Why the documentation of representative office employees must comply with Russian legislation

We often encounter situations where a host of mistakes have been made in documenting new employees. As a result, the parent company faces substantial financial losses. It does not matter whether the contract has been concluded with a foreign worker or a Russian citizen.

Foreign businesses that begin their operations in the Russian Federation must understand that Russians will likely be hired in the first instance. To commit errors in a contract with foreigners is one thing. But Russians are a different matter: they know their rights well, have learned to defend them and on occasion, even to twist their employer around their little finger. That is, oversights can turn into a labour dispute and court case, with all that this entails.

There are two cases where documents contain mistakes:

1. When the foreigners themselves get involved in the documentation. They do not know the specific requirements of Russian labour law and go by the “HR traditions” of their own countries.
2. If incompetent staff deal with staff records (to the point that even accountants are often entrusted with HR issues even though they have insufficient knowledge of Russian labour law and staff recordkeeping skills)
3. Many foreigners incorrectly assume that a contract prepared by head office and signed by both the employer and employee is sufficient grounds to hire in Russia and protects the parties, i.e. the foreign employer and the hired employee, in case of conflicts.
4. When contractual relations with an employee, the managing director, the head of the representative office do not comply with Russian legislation (i.e. the employment contract is replaced by the foreign document), serious complications may arise. There is a high risk that the head of the representative office has taken advantage of the situation.

In the knowledge that there are no labour relations have been set up in the required form, the employee takes advantage of the employer and asks head office to pay him some fantastic sums of money.

As a result, the foreign company risks substantial financial losses. If it fails to indulge the deceitful employee, the risk of court cases, reputational risks and even a potential loss of the right to operate in Russia are on the line.

True story: a contract with a foreign or Russian employee

On one occasion, we received an instruction to assess and transfer severance pay to the head of a representative office in the context of a dismissal.

The sum was, to put it mildly, rather significant.

In keeping with our internal rules, we approached the head office of the foreign organisation directly for confirmation of the payout.

We came to witness a rather unpleasant affair.

When the head of the representative office was recruited, a contract prepared by lawyers abroad was signed. It contained his powers of attorney, in particular, the right to exercise discretionary control over the representative office’s cash flows. After some time, doubts began to creep in regarding the appropriate use of funds. They asked the head of the representative office to account for the amounts spent, but he failed to do so. In the end, Head Office established strict requirements regarding the confirmation of all expenses incurred.

In reply, the head of the representative office declared that he was not interested and that he was going to leave the company. Shortly afterwards, he submitted a demand for severance pay. Knowing his rights, he twisted his employer around his little finger. He said that according to the contract, he was entitled to a large payout and threatened to complain to the Labour Inspectorate. He brandished a contract which he had at some point prepared himself, without having it signed by shareholders, owners, or Head Office. In this sham contract, he included everything he wanted, including his desires regarding severance pay, specifying concrete sums. However, this piece of paper was devoid of legal force.

Head Office, in turn, countered with its own demand: first, he was to return all expenses that were unfit for the intended purpose, and only then severance pay could be discussed.

Unfortunately, very often we are only approached for help when the labour dispute has already picked up steam and the ill-used member of staff either threatens to complain to the Labour Inspectorate or the public prosecutor’s office or has already done so (to find out how to protect yourself from disgruntled employees’ complaints, read 5 precautions in case an employee threatens you with complaints and lawsuits).

This is exactly what happened to our client: when the company’s management approached us for advice, the labour dispute had already culminated in a complaint to the “competent authorities”; the former employee threatened that things would “end badly” unless Head Office would meet his demands. We analysed all contractual relations with the employee and arrived at an unfavourable conclusion: we could not tame the complainant’s ardour – the law was on his side.

As part of our advisory services, we recommended a series of joint steps and recommended actions appropriate to the situation: namely, to pay out sums under the procedure and in the amount stipulated by Russian legislation.

We enter into a contract of employment with a foreign or Russian employee

In our client’s case, the lack of formal labour relations with the head of the representative office essentially enabled him to play cat and mouse with his employer. When he was threatened with dismissal, he demanded money. When this was rejected, he resorted to threats.

This is, so to speak, the “ideal” and most common labour dispute.

In order to steer clear of such situations, Head Office representative must discuss all main points (compensation, conditions the consequences and possible causes of dismissal, severance pay, bonus payments etc.) with the future employee at the outset and articulated in all documents required under Russian labour law (employment contract, job description, bonus plan, etc.)

The contract with a foreign or Russian citizen must conform with the following rules:

1. The Russian or foreign employee cannot work on Russian territory under a foreign-language contract since such documents are not an accepted means of establishing labour relations in Russia.
2. A preliminary contract validated by both parties that spells out all working conditions and initially satisfies everyone involved may reflect the essence of the deal but does not meet all requirements of the Russian Labour Code. Hence, such a preliminary contract can be the basis for a properly formalised contract of employment.
3. A contract of employment with foreign citizens can be presented in two languages: Russian and a foreign language.
   
   Both versions can be sent to headquarters to ensure that the final contract does contradict the provisions of the preliminary one. At the same time, the final contract takes into account all subtleties of labour relations in order to minimise disputes and negative consequences.
4. Employment contracts with foreign or Russian citizens must include a clearly defined job description as well as the employee’s duties and rights.
5. All points agreed with Head Office expressed in a preliminary foreign-language contract must be included in the contract of employment (apostilled translation).
6. Only an adapted dual-language document can serve as a proper contract of employment and as a point of departure in labour disputes.
7. The contract must show the duties of employee and employer in case the contract is terminated, regardless of the reason, i.e. who initiates the termination: the employee is awarded severance pay in a specific amount, and obligations that are applicable for a certain time period after the payout can be specified. It is very important to address such matters.

Why it’s safer to outsource contracts with foreign and Russian citizens

For foreign companies, it is cheaper and safer to outsource staff records, payroll and contracts with foreign citizens and Russian workers.

There are several compelling reasons as to why outsourcing firms such as 1C-WiseAdvice should be entrusted with payroll as well as contacts with foreign and Russian citizens.

• With new hires, we always act as an unbiased third party and always tell the head of the representative office or other authorised persons about any specific issues, risks or important points that might arise with that employee. For instance, upon receipt of a contract from a foreign client, our specialists immediately spot the risk of any labour disputes and suggest solutions designed to mitigate that risk – now and in future.
• In working with the representative office, we always have a contact at headquarters. Head Office employees can approach us anytime as a third party to secure an independent expert opinion on any particular issue or when important or political issues must be solved.
• In the event that the head of the representative office or any other employees are paid large bonuses we always consult Head Office to ascertain their legitimacy. In case of doubt we always seek to secure Head Office confirmation.
• We are operators that can provide qualified advisory services on how to minimise risk (including what documents to create). When a contract is due to be signed, we can simulate all scenarios from the outset based on various possible events.
• We do not take “political” decisions, e.g. to pay a large severance package to the head of the representative office. Only the employer itself (the foreign company) can take such decisions, and we as a provider supply all necessary staff records as well as recommendations to the foreign company on how to safeguard its interests as an employer.