A new law on gig contracts has come into force recently, introducing, as always, more questions than answers. On the one hand, this is a significant reduction of the financial burden on an employer; on the other hand, not everything is so simple, especially for accountants.
Gig contracts were first mentioned in the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine” No. 1667-IX dated July 15, 2021 (hereinafter — Law No. 1667-IX). It is stated in the very first paragraph of this law that a gig contract is a civil contract under which a gig specialist undertakes to perform works and/or provide services following the tasks of a Diia City resident as a customer, and a Diia City resident undertakes to pay for the work performed and/or services provided and to provide a gig specialist with appropriate conditions for the performance of works and/or provision of services, as well as social guarantees provided for in Section V of this Law. Essentially, such a contract is very similar to a well-known regular civil contract (hereinafter — the civil contract), but there are significant differences. We first have to understand the terminology. A gig specialist is an individual who, under a gig contract, is a contractor and/or an executor, that is, there are no special requirements for the gig specialist, but as for a Diia City resident — it is a bit trickier. A resident of Diia City can be any legal entity that, in accordance with the Law No. 1667-IX, acquired the status of a resident of Diia City.
It is stipulated that for the period of martial law and until the 1st day of the calendar month, following the month of ending or cancellation of martial law, the provisions of paragraphs 2, 4-6 of part one of Article 9 of this Law shall not apply. Until 1 January of the calendar year, following the year of ending or cancellation of martial law, the submission by a resident of Diia City of a compliance report and an independent opinion, stipulated by Article 13 of the mentioned Law, is not required under the Decree of the Cabinet of Ministers dated 29 March 2022, No. 382). That is, the missing compliance report will not so far result in the loss of Diia City's resident status.
To acquire this status, a legal entity must meet several requirements:
- To perform one or more types of activities outlined in Part 4 of Article 5 of the Law No. 1667-IX, which is indicated in its charter and/or information contained in the Unified State Register. For example, computer programming, informatization consulting, computer equipment management; publishing of computer games and other software; educational activity in the field of information technologies; ensuring cyber security of information and communication systems, software products and information processed therein, etc.
- Average monthly remuneration of the involved employees and gig specialists, starting from the calendar month following the calendar month in which the status of Diia City resident was acquired, is not less than the equivalent of EUR 1200 (before withholding taxes, fees and other levies) each calendar month, at the official exchange rate of the hryvnia against the euro, established by the National Bank of Ukraine as of the first day of the corresponding calendar month. The average monthly remuneration for employees and gig specialists is calculated by dividing the total payments in the form of remuneration (wages) (before withholding taxes, fees and other levies) made by a legal entity to employees and gig specialists in the corresponding calendar month, by the total number of employees and gig specialists to whom such payments were made. Therefore, the residents of Diia City are not obliged to hire only gig specialists, but employment is also possible under employment contracts. It is also important to track not only remunerations made under gig contracts, but also wages of employees under employment contracts.
- The average number of employees and gig specialists at the end of each calendar month, starting with the following calendar month in which the legal entity acquired the status of a resident of Diia City, is at least 9 people;
- The qualifying income of a legal entity received during the first three calendar months following the calendar month in which the legal entity acquired the status of a resident of Diia City is at least 90 percent of its total income for such period, and the amount of the qualifying income received for each calendar year of being a resident of Diia City, is at least 90 percent of the total income (if any) of the legal entity for the same period. Please note that the term “qualifying income” appears for the first time in the Law No. 1667-IX and is defined as the net income from sale of products (goods, works, services) and royalties (unless such royalties are included in the net income from sale of products), resulted from the activities provided for in Part 4 of Article 5 of this Law.
Moreover, there is a list of indicators/conditions under which an entity cannot become a resident of Diia City, and we will not go into the details. If necessary, all information can be found in paragraph 2 of Article 5 of the Law No. 1667-IX. Residents of Diia City are registered by the Ministry of Digital Transformation within 10 days from the receipt of a relevant application based on the principle of “tacit consent”. That is, if within 10 days the Ministry has not made a decision to reject the application, it is considered that the entity has acquired the status of a resident of Diia City.
Gig contract and remuneration of gig specialists
A gig contract between a Diia City resident entity and a future gig specialist is concluded in written (electronic) form for any period of time or indefinitely. In the case of continued execution of a fixed-term gig contract by both parties after its expiration, the gig contract is considered extended for the same term and under the same conditions, unless otherwise provided by the gig contract or the law. That is, if such a gig contract is concluded, for example, for 6 months, upon expiration of the term, with the consent of both parties, it shall be extended for 6 months without becoming a permanent contract (which is the case with labor contracts).
*A civil contract is not considered a gig contract, unless it explicitly states the conclusion of a gig contract.
In the gig contract, the parties can prescribe any working conditions they consider necessary, for example: performance time, rest time, payment for rest (breaks), place of work (whether it is an office, home of a specialist, or even outside work, etc.), providing the specialist with equipment / technique to perform work tasks, motivation schemes, additional compensation payments, methodology for setting technical tasks and receiving / evaluating work results, methods of transferring developed IT solutions, confidentiality, etc. The law allows fixing the remuneration amount in currency, but we remember that funds are paid in hryvnias.
For the work performed (services provided) during the month, the gig specialist is paid a remuneration in the amount, procedure and terms specified by the parties in the gig contract, taking into account the provisions of the Law No. 1667-IX. The remuneration under the gig contract can be set for a certain period or calculated depending on the amount of work performed (services provided) or the time spent to perform (provide) thereof. The amount of the remuneration can be increased at the sole discretion of the employer, and cannot be reduced, except for compensation and in cases where the gig specialist is held liable for damage caused to the property of a resident of Diia City due to a fault of the gig specialist. If the gig specialist is held liable for damages, the amount of the monthly deductions, as in the case of an employment contract, cannot exceed 20 percent of the gig specialist's monthly remuneration under the contract concluded.
Working conditions of gig specialists
First of all, I would like to point out that the Labor Code of Ukraine does not apply to relations between gig specialists and residents of Diia City, defined by the Law No. 1667-IX, because a gig contract is not labor relations.
The working hours and work schedule of a gig specialist are fixed in the contract and cannot exceed 8 hours per day and 40 hours per week, which is more like an employment contract, rather than a civil one. However, as always, there are exceptions / conditions that allow irregular working hours and overtime:
- the exact time for the work performance by a gig specialist cannot be determined;
- the gig contract enables the gig specialist to plan his/her time for performing work;
- performance of work under the gig contract requires a high level of initiative of a gig specialist, which involves periodic performance of work (provision of services) overtime without specific instructions from the Diia City resident.
According to Clause 4 of Article 21 of the Law No. 1667-IX, a gig specialist has the right to an annual paid break in the performance of work (provision of services) lasting 17 working days, unless the gig contract specifies a longer break. Please note that the term “paid break” currently can be found nowhere else but in this law, and the methodology for calculating such payment is not regulated. All we know is that such a break is paid at the expense of funds of the Diia City resident in the manner specified in the gig contract. It should be noted that since the annual paid break is not a vacation, it is not subject to the mandatory use of 14 days of rest per year. But the condition of granting such a break only after 6 months of work (unless otherwise stipulated in the gig contract) is very similar to that of granting annual leave to an ordinary employee.
According to Article 22 of the Law No. 1667-IX, gig specialists shall be subject to the temporary disability insurance and have the right to temporary disability benefit, which is provided in the manner and amounts provided for by the Law of Ukraine dated 23.09.1999 No. 1105-XIV “On Mandatory State Social Insurance” (hereinafter — Law No. 1105-XIV), with relevant amendments. Temporary disability benefits and maternity benefits for gig specialists are calculated in accordance with the procedure provided for by the Law No. 1105-XIV and in the same manner as for employees working under employment contracts. That is, a gig specialist can be on sick or maternity leave just like an ordinary full-time employee of an entity. In this case, the entity is prohibited from unilaterally terminating of the gig contract during a break in the performance of work during the period of a specialist’s temporary disability, unless such a break lasts more than 1 month. Furthermore, the Diia City resident is prohibited from unilaterally terminating of the gig contract during the gig specialist's pregnancy and a maternity break (lasting 126 calendar days, and in case of birth complications or the birth of two or more children — 140 calendar days.)
By agreement (recorded in the gig contract) between the gig specialist and the Diia City resident, such specialist can receive both health insurance and life insurance against accidents on a level with employees working under an employment contract.
Terms of termination of a gig contract
According to Article 18 of the Law No. 1667-IX, a gig contract may be terminated subject to the following conditions:
- by agreement of the parties;
- expiration of the gig contract;
- the Diia City resident’s repudiation from the gig contract, i.e., unilateral termination of the gig contract is possible provided that the gig specialist is notified in writing (in electronic format) no later than 30 calendar days before the planned termination date, unless other manner and period of notice are set by the gig contract;
- unilateral gig specialist’s repudiation from the gig contract, i.e., unilateral termination of the gig contract is possible provided that the employer is notified in writing (in electronic format) no later than 30 calendar days before the planned termination date, unless other manner and period of notice are set by the gig contract;
- loss of Diia City resident’s status by the employer;
- other grounds stipulated by the gig contract.
As always, there are several exceptions:
- For the first 3 months, both the employer and the employee can terminate the gig contract at their own will, by notifying the other party in writing 3 calendar days before the scheduled termination date.
- The resident of Diia City has the right, at his/her own discretion, to reduce the period of notice to the gig specialist about the unilateral repudiation from the gig contract, by replacing it with a compensation payment in the amount determined by the gig contract, but not less than the daily remuneration of the gig specialist for each working day of the reduced notice period. That is, if the entity shortens the notice period from 30 calendar days to 10, it shall pay the gig specialist a compensation for the reduced days of the notice period.
- The resident of Diia City is entitled to “one day” contract termination at his/her own discretion, but under this condition he/she is obliged to pay compensation in an amount not less than the daily remuneration of the gig specialist for each working day of the next 30 calendar days, and if the termination took place during the first three months of the gig contract — for each working day of the next three calendar days.
In this case, the daily remuneration is calculated as the monthly remuneration specified in the gig contract, divided by 21 (regardless of the number of working days in any particular month).