State Labor Service Fine for Unregistered Employees: The Supreme Court Explained When It May not Be Canceled

The Supreme Court, as part of the Cassation Administrative Court, formulated a number of important legal conclusions regarding the application of fines for the use of unregistered employees, the assessment of repeated violations, the distinction between labor and civil-law relations, the evidentiary value of video recordings during State Labor Service inspections, and the consequences of procedural violations during the imposition of financial sanctions.

In the reviewed case, the State Labor Service imposed a fine of UAH 3.36 million on the enterprise, considering that the employer had repeatedly allowed 14 persons to work without proper formalization of labor relations. The courts of first and appellate instances recognized the controlling authority's decision as unlawful; however, the Supreme Court concluded that they incompletely examined the circumstances of the case, incorrectly applied the law, and prematurely canceled the fine. The case was sent back for a new review.

Circumstances of the case

In April 2024, the State Labor Service conducted an unscheduled inspection of the enterprise, based on which it drew up an act and issued an order to eliminate labor law violations.

After that, inspectors carried out a repeated unscheduled measure to check compliance with the order. Based on its results, the controlling authority concluded that the enterprise continued to use the labor of unregistered security guards at the facilities of JSC "Ukrposhta," and imposed a fine of UAH 3.36 million.

The enterprise appealed the decision, referring, among other things, to the fact that some persons could not be properly identified, civil-law contracts were concluded with seven persons, the State Labor Service did not prove the actual existence of labor relations, and also committed procedural violations during the consideration of the fine imposition case.

Why previous courts canceled the fine

The courts of first and appellate instances satisfied the enterprise's claim.

They reasoned that the State Labor Service did not prove the repetition of the violation, did not confirm with proper evidence the actual admission of persons to work without formalizing labor relations, and that video recordings and other inspection materials did not allow reliably establishing who exactly worked at the enterprise. In addition, some persons in the fine imposition decision were indicated only by name, which, according to the courts, did not allow their proper identification.

What the courts did not consider, according to the Supreme Court

The Supreme Court concluded that the lower courts incompletely established the factual circumstances of the case, did not examine all necessary evidence, and prematurely recognized the State Labor Service's decision as unlawful.

Repetition of violation does not depend on the decision regarding the director

The Supreme Court emphasized that the repetition of a violation, as provided in the third paragraph of part two of Article 265 of the Labor Code, is associated with the repeated commission by the employer of the same type of violation within two years from the date of its initial detection by the authorized body, and not with the existence of a court decision on holding the enterprise's director administratively liable.

Therefore, returning the administrative case materials concerning the director for proper formalization by itself does not indicate the absence of repetition.

An unchallenged order has legal significance

The Cassation Administrative Court noted that the State Labor Service's order is an individual administrative act, which is presumed lawful. If such an order is not appealed or canceled, it is valid and mandatory for execution.

At the same time, failure to appeal the order does not relieve the court of the obligation to examine its content. The court must establish what primary violation was recorded, whether the order's requirements were fulfilled, and whether these circumstances may indicate a repeated violation.

The Supreme Court stressed that the legality of the order itself is not the subject of such a dispute if it was not separately appealed. Within the case review, the court should consider it only as evidence of the primary violation and a basis for assessing repetition.

The contract name does not determine the nature of legal relations

The Supreme Court confirmed its established practice regarding the distinction between labor and civil-law relations.

The decisive factor is not the name of the concluded contract but the actual content of the legal relations. If a person systematically performs a labor function, works according to a set schedule, is subordinate to the employer, and receives remuneration for the work process, such relations may be labor relations regardless of the fact that the parties formalized them with a civil-law contract.

Special approaches apply to security activities

The court recalled its previously formed legal position according to which security personnel functions cannot be performed on the basis of civil-law contracts if, in fact, labor relations exist.

During the new review, the court must establish whether the enterprise carried out security activities based on the appropriate license, what functions the involved persons performed, and whether they corresponded to the characteristics of security personnel as understood by special legislation.

Video recordings must be evaluated together with other evidence

The Supreme Court emphasized that video recordings made by labor inspectors during inspections are electronic evidence and must be evaluated in conjunction with other evidence.

The previous courts did not play these recordings directly during the case hearing and effectively rejected them without proper analysis.

At the same time, even if some persons in the video incorrectly named the location or other details of the enterprise, this alone does not disprove their explanations regarding the work performed, shift schedules, remuneration received, and the person who coordinated their work.

Simultaneously, the Supreme Court noted that incomplete identification of some persons alone does not mean the failure to prove the fact of using unregistered labor if this fact is confirmed by other proper evidence, including video recordings and the explanations of the persons themselves.

The court also noted that the absence of formalized labor relations is often part of the mechanism of hidden employment. Therefore, the fact of using unregistered labor cannot be confirmed solely by the employer's paper documents but must be established based on the evaluation of the entire body of evidence.

Not every procedural violation cancels the State Labor Service's decision

A separate block of legal conclusions concerns procedural guarantees.

The Supreme Court noted that not every procedural violation is an independent ground for canceling an administrative body's decision. The court must establish whether such a violation was significant, i.e., whether it could have actually influenced the content of the decision or deprived the person of the opportunity to effectively protect their rights.

This approach corresponds to the provisions of the Law "On Administrative Procedure," which provides that a violation of administrative procedure does not automatically entail the unlawfulness of an administrative act if it did not and could not affect the correctness of the case's substantive resolution.

The Supreme Court also pointed out that a legal entity must ensure the receipt of correspondence at its official address, and the risk of non-receipt lies with the addressee if the controlling authority properly sent the relevant documents.

What the Supreme Court decided

The Cassation Administrative Court concluded in case 160/31220/24 that the courts of first and appellate instances did not investigate all essential circumstances of the case, did not properly evaluate the evidence, and prematurely canceled the State Labor Service's decision.

Therefore, the Supreme Court partially satisfied the State Labor Service's cassation appeal, canceled the decisions of the courts of first and appellate instances, and sent the case for a new trial to the court of first instance.

At the same time, the Supreme Court did not decide on the legality of the fine itself on the merits. The court only stated that the lower courts incompletely clarified the circumstances of the case and did not examine all necessary evidence. The final assessment of the legality of the fine imposition decision should be given by the court of first instance during the new trial.

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