How Can Companies Pay Employees in Russia?

From Coca-Cola to Spotify, hundreds of companies have halted, suspended, or scaled back their Russia-based operations in the weeks since Russia began its invasion of Ukraine.

For companies that haven’t yet left and are in the process of winding down operations, one employment question has been top of mind as global leaders continue to unveil new ways to cut off Russia’s access to the global economy: How do they pay employees who are still there? 

It’s a high-stakes issue, according to attorneys advising these companies, since it not only concerns getting needed funds into the hands of Russia-based employees but also safeguarding the companies and those employees from retribution by the Russian government.

“We’re trying to read the tea leaves of what the Russian government is most concerned about when they have threatened foreign companies that have halted operations or pulled out of Russia,” said Thad McBride, an international trade partner with Bass, Berry & Sims.

“I’m just not that concerned that Russia thinks, ‘Oh no, society is going to break down if people can’t buy Coca-Cola anymore.’ But they may be concerned that if Coca-Cola has … 10,000 employees in Russia, and all of a sudden those people are unemployed, that those people … are going to be a threat to social order.”

By making sure its Russia-based employees get paid, a company might reduce the fallout of its pulling out of the country and therefore hope to maintain a more cordial relationship with the Russian government, McBride suggested. Such a relationship is key not only because many of those companies want to resume operations in Russia in the future, but also because they want to protect their Russia-based employees.

“I know that some companies that are closing down branches with a considerable number of American employees are getting Americans out first before they do anything at all,” said Clif Burns, who works on economic sanctions matters as senior counsel at Crowell & Moring. “They don’t want to start closing while Americans are there because the chance of them being arrested … is relatively high.”

Getting payments to employees in Russia is not a straightforward task, however. In recent weeks, sanctions and other restrictions the U.S. and other countries imposed on Russia’s largest banks have blocked many companies from directly transferring wages to employees’ Russian bank accounts.

Restrictions that ban transactions with Russia’s central bank—to which many taxes as well as routine registration and filing fees are due—have also complicated compensation matters, said Erika Collins, an international labor and employment partner at Faegre Drinker Biddle & Reath who is also part of the firm’s Ukraine support task force.

While the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued a general license permitting these payments to the central bank until late June, “once the license runs out, it’s going to be difficult to make those tax payments,” Collins said. “There is potential civil and even criminal liability for the managerial employees located in Russia, especially the ones in charge of payroll and tax payments.”

Possibly complicating matters are a handful of state executive orders, including in New York, New Jersey, and Massachusetts, which ban government entities from doing business with Russia. A New Jersey law, which the state legislature passed in mid-March, specifically tasks the state Department of Treasury with keeping a list of individuals and entities that have ties to Russia and Belarus, and banning them from receiving government contracts, tax breaks, or government subsidies.

“Question is: If you pay an employee in Russia, taxes will be collected on that payment,” said Burns. “You’ll be increasing the treasury of Russia. Does that help them in their invasion of Ukraine?”

In the meantime, companies have developed a few strategies for paying employees in Russia, Burns said. These include asking employees to open accounts at banks that haven’t been sanctioned or writing checks to the employees. But in the latter case, there isn’t much guidance on what could happen if an employee then tries to deposit the check in a sanctioned bank.

Burns said he hasn’t seen any clients try to pay clients with cryptocurrencies.

McBride said he’s been advising some clients to put Russian personnel on administrative leave and prepay them a lump sum.

“The idea with prepaying employees is to at least be able to say, if the Russian government ever asks, ‘Look, we’ve halted operations here, we really cannot continue to do business here under U.S. law, under EU law, U.K. law, whatever it is. But we care about our employees, we’ve paid them in advance for six months and want to keep them on and are hopeful that when things settle down again, we’ll be able to return to the country,’” he said.

“Look, there’s a financial cost for a lot of companies to suspending or ending their Russia operations,” McBride added. “But in many cases, I think this human cost is what’s brought it home more to our clients, and trying to just do whatever they can to protect employees there—both in terms of ensuring they’re getting paid, but also just kind of protect them to the extent they can from any sort of legal harm or even physical harm.”

From: Law.com