The Supreme Court Exposed Another Business Scheme: “Cooperation” Between FOPs Can Cost 240 Thousand Hryvnias

The Supreme Court, composed of judges of the Cassation Administrative Court, made an interim but important decision in the dispute between an individual entrepreneur and controlling authorities in case No. 280/10418/24. The subject of the dispute was a ruling imposing a fine of 240 thousand hryvnias for allowing a person to work without formalizing an employment contract.

Businesses should take this case into account as it concerns a fairly common model of cooperation between two sole proprietors. The Supreme Court analyzed not only the powers of the State Labor Service and the Tax Service but also reminded about the principle of the priority of law over government resolutions.

Case Circumstances

The Main Department of the State Tax Service in Kyiv conducted an on-site inspection at a  sole proprietor internet store. During the inspection, it was established that settlement operations were carried out by a person who explained that they worked as a consultant 5 days a week, complied with internal regulations, and underwent occupational safety training.

The  sole proprietor, as the plaintiff, emphasized that the consultant was also a registered  sole proprietor and acted under a cooperation agreement. According to this agreement, the parties allegedly combined efforts to organize the work of the retail point. However, the State Labor Service, having received materials from the tax authorities, interpreted this as concealed employment relations and issued a ruling imposing a fine.

The court of first instance canceled the fine, noting that the State Labor Service’s decision was unmotivated and did not consider the entrepreneur’s explanations or the existence of the cooperation agreement.

The appellate court, in turn, concluded that the tax authority’s on-site inspection report is not admissible evidence for the State Labor Service’s decision-making. According to the appellate court, the State Labor Service is limited in its ability to impose fines based on inspections conducted by another controlling authority unless explicitly regulated by subordinate acts.

Supreme Court Decision

The Cassation Administrative Court of the Supreme Court concluded that the appellate court violated procedural law norms, therefore the appealed court decision must be canceled, and the case sent back for a new appellate review.

In particular, the Supreme Court emphasized that according to part two of Article 259 of the Labor Code of Ukraine, tax authorities have the power to monitor compliance with labor legislation to verify adherence to tax laws regardless of the form of ownership of the business entity.

The Court also noted that the tax authority’s on-site inspection report is proper and admissible evidence in cases of labor law violations. The absence of a separate subordinate act that would regulate the procedure for imposing fines specifically based on such an inspection report does not negate the powers explicitly provided by law.

Separately, the Supreme Court drew attention to Article 7 of the Code of Administrative Procedure of Ukraine regarding the priority of legal norms over subordinate acts. The Court stressed that in case of conflict between the law and government normative acts, the law’s norms apply as they have higher legal force. In particular, Article 265 of the Labor Code explicitly provides the right to impose fines for labor law violations.

The panel of judges noted that the absence during the disputed legal relations period of a subordinate normative act explicitly providing for the possibility of imposing fines based on the tax authority’s on-site inspection report does not affect the powers of tax authorities and the State Labor Service. The Court emphasized that such powers are directly provided by law, namely Article 265 of the Labor Code of Ukraine.

Cooperation Between  sole proprietors or Employment?

The Supreme Court noted that the appellate court focused mainly on procedural issues but did not properly investigate the nature of the legal relations between the parties.

The Court stated that the case materials contained circumstances that could indicate the formal nature of cooperation between two  sole proprietors. In particular, sublease and commission agreements were concluded exclusively by  sole proprietor 1, while  sole proprietor 2 did not participate in them. Moreover, the consultant worked according to a set schedule and performed sales functions.

The Supreme Court also noted that the cooperation agreement did not actually define independent roles of the parties, except for carrying out settlements on behalf of  sole proprietor 1.

The cassation court emphasized the need to establish whether it was a real cooperation of two independent entrepreneurs or actual employment relations disguised through the  sole proprietor model to avoid concluding an employment contract.

In its decision, the Supreme Court pointed out that the mere existence of a cooperation agreement between two  sole proprietors does not exclude the possibility of establishing actual employment relations. To assess the legal nature of such relations, circumstances such as the presence of a work schedule, subordination to internal regulations, and the nature of performed functions are important.

Separately, the Court stressed the need for a comprehensive evaluation of evidence. In particular, circumstances regarding the participation of  sole proprietors in lease, sublease, goods procurement agreements, and actual organization of economic activities may be significant. The appellate court in this case must consider all circumstances and re-examine the evidence to determine whether the cooperation was genuine.

The Supreme Court’s decision reflects an approach to strengthening control over the formalization of labor relations and verifying the real substance of cooperation between business entities.

Subscribe to our Telegram channel t.me/sudua and to Google News SUD.UA, as well as to our VIBER and WhatsApp, Facebook page and Instagram to stay updated on the most important events.