Employee Relations During Company Reorganization in Russia: A Legal Guide

 

June 25, 2025

BRACE Law Firm ©

 

To increase the efficiency of business processes, optimize management, or reduce costs, a company may need to radically change its structure. These issues can be addressed by conducting a reorganization procedure.

However, reorganization is associated with the potential risk of litigation with employees. Employees are often intimidated by the possibility of losing their jobs or deteriorating labor conditions. Therefore, it is extremely important to conduct this procedure as transparently as possible and in strict accordance with current legislation.

In this article, we consider the rights granted to employees by labor legislation in the event of a company reorganization and the actions an employer must take to minimize the risks of violations.

What is Company Reorganization?

Before examining the topic, let us define the term "reorganization". The Civil Code of the Russian Federation (the "Civil Code") does not contain a definition of this concept. In practice, reorganization is understood as the termination of a legal entity's existence with the transfer of its rights and obligations (succession) to other persons. Reorganization may be voluntary (by decision of the founders or the body of the legal entity) or compulsory (by decision of state authorities or by a court decision in cases expressly provided for by law).

Reorganization is possible in the following forms:

• Merger of several legal entities into one company. The rights and obligations of each pass to the newly created legal entity.
• Accession of one legal entity to another. Upon accession, the rights and obligations of the joined legal entity pass to the latter.
• Division of a legal entity into several legal entities. The rights of the previously operating legal entity pass to the newly created legal entities in accordance with the transfer act.
• Separation of a new legal entity from an existing one, with the transfer of part of the rights and obligations of the parent company.
• Transformation – a change in the organizational and legal form of a legal entity. The rights and obligations of the reorganized legal entity in relation to other persons do not change, except for rights and obligations in relation to the founders.

A reorganization of a legal entity with a simultaneous combination of its various forms is permitted.

A legal entity is considered reorganized from the moment of state registration of the legal entities created as its result, or in the case of accession, from the moment an entry is made in the Unified State Register of Legal Entities (the "USRLE") regarding the termination of the activities of the joined legal entity.

It is important to understand that reorganization differs from liquidation, as these procedures entail different legal consequences, including in the field of labor relations. Unlike reorganization, the liquidation of a legal entity entails the termination of its activities without the transfer of its rights and obligations to other persons.

Below, we analyze the rights granted to employees by legislation during the reorganization process.

The Right to Maintain Labor Relations During Company Reorganization

Article 75 of the Labor Code of the Russian Federation (the "Labor Code") is dedicated to the regulation of labor relations during reorganization. According to its provisions, reorganization cannot serve as a basis for terminating labor contracts with the organization's employees. At the same time, as Rostrud indicates, in the event of a reorganization of a legal entity, the extension of labor relations occurs automatically; dismissing an employee from the "old" company and hiring them at the "new" one is not required.[1] Moreover, such actions may be regarded by the supervisory authority as a violation of labor legislation.

Furthermore, the law does not require notifying employees of an upcoming reorganization or obtaining consent to continue working for the new employer. Article 53 of the Labor Code grants the right to receive information on reorganization issues only to employee representatives (trade unions, etc.). However, since an employee is not deprived of the right to refuse to continue working, we consider it mandatory to notify the employee of the upcoming changes in the organization.

As Rostrud explains, the employer must perform the following actions:

• issue a reorganization order;
• notify employees of the reorganization;

The form and terms of notification are not established by labor legislation. We recommend specifying the following information in the notification: the full name and position of the employee to whom the notification is addressed, information about the upcoming reorganization, information about the employee’s right to refuse to continue working due to the reorganization with the subsequent termination of the labor contract, and an offer to provide written information regarding the refusal to continue working. The employee must be familiarized with the notification under their personal signature.

• conclude additional agreements to labor contracts with employees who agree to continue working to change information about the employer;
• make the corresponding entry in the labor books or information on labor activity regarding the name and details of the new employer. [2]

Compliance with this algorithm will minimize the employer's risks regarding violations of employee rights.

For example, in Case No. 88-11646/2020, F. filed a lawsuit against the employer to cancel the dismissal order, change the wording of the dismissal, pay compensation for forced absence, and provide compensation for moral harm. The justification cited the employer’s failure to offer vacant positions in the reorganized legal entity. [3]

During the consideration of the case, it was established that the employer had issued a merger order. The plaintiff was notified of the upcoming reorganization and informed that if they refused to continue working due to the reorganization, the labor contract would be terminated. The plaintiff refused to continue working, as indicated in the notification.

The court concluded that by virtue of Article 75 of the Labor Code, a labor contract with the specified labor function (work in a specific specialty, qualification, or position) remains in force during reorganization. The plaintiff was dismissed due to their refusal to continue working in connection with the reorganization, rather than due to a change in the terms of the labor contract or other grounds. Furthermore, the plaintiff did not exercise the right to withdraw their application; therefore, there were no grounds to satisfy the claims.

There is an exception to the general rule provided for in Article 75 of the Labor Code regarding the maintenance of labor relations. If a change in the owner of the organization's property occurs as a result of reorganization, the new owner has the right to terminate the labor contract with the head of the organization, their deputies, and the chief accountant based on Clause 4 of Part 1 of Article 81 of the Labor Code. Other employees cannot be dismissed on this basis.

In accordance with the clarifications of the Supreme Court of the Russian Federation, a change in the owner of the organization's property is understood as the transfer of ownership rights to the organization's property from one person to another, particularly during the privatization of state or municipal property; when property owned by an organization is transferred to state ownership; or when state enterprises are transferred to municipal ownership and vice versa. The situation is different regarding partnerships and companies. Since the owner of the property of a business partnership or company remains the partnership or company itself, no change in the owner of the property occurs.[4]

The labor contract with the head of the organization, deputies, and the chief accountant may be terminated no later than 3 months from the date the right of ownership arises. Dismissal is processed in the standard manner. The obligation to notify the specified employees in advance of the termination of the labor contract is not required but is advisable for the purpose of organizing the transfer of affairs.

The new owner is obliged to pay these persons compensation in an amount not less than three times the employee's average monthly earnings. It is not permitted to establish an increased amount of payments for the following categories of employees:

• heads, their deputies, and chief accountants of state companies, as well as business entities in which more than fifty percent of the shares (stakes) in the authorized capital are in state or municipal ownership;
• heads, their deputies, and chief accountants of state extra-budgetary funds of the Russian Federation, territorial mandatory medical insurance funds, state or municipal institutions, or state or municipal unitary enterprises (Articles 181, 349.3 of the Labor Code).

Thus, as a general rule, labor relations with the employees of a reorganized company continue, and no changes occur in the rights and obligations of the employee and the employer. An exception is provided only for management and only in cases where a change of owner occurred during the reorganization.

Effect of a Collective Bargaining Agreement During Reorganization

A collective bargaining agreement is a legal act regulating social and labor relations in an organization, including the forms, systems, and amounts of labor remuneration, and the procedure and amounts for paying benefits and compensation, etc. A collective bargaining agreement may establish benefits and advantages for employees that are more favorable than those established by laws and other regulatory legal acts.

In accordance with Article 43 of the Labor Code, during a reorganization in the form of transformation, the collective bargaining agreement remains in effect for its entire term; during reorganization in the form of merger, accession, division, or separation, it remains in effect only during the reorganization period. In the latter case, after the reorganization is completed, the collective bargaining agreement loses its force. However, either party (the employer or the employee representative) has the right to send the other party proposals to conclude a new collective bargaining agreement or extend the previous one for a term of up to 3 years.

Thus, in Case No. 33-2465/2019, S. filed a lawsuit against the employer for the recovery of a lump-sum material assistance payment in the amount of 210,000 rubles. In support of the claims, it was stated that the plaintiff worked as a department head and was dismissed due to a refusal to continue working. However, as of the date of dismissal, the lump-sum material assistance provided for by the collective bargaining agreement had not been paid. The court established that on the date of the plaintiff's dismissal, the collective bargaining agreement had terminated due to the reorganization in the form of accession to another legal entity. A new collective bargaining agreement was not concluded, and no decision was made to extend it; therefore, there were no grounds for paying the plaintiff the requested material assistance. The claims were denied. [5]

Thus, the terms of a collective bargaining agreement should be taken into account when determining the amount of payments, compensations, and other benefits provided to employees in accordance with a collective bargaining agreement beyond those guaranteed by legislation.

The Employee's Right to Refuse to Continue Working During Company Reorganization

In addition to the right to maintain labor relations, an employee has the right to refuse to work for the reorganized legal entity. In this case, the labor contract is terminated on a special basis – Clause 6 of Part 1 of Article 77 of the Labor Code.

The refusal must be obtained in writing and must be voluntary. The form for an employee's refusal to continue working is not established. In practice, the employee writes a resignation letter. It must state the reason for the termination of the labor contract (refusal to continue working in connection with the reorganization of the organization), the desired date of dismissal, and the employee's signature. The law does not establish a period for notice/working out, so the employee should be dismissed on the day specified in the application.

Termination of the labor contract is performed in the standard manner. On the last working day, the employee is paid their salary, compensation for unused vacation, and other amounts due to the employee. Severance pay upon dismissal of an employee under Clause 6 of Part 1 of Article 77 of the Labor Code is not provided. Otherwise may be provided for in the collective bargaining agreement or labor contract (Part 8 of Article 178 of the Labor Code).

For example, in Case No. 88-14114/2022, a chief accountant was dismissed due to a refusal to continue working under Clause 6 of Part 1 of Article 77 of the Labor Code. she filed a lawsuit demanding the payment of severance pay. The court established that the collective bargaining agreement provided for the payment of severance pay in the amount of three times the average monthly earnings upon dismissal on any basis, except for "fault-based" grounds. The plaintiff's claims were satisfied in full. [6]

Thus, to minimize the risks of a dismissal being recognized as illegal, it is necessary to correctly process personnel documents.

Changes in Labor Conditions Due to Reorganization

The norms of Article 75 of the Labor Code, which guarantee the continuity of labor relations, create an illusion of procedural simplicity. In practice, reorganization often entails changes to the terms of labor contracts with employees or staff reductions. In such cases, the employer should follow the procedures provided by the Labor Code for these activities. We examine them in more detail below.

The procedure for an employer's actions in the event of a change in the terms of a labor contract is regulated by Article 74 of the Labor Code. In accordance with this norm, the employer must perform the following actions:

• at least 2 months in advance, deliver a notification to employees regarding the planned changes to the labor contract;

At the same time, according to Rostrud, [7] a reorganizing employer may not know whether the reorganization will entail changes to the terms of the labor contract. Therefore, they cannot be required to send the employee a corresponding notification in accordance with Article 74 of the Labor Code. In this case, the new (reorganized) employer must send the notification to the employee.

• conclude additional agreements to labor contracts with employees who agree to continue working under the new conditions regarding the change in the terms of the labor contract;
• if the employee does not agree to the change in the labor contract, offer them other work in writing.

All vacancies available to the employer must be offered (both those corresponding to the employee's qualifications and lower positions or lower-paid work that the employee can perform taking into account their state of health). As an analysis of law enforcement practice shows, vacancies should be offered from the moment of notification of the change in the terms of the labor contract up to and including the day of dismissal. If there are no vacancies, we also recommend notifying the employee of this.

If the employee refuses the offered work or if there is no work, the labor contract is terminated in accordance with Clause 7 of Part 1 of Article 77 of the Labor Code. As Rostrud points out,[8] termination of the labor contract is permitted only after the expiration of the notice period.

Furthermore, when checking the legality of a dismissal, the court assesses the reasons for the change in the terms of the labor contract and the impossibility of maintaining them due to reorganization. This is expressly provided for by the norms of Article 74 of the Labor Code.

In Case No. 88-13126/2022, [9] during a reorganization, a labor contract with F. was terminated due to the employee's refusal to continue working in connection with a change in the terms of the labor contract determined by the parties. F. filed a lawsuit to recognize the dismissal as illegal, for reinstatement, for recovery of wages during the forced absence, and for compensation for moral harm.

The court established that the employer had vacant positions that were not offered to F. The plaintiff’s qualifications corresponded to the requirements for the vacancy, although the vacancy was a lower-paid job for her. Furthermore, the defendant did not present evidence that the previous terms of the labor contract could not be objectively maintained and that the plaintiff could not continue working in her previous position with changed job duties. By court decision, F. was reinstated, wages for the period of forced absence in the amount of 105,563 rubles were recovered, and compensation for moral harm in the amount of 3,000 rubles was awarded.

In addition to the payments due upon dismissal, the employee must be paid severance pay in the amount of two weeks' average earnings (Part 7 of Article 178 of the Labor Code). A collective bargaining agreement or labor contract may provide for an increased amount of payments.

For example, in Case No. 2-3218/2021, [10] K., Zh., and P. filed a lawsuit against the employer to recognize the dismissal order as illegal, change the wording of the basis for dismissal, recover severance pay, and provide compensation for moral harm. During the court hearing, it was established that the plaintiffs had received notifications of the upcoming reorganization of the enterprise in the form of division, which stated that the labor function would remain unchanged. Subsequently, additional agreements to the notifications were handed over, specifying which employer would continue the labor relations and its location. On the notification, the employees made a note of their refusal to continue working.

The court concluded that during the reorganization, there was a change in the terms of the labor contract in the form of a change in the place of work; the employer did not notify the plaintiffs of the upcoming changes in writing 2 months in advance. The court concluded there were grounds for changing the wording of the basis for terminating the labor contract from Clause 6 to Clause 7 of Part 1 of Article 77 of the Labor Code. Furthermore, severance pay in the amount of two weeks' average earnings was recovered in favor of the employees, as well as compensation for moral harm in the amount of 10,000 rubles to each.

It should be noted that employees also frequently attempt to abuse their rights to receive compensation. For instance, in Case No. 88-6667/2022, [11] M. filed a lawsuit against the employer to recognize the wording of the dismissal as invalid, recover average earnings in the amount of 241,790 rubles, severance pay in the amount of 31,401 rubles, compensation for unused vacation for the days of forced absence in the amount of 37,681 rubles, and compensation for moral harm of 100,000 rubles. In support of the claims, it was stated that the employee submitted a resignation letter under Clause 7 of Part 1 of Article 77 of the Labor Code (refusal to continue working in connection with a change in the terms of the labor contract), but the employer dismissed him under Clause 6 of Part 1 of Article 77 of the Labor Code (refusal to continue working in connection with reorganization). The plaintiff disagreed with this basis, as it did not correspond to his will.

During the court hearing, it was established that the plaintiff was handed a notification of the upcoming reorganization and a change in the labor remuneration system, and the right to refuse to continue working in connection with the reorganization was explained. M. submitted an application in which the plaintiff requested to terminate the labor contract on two bases: under Clause 7 of Article 77 and under Clause 6 of Article 77 of the Labor Code.

The court concluded that the plaintiff's labor remuneration conditions had improved rather than deteriorated, and therefore there were no legal grounds for dismissing the plaintiff in connection with a change in the terms of the labor contract. The claims were denied.

Thus, when labor conditions change as a result of reorganization, the employer must strictly comply with the mandatory requirements provided for by Article 74 of the Labor Code, which regulates the procedure for changing a labor contract at the initiative of the employer.

Staff Reductions During Reorganization: Permitted or Prohibited?

In some cases, when companies want to optimize the number of employees, they begin a reduction procedure during reorganization. We note that Article 75 of the Labor Code expressly provides for a reduction in the number or staff of employees only in the case of a change in the owner of the organization's property. For reorganizations not associated with a change of owner, there is no such proviso.

In this regard, a question arises in practice: is such a reduction permissible if the law establishes that the reorganization of an organization cannot serve as a basis for terminating labor contracts with employees. The position of the courts on this issue is not uniform.

For example, in Case No. 88-23456/2022, [12] after the decision on reorganization was made, the employee was notified of the reduction of his position and the absence of other vacant positions. Subsequently, the labor contract was terminated under Clause 2 of Part 1 of Article 81 of the Labor Code due to a reduction in the organization's staff. The employee filed a lawsuit to cancel the dismissal order and for payment of compensation for forced absence in the amount of more than 500,000 rubles. In support of his claim, he cited Part 5 of Article 75 of the Labor Code, which contains a prohibition on terminating a labor contract in connection with reorganization.

The court concluded that the plaintiff's dismissal was carried out due to a staff reduction, rather than due to reorganization, and before the completion of the reorganization procedure; therefore, the plaintiff's claims to compel the conclusion of a labor contract with him on the previous terms were not subject to satisfaction.

The Constitutional Court of the Russian Federation, [13] in considering this employee's complaint regarding the unconstitutionality of the provisions of Article 75 of the Labor Code, which allows for the dismissal of an employee during reorganization without offering vacant positions, concluded that an employer has the right to independently make necessary personnel decisions to carry out effective economic activities and rational management.

At the same time, in another Case No. 46-КГПР22-36-К6, [14] the Supreme Court of the Russian Federation reached the opposite opinion. In this case, employees of a bank were dismissed for redundancy during a reorganization period. The employees filed a lawsuit demanding reinstatement and recovery of compensation for forced absence. The court decided that dismissal under Clause 2 of Part 1 of Article 81 of the Labor Code could not be recognized as legal, since at the time the decision to reduce staff was made, the Bank was in the process of reorganization in the form of accession, and the statutory guarantee of maintaining labor relations with employees was not fulfilled. However, the claim was denied due to the expiration of the statute of limitations. The Supreme Court of the Russian Federation supported the position on the illegality of the dismissal, overturned the decision on the expiration of the statute of limitations, and sent the case for a new trial.

It is also extremely important to observe the guarantees provided to employees by Article 180 of the Labor Code and follow the algorithm of the employer's actions when reducing staff:

• notify the trade union body in writing 2 months in advance, and in the case of mass dismissal of employees – no later than 3 months before the start of the relevant activities;
• determine the persons who are prohibited from being dismissed in connection with a reduction in number or staff, and persons who have a preferential right to remain at work;
• notify each employee subject to dismissal in writing no later than 2 months before dismissal and offer vacant positions;
• upon refusal of the offered work or its absence, terminate the labor contract with the employee.

Upon reduction, in addition to the payments due, the employee is paid severance pay in the amount of the average monthly earnings. Furthermore, the employee retains their average monthly earnings for the period of employment, but for no more than 2 months from the date of dismissal. If the employee is registered as unemployed within two weeks after dismissal and is not employed, by decision of the employment authority, the average monthly earnings are retained for the dismissed employee for the third month from the date of dismissal.

Thus, given the inconsistency of judicial practice, we recommend starting the reduction procedure after the completion of the reorganization. Furthermore, all guarantees provided to employees by labor legislation in connection with reduction must be observed.

Liability for Violation of Employee Rights During Reorganization

In the event of a violation of employee rights during reorganization, the employer may be held administratively liable under Part 1 of Article 5.27 of the Code of Administrative Offenses of the Russian Federation (the "CAO RF"). This entails a warning or the imposition of an administrative fine on officials in the amount of 1,000 to 5,000 rubles; and on legal entities – from 30,000 to 50,000 rubles.

For non-payment or incomplete payment of amounts due to an employee within the established period, they will be held administratively liable under Part 6 of Article 5.27 of the CAO RF. This entails a warning or the imposition of an administrative fine on officials in the amount of 10,000 to 20,000 rubles; and on legal entities – from 30,000 to 50,000 rubles.

Furthermore, if a dismissal is recognized as illegal, the employee may be reinstated and the employer may be ordered to pay their average earnings for the entire period of forced absence, provide compensation for moral harm, and cover court costs.

In conclusion, we note that the labor issues arising for employees and employers during reorganization are quite diverse, and current legal regulation is clearly insufficient. A significant number of situations remain outside of unambiguous legal regulation; the employer is forced to turn to related norms that do not always take into account the specifics of relations during reorganization. To minimize risks during reorganization, we recommend engaging qualified lawyers specializing in labor law.

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References

[1] Order of Rostrud dated November 11, 2022 No. 253, On Approval of the Guide on Compliance with Mandatory Requirements of Labor Legislation.

[2] Review of Current Issues from Employees and Employers for June 2020 // Onlayninspektsiya.RF: Electronic Resource. 2020.

[3] Ruling of the Fourth Cassation Court of General Jurisdiction dated July 7, 2020, in Case No. 88-11646/2020.

[4] Clause 32 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated March 17, 2004 No. 2, On the Application of the Labor Code of the Russian Federation by the Courts of the Russian Federation.

[5] Appellate Ruling of the Supreme Court of the Republic of Crimea dated February 27, 2019, in Case No. 33-2465/2019.

[6] Ruling of the Eighth Cassation Court of General Jurisdiction dated August 23, 2022 No. 88-14114/2022 in Case No. 2-493/2022.

[7] Onlayninspektsiya.RF: Electronic Resource.

[8] Letter of Rostrud dated May 2, 2012 No. PG/3382-6-1.

[9] Ruling of the First Cassation Court of General Jurisdiction dated September 5, 2022 No. 88-20710/2022 in Case No. 2-3218/2021.

[10] Appellate Ruling of the Lipetsk Regional Court dated April 6, 2022, in Case No. 33-791/2022, 2-3218/2021.

[11] Ruling of the Ninth Cassation Court of General Jurisdiction dated July 21, 2022 No. 88-6667/2022.

[12] Ruling of the Second Cassation Court of General Jurisdiction dated October 11, 2022, in Case No. 88-23456/2022.

[13] Ruling of the Constitutional Court of the Russian Federation dated December 27, 2023 No. 3357-O.

[14] Ruling of the Judicial Chamber for Civil Cases of the Supreme Court of the Russian Federation dated November 28, 2022 No. 46-KGPR22-36-K6.