Russia: Reforms imposing restrictions on “golden parachute” provisions

Employment contracts in Russia often contain ‘golden parachute’ provisions which entitle employees to compensation in the event of termination of their employment.

Under the Russian Labour Code a director is entitled to compensation equal to not less than three months’ average salary if their employment is terminated by the company prior to the expiry of the agreed term. Directors, deputy CEOs and chief accountants are entitled to compensation equal to not less than three month’s average salary if their employment is terminated due to a change of ownership of their employer. The Russian Labour Code also allows for similar compensation to be paid to other categories of employees.

There is currently no restriction on the maximum amount of such compensation. As a result employment contracts, especially with senior managers, often provide for generous compensation.

On 2 April 2014 the President of the Russian Federation signed the Federal Law “On Amending the Labour Code of the Russian Federation by Imposing of Restrictions on the Size of Severance Benefits, Compensation and Other Payments in Connection with the Termination of Employment Contracts for Certain Categories of Employees” which amended the current rules.

In particular it provides that:

• compensation is prohibited (for all categories of employees) where the employment has terminated as a result of misconduct or the imposition of disciplinary sanctions; and
• the maximum amount of compensation is restricted to a sum equal to three months’ average salary for CEOs, deputy CEOs, chief accountants and members of collective executive bodies (management bodies) employed by state companies, other state entities or agencies, including commercial companies in which more than 50 per cent of the share capital is owned by the state. No compensation may be paid to these employees where the employment is terminated by mutual agreement.

Actions for employers

The Law comes into force on 13 April 2014.

Employers hiring new employees after this date will need to take these reforms into account when drafting employment contracts. Moreover, any provision of an employment contract (entered into before that date) which contradicts to the abovementioned rules will not be enforceable and relevant provisions of legislation shall be applied.

Article written by Maria Baranovskaya.