On 7 June 2018 Kharkiv District Administrative Court (the “Court”) issued decision in case No. 820/3159/18 (the “Judgement”), where the Court opined that a participant in a limited liability company acting as the company’s director may spare himself/herself from entering into a formal labour agreement with such a company.
The case concerned the fine imposed by the State Labour Service of Ukraine (the “Authority”) on a limited liability company (the “Company”) for its alleged failure to pay salary to the Company’s director. The focal point of the case was that the Company’s participant (the “Participant”) performed the director’s functions in the Company. The Authority argued that the Participant was a de facto employee of the Company. Accordingly, the Company was obliged to pay salary to the Participant. Under Ukrainian labour law, any failure to pay salary to employee within the minimum standards prescribed by law both amount and time wise qualifies as an administrative offence punishable by an administrative fine of UAH 37 230 (per each such employee) and UAH 11 169 respectively (approximately EUR 1 185 and EUR 355).
The Court disagreed with the Authority’s reasoning. The Court concluded that the exercise of the director’s functions by the Participant did not amount to building up labour relationship between them. The Participant engaged in exercising those functions as part of his corporate rights granted to him by the Ukrainian corporate legislation. Therefore, the Company was not obliged to pay salary to the Participant. Based on that premise, the Court cancelled the Authority’s resolution that imposed fine on the Company.
The Judgement has already entered into force. The Judgement illustrates how some Ukrainian courts can approach the issue of exercise of director’s powers by a participant of a limited liability company without entering into labour agreement with such company.
For more information on this publication please refer to authors of this publication.
Source: Decision of Kharkiv District Administrative Court dated 7 June 2018 in case No. 820/3159/18
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