Who needs to be prepared for inspections by the State Labour Service?
On 19 July 2022, the Law of Ukraine ‘On Amendments to Certain Legislative Acts of Ukraine on Optimisation of Labour Relations’ came into force, unblocking the activities of the State Labour Inspectorate for business inspections.
The law specifically focuses on inspections of compliance with post-war changes to the Labour Code, the legality of dismissals during the war, and, of course, the search for unofficially employed people.
The updated rules set out risk measures that determine the frequency of inspections:
- high – no more than once every 2 years;
- medium – no more than once every 3 years;
- low (insignificant) – no more than once every 5 years.
The difficulty lies in the fact that this is the approximate frequency of scheduled inspections – you can even find out in advance whether your company is on the list of those to be inspected. But there are also unscheduled inspections, and it is more difficult to prepare for them.
To help you navigate the degree of risk, let’s say that the following factors can increase this degree in the State Labour Service
- If your business involves complex equipment, machinery, or high-risk equipment that has been in operation for at least five years prior to the inspection;
- if your company provides for and has been working with such mechanisms or high-risk equipment for 5 years prior to the scheduled inspection;
- if your activity involves the performance of work with increased risk (which was performed in the last 5 years before the inspection);
- if you have previously received comments during an occupational health and safety audit;
- if your company has been the subject of any labour protection violations;
- if there have been any accidents or chronic occupational diseases at your company in the last 5 years;
etc.
It should be noted that the ‘risk’ areas where most violations are detected by inspectors are
- violations in the employment of foreigners or stateless persons;
- violations in the payment or calculation of salaries to foreigners and stateless persons;
- violations of the procedure for hiring or dismissing employees;
- allowing an employee to work without proper registration;
- violation of the rules of registration or work with persons with disabilities;
- violations in the area of paying taxes or other payments accrued during labour remuneration.
First of all, they may check
- companies whose income from works and services far exceeds the number of employees;
- companies in which the employer reduced (dismissed, sent on paid leave, etc.) the number of employees during the quarantine, and after the quarantine regulations were eased and the company resumed full operations, the number of employees remained the same;
- businesses operating exclusively under civil liability contracts hire interns or operate through individual entrepreneurs.
Important! Before starting the inspection, the inspector must confirm his or her authority and show the relevant certificate. The register of issued certificates is published on the website of the SLS, where you can check the authenticity of a particular inspector’s certificate.
It is important not to wait for a scheduled inspection by the SLS and not to check whether you are on the list of upcoming inspections. If you take care of meeting the requirements of the state authority in advance, you will not have to be afraid of inspections.
Our company can offer you both services to prepare your company for an inspection and support during the inspection process.
Why is it important to know about state inspections?
The Law on State Supervision states that inspections must safeguard the public interest. The key principle is the priority of safety in matters of human life and health, the functioning and development of society.
Instead, entrepreneurs believe that inspections are also used by unscrupulous inspectors to interfere with their activities and impose heavy fines.
There have been cases where businesses have been fined substantial sums, but the very next day, the head of the service made an official statement and assured the public that there would be no fine because it was not adequate to the violation. This is a vivid example that demonstrates why the area of state control is worthy of attention and research.
In turn, open data on inspections helps in this regard, as it allows controlling both the process of planning inspections and their results.
The disclosure of this data makes it possible to create various services to facilitate the work of enterprises and the passage of inspections, such as informing about the upcoming inspection, compliance with its procedure, and notifications about the publication of the inspection report.
Even the publication of the reports themselves provides a good opportunity for entrepreneurs to analyse what violations are commonly committed and correct them in a timely manner – even before the inspection itself.
What are the types of inspections?
State supervision (control) measures – inspections – can be of 2 types:
- Scheduled (can be complex if carried out simultaneously by several regulatory authorities)
Unscheduled. - Scheduled inspections are carried out in accordance with annual plans approved by the supervisory authorities no later than 1 December of the year preceding the scheduled one.
Annual inspection plans and plans for comprehensive inspections are published on the official website of the supervisory authority and entered into the integrated automated system of state supervision (control) – the Inspection Portal. That is why you can find out about a scheduled inspection in advance by checking the annual plans on the Inspection Portal (https://www.inspections.gov.ua) or on the official websites of the supervisory authorities.
Scheduled inspections are carried out in compliance with the following requirements
- Frequency: businesses with different risk levels will be inspected at different intervals;
- the duration of the inspection and the total duration of all inspections during the year;
- mandatory prior notification of the entrepreneur about the inspection (no later than 10 days before the day of the inspection);
- a specific list of issues to be inspected.
In order to check whether your company is subject to scheduled inspections, you can use our assistance.
A comprehensive inspection is a measure of state supervision (control) conducted by several supervisory authorities at the same time (in fact, a combination of scheduled inspections at the same time).
A comprehensive inspection plan is automatically generated if one company is included in the annual inspection plans of several regulatory authorities.
Remember: You can refuse to undergo a comprehensive inspection by sending an application to the State Regulatory Service of Ukraine. In this case, the company will be inspected separately in accordance with the annual plans of the regulatory authorities.
An unscheduled inspection is a measure of state supervision (control) that is carried out only if there are specific grounds determined by law.
The entrepreneur is not notified of the inspection in advance. Unscheduled inspections are not subject to the rules on frequency and maximum total duration during a calendar year. However, the term of an unscheduled inspection may not exceed 10 business days, and in the case of small businesses, two business days.
In the course of an unscheduled inspection, the supervisory authorities shall only investigate a limited number of issues that were the basis for the inspection. Such a range of issues must be specified in the certificate (referral) for the inspection.
What are the grounds for unscheduled audits?
Pursuant to clause 78.1 of the Tax Code of Ukraine (the ‘TCU’), a documentary unscheduled tax audit is carried out in the presence of at least one of the following circumstances
- based on the results of audits of other taxpayers or receipt of tax information, facts have been revealed that indicate possible violations by the taxpayer of tax, currency and other legislation, control over compliance with which is entrusted to the state tax authorities, unless the taxpayer provides explanations and their documentary evidence at the mandatory written request of the state tax authority within 10 business days from the date of receipt of the request;
- the taxpayer has failed to submit a tax return or calculations within the time limit established by law, if their submission is required by law;
- the taxpayer has submitted to the state tax authority a corrective calculation of the relevant tax for the period audited by the state tax authority;
- the data contained in the tax returns filed by the taxpayer is found to be unreliable, unless the taxpayer provides explanations and documentary evidence upon written request of the state tax authority within ten business days from the date of receipt of the request;
- the taxpayer has filed, in accordance with the established procedure, an objection to the audit report or a complaint against the tax notice-decision based on its results to the state tax authority, which requires full or partial revision of the results of the relevant audit or cancellation of the tax notice-decision based on its results, if the taxpayer in its complaint (objections) refers to circumstances that were not investigated during the audit and their objective consideration is impossible without an audit. Such an audit is carried out exclusively on the issues that were the subject of the appeal;
- the procedure of reorganisation of a legal entity (except for transformation), termination of a legal entity or business activity of an individual entrepreneur has been initiated, proceedings on declaring the taxpayer bankrupt or an application for deregistration of the taxpayer has been filed;
- the taxpayer has filed a tax return claiming value added tax for refund from the budget, if there are grounds for an audit as defined in Part V of the Tax Code, and/or with a negative value of value added tax exceeding UAH 100 thousand.
A documentary unscheduled audit on the grounds specified in this sub-clause shall be conducted exclusively with respect to the legality of declaring the VAT claimed for refund from the budget and/or the negative value of VAT exceeding UAH 100 thousand;
- a complaint has been filed against the taxpayer regarding the taxpayer’s failure to provide a tax invoice to the buyer or violation of the rules for filling out a tax invoice in case the taxpayer fails to provide explanations and documentary evidence at the written request of the state tax authority within 10 business days from the date of receipt;
- a court decision (investigating judge) on the appointment of an audit or a resolution of the body conducting operational and investigative activities, investigator, prosecutor, issued by them in accordance with the law, has been received;
- a higher-level state tax authority, in the course of controlling the actions or inaction of officials of a lower-level state tax authority, has audited the taxpayer’s mandatory reporting documents or materials of a documentary audit conducted by a lower-level controlling authority, and found that the conclusions of the audit report do not comply with the requirements of the law or that the audit did not fully clarify the issues that should be clarified during the audit in order to make an objective conclusion on compliance with the tax.
In this case, the decision to conduct a documentary unscheduled audit is made by a higher-level state tax authority only if the officials of the lower-level state tax authority who conducted the documentary audit of the said taxpayer have been subject to an internal investigation or have been notified of suspicion of committing a criminal offence;
In case of receipt of information on tax agent’s evasion of taxation of wages, passive income, fringe benefits, other payments and reimbursements paid (accrued) to employees (including without documentary registration), including as a result of the taxpayer’s failure to conclude employment contracts with employees in accordance with the law, as well as the person’s conducting business activities without state registration. Such an audit is carried out exclusively on the issues that became the basis for such an audit.
Who conducts the most inspections and where?
The State Emergency Service of Ukraine carries out the most inspections – almost 90,000 inspections since the beginning of 2020. The State Service of Ukraine on Food Safety and Consumer Protection is in second place. The State Labour Service of Ukraine is in third place.
The largest number of inspections were conducted in Kharkiv region, with Kyiv in second place, although the capital has the largest number of registered entrepreneurs. And the largest number of inspectors, by the way, is in Dnipropetrovska oblast. Zhytomyr and Odesa regions are also in the top ten in terms of the number of inspections.
How many inspectors are there in Ukraine?
In total, there are more than 10,000 inspectors of various regulatory authorities in the country. Most of them are in Dnipro and Kharkiv regions. The largest groups are inspectors from the State Emergency Service, the Consumer Protection Service and the State Labour Service.
Who conducts the most inspections?
On average, SES inspectors find four violations per year during one inspection. This service has the highest average number of violations per inspector – 257 per year.
The State Labour Service of Ukraine is in second place: 82 violations per inspector per year and just over three violations per inspection. Ukrainian companies commit the most violations in relation to the employment and safety of employees.
The regulatory authorities can use this data to monitor the performance of employees, control their integrity, and make management decisions on the appointment of inspectors to inspect certain companies.
How effective are inspectors?
The Cabinet of Ministers of Ukraine is constantly working to improve the regulatory framework for state supervision.
With the support of the BRDO’s Better Regulation Delivery Office, risk assessment criteria for enterprises are being developed, which should be the main markers for inspections. Thus, during the strict lockdown, inspections were carried out to ensure compliance with quarantine restrictions.
More inspections are conducted among high-risk businesses. The purpose of this approach is to facilitate the work of small, low-risk businesses as much as possible by inspecting businesses where violations can really harm people and society.
Sometimes inspectors conduct few inspections, but find many violations – this is primarily due to the fact that such inspectors inspect large enterprises. If a factory or plant employs thousands of workers and has dozens of buildings with square kilometres of floor space, an inspector may find up to two hundred violations at one enterprise.
Entrepreneurs can receive an order to eliminate violations within a certain timeframe – this is a common practice. In Ukraine, fines are rarely imposed during the first inspection or the first violation detected.
What to do after the inspection?
The inspection is not over after the inspector has closed the doors of the company, and the entrepreneur still has a lot of work to do. It is necessary to check the inspection report: whether it complies with the unified form, whether it contains only those violations that have been identified, and in the case of an unscheduled inspection, only those violations that relate to the reason for its conduct.
The results of an inspection may be appealed. To do so, you can either indicate your comments directly in the aforementioned act or submit them to the supervisory authority within 5 days after the inspection is completed. However, it is worth filing as soon as possible, as 5 days is the maximum period within which the supervisory authority must issue an order to eliminate violations.
The entrepreneur can evaluate the work of the inspector – this can be done in the form of an inspection report. The assessment will be taken into account when evaluating the inspector.
The entrepreneur may also appeal the results of the inspection, in particular, the sanctions imposed, the results of tests and examinations, and the suspension of the licence. They can also claim compensation for damage caused by the inspection and sanctions, including compensation for lost profits.
Conclusions and advice
To sum up, in each individual case, taxpayers should analyse whether the tax authorities have lawfully and reasonably sent a request for information and whether there are grounds for appointing an audit after providing (or not providing) a response to such a request. The Supreme Court’s case law provides many opportunities to challenge unreasonable actions of tax authorities and avoid unlawful audits, which should be used, as prevention is always easier than fighting off million-dollar audit reports in courts.