves must understand this and demand fair conditions from employers if they do not want to be afraid to suddenly hear “You’re fired”.