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Editorial

LEASED LABOR IN KAZAKHSTAN: HAS THE NEW LABOR CODE LEGALIZED IT?

July 2016 - Employment. Legal Developments by AEQUITAS.

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Yuliya Chumachenko, Partner, AEQUITAS Law Firm

LEASED LABOR [1] IN KAZAKHSTAN: HAS THE NEW LABOR CODE LEGALIZED IT?

"Legislative activity is like old age – it moves slowly and looks suspiciously at everything." - [A. F. Koni]

As business globalizes, different forms of the leased or so-called atypical labor are going increasingly popular, which cannot be neglected.  Whilst not disapproving of this phenomenon in principle, Kazakhstan's labor law, unfortunately, does not always flexibly respond to messages from economy.  This is normal athough, as any law is essentially conservative.

There exist several different options of leased labor: outstaffing, outsourcing, etc.  The most popular type of leased labor is the so-called secondment – temporary transfer of employees by an employer to another employer.

[1] In Russian "zayomnyi trud" also translated as "outsourced employment" or "agency employment."

Kazakhstan has started using various forms of leased labor quite recently, this practice, however, currently gaining fast momentum, despite the Kazakh labor legislation disallowing such possibility until 2016.  By adopting the new Labor Code, Kazakhstan has joined those countries that are using the institute of secondment at the legislative level; however, other forms of leased labor still remain illegitimate.

We will try to look into how the mechanism of secondment works and whether other forms of leased labor are allowable in Kazakhstan, as well as how the local experience correlates with the global practice in this area.

Global Experience and Local Background

Until recently, leased labor has been actually outside the legal framework in many jurisdictions.  The first attempts to legalize and regulate the leased labor worldwide were made in the 1990s; for instance, a 1994 Luxembourg law contained a special section describing the procedure for temporary secondment of employees to other enterprises.

The International Labor Organization recognized the leased labor in 1997 by adopting Convention No. 181 on private employment agencies, which received the right to recruit employees with a view to making them available to a third party.

South Korea is one of the countries 100%-supporting the leased labor: in 2007, Korean recruiting agencies were actively advocating the effectiveness of this mechanism, which lead to the enactment of the law on temporary worker rights protection.  As a result, South Korea is a world leader in leased labor with some 35% Koreans out of the 15 million able-bodied population working under civil law contracts.

In North America the leased labor mechanism served to mitigate unemployment during crisis, increasing in 2008 practically twofold the number of Americans working without direct employment agreement.  In Canada the province of Ontario took the lead to support the leased labor by adopting the Bill 139 establishing guarantees for temporary employees and providing for agency fees in case of direct employment of a temporary employee.

The Russian legislation was added, starting from 2016, with special regulations relevant to leased labor, legalizing only two of its forms – outsourcing and work under a personnel provision agreement – the latter option being available only with participation of a duly accredited recruiting agency.

Secondment was first mentioned in the Kazakh legislation in 1993 in the context of the state apparatus activities.  Later in 2001, the term "secondment" also appeared in commercial legislation governing foreign labor engagement issues to signify importation of foreign labor into Kazakhstan without obtaining a special work permit and on condition of concurrently sending local personnel abroad to complete advanced training.  In 2012, this legal concept was substituted by a new one – "corporate transfer" – adding, starting November 2015 due to Kazakhstan's accession to WTO, the "intra-corporate transfer."

The term "secondment" reappeared in the 2015 Labor Code, although its regulations still feature no statutory concepts of outsourcing, outstaffing or other forms of leased labor; leave alone the conditions for their application in Kazakhstan, as mentioned above.

Key Secondment Conditions under the Labor Code of the Republic of Kazakhstan

Pursuant to the current labor legislation, secondment means "performance by the employee (secondee) of work in a certain specialty, qualification or position (labor function) as stipulated by the employment agreement, or in another position, specialty or qualification, for another legal entity, except for restrictions provided for by the legislation of the Republic of Kazakhstan."

Secondment is formalized by executing a supplementary agreement to the employment agreement, specifying the place of work performance for the period of secondment.  Upon completion of the secondment term, the employer is obligated to provide the employee with the work place (position) the employee was occupying prior to secondment.  Hence, no employment agreement between the host (receiving) company and the employee seconded to such company is required.

It should be mentioned that in order for this legal concept to apply the legislation establishes certain restrictions, as follows: firstly, secondment of employees is permitted only within a group of companies, i.e. where the host and seconding companies are affiliated by corporate direct or indirect participation in one another, otherwise secondment between them is unlawful; and secondly, secondment covers employees who are Kazakhstan and foreign nationals, except for foreign employees whose labor activities are carried out based on work permits.

The above means that the previously often practiced secondment of foreign employees to Kazakh companies is now, strictly legally, unallowable, even if both companies – foreign and Kazakh – meet the above corporate affiliation requirements.  In this case the legislation offers the only legitimate option: to enter into an employment agreement with the Kazakh employer, previously obtaining the work permit (foreign labor engagement permit) in the framework of a corporate or intra-corporate transfer.

Risks Associated with the Use of Leased Labor in Kazakhstan

The Kazakh legislation not just fails to take into account the peculiarities of outsourcing and outstaffing, but also does not contain even a basic terminology based on which it would be possible to regulate the mutual relations when assigning certain work to an outside performer or a representative of the transferred personnel.  The law, although defining the concept and conditions of secondment, is restricted in application, giving no opportunity to use this form of leased labor in respect of foreign employees, which is most sought for in the today's Kazakhstan market.

The legal profession has no common view of the leased labor legitimacy.  A number of auditing companies support this scheme (for example, PWC and SG Global Advice LLP), while a number of law firms, lawyers and labor law experts take the opposite view (for example, Baker & McKenzie, AEQUITAS, legal forum lawyers and others).

The legal risks include issues related to tax aspects and permitting procedure for foreign labor engagement, but no less significant is the risk associated with the recognition of the leased personnel relationships with the client company as labor relations.  Practice shows that the competent authorities would rather assess the essence of relationships than their form.

The implications of such recognition are most serious – imposition on the services/work receiving company of all employer's leased personnel-related obligations to retrospectively cover all the period of such personnel's work for that company.  The company may potentially be made liable for breaches of the Kazakh labor or other legislation in respect of the leased employee (failure to enter into the employment agreement, pay salary, grant a leave, etc.).

If using leased foreign labor for more than 120 days per year, one should also bear in mind that in such cases in order to register the foreign nationals' passports local migration police authorities require to present employment agreements and work permits for the term of which the registration is normally being issued.  Lack of such documents executed in the name of the host (receiving) company may entail administrative or criminal liability of the parties involved for the breach of the foreign labor engagement rules or migration legislation and other adverse implications.

The seconding company, legally being the leased employees' employer, cannot stand aloof as well, because the employment agreements concluded with the employees it seconds to other companies may be qualified as fictitious.  Since the subject of a secondment contract or a contract for another form of leased labor is, as a rule, performance of a certain type of work or services (for instance, expert services or repair work, etc.), the leased employee may be performing in Kazakhstan the types of work subject to licensing, and in case the seconding company has no such license, governmental agencies may regard the secondment contract (contract for another form of leased labor) as a sham agreement covering up a contract for licensable work/services to be performed without appropriate license, entailing the relevant consequences for those responsible.

_______________

Secondment and other forms of leased labor are largely advantageous for companies business-wise, allowing them to reduce staff, cut payroll taxes and costs of opening offices in the regions and to concentrate their resources on core business, outsourcing certain activities that are non-core for the company.  Therefore, the popularity of leased labor is not plummeting.  Still, however attractive it may seem, mechanisms going beyond the legal regulations are illegal.  Thus, when deciding to enter into such a relationship, one should not underestimate the existing legal risks, and it might make sense to vote for alternative solutions that fall within the Kazakh legislation's general approaches to this matter.

[1] http://forum.zakon.kz/index.php?showtopic=119985

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