Aleksandra Minkowicz-Flanek, lawyer and Filip Świtała,
tax advisor, both at Salans Warsaw office summarise the basic
differences between regular employment and self-employment under Polish
civil, labour and tax law. It aims to highlight mistakes to be avoided
by entrepreneurs who wish to take advantage of cooperation with the
self-employed.
Under Polish law an employment contract is defined as an agreement
based on which an employee is required to perform work of a defined
type for the benefit of the employer, under the employer’s supervision
and at a time and place determined by the employer. The employer is
required to pay remuneration in return for work performed. Moreover, an
employee is required to perform work individually, i.e. not to entrust
it to any third party.
The Polish Labour Code provides that any person representing an
employer who enters into a civil law agreement (such as, for example,
agreement for the rendering of services) under terms and conditions
typical for an employment contract, i.e. factually replaces an
employment contract by an other type of agreement, may be subject to a
fine of up to PLN 5,000. This fine may be imposed by the State Labour
Inspector. This regulation aims to protect employees, as they are
better protected by Labour Law than the contractors, whose legal
relation with the company is regulated by the Civil Code.
Self-employment is currently very popular in Poland. Regulated by the
Civil Code, it gives flexibility to the contractors and to the
companies, as Civil Code contracts are terminable in an easy way
(contractors are not entitled to overtime payments, termination by
notice does not require justification, is free of any severance
payment, compensation for unused vacation, etc.). Termination of
contracts of this type does not trigger collective redundancy
procedures. Moreover, contractors are entitled to benefit from lower
taxes, as they pay only 19 per cent flat rate personal income tax
instead of taxes calculated based on a progressive rate typical for
employees (i.e. 19 per cent, 30 per cent or 40 per cent of employee
income depending on the level of annual income). Social security is
also lower, as the self-employed can nearly freely declare the base for
contributions calculations at a level not lower than 75 per cent of
national minimum wage. Contributions are payable only by the
self-employed whereas under an employment contract the employer is
obliged to calculate, withhold and pay contributions imposed both on
the employer and on the employee, which amount to virtually 50 per cent
of the employee’s salary. Therefore, both employees and employers are
interested in cooperation under the self-employment scheme.
This is particularly interesting for highly qualified specialists who
are well paid and want to keep professional freedom by maintaining the
status of ‘freelancer’. Companies eagerly accept self-employment as a
form of cooperation with this group of persons as it reduces the costs
of employment and facilitates HR management. The companies should
remember, however, that freelancers must remain truly independent,
otherwise there is a risk that their contracts could be reclassified
into a regular employment contact and their contracting parties will be
required to repay the social security contributions and tax advances
for the whole employment period.
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Taking into consideration the above, employers should assess the nature
of the contracts taking into account the following points:
· not every position in the company may be taken by a self-employed
person, as some positions by nature require supervision of the
employer;
· self-employed people are to be independent contractors and may not be
instructed in detail as to the time, place and manner of work
performance;
· self-employed people should not be remunerated nor awarded in
accordance with schemes provided for regular employees of the company;
· contracts should not provide for benefits specific for employment
relationship like 26 days of paid vacation or paid sickness leaves;
· the self-employed should bear some liability and risk related to their activity;
· there should be no restrictions imposed on the self-employed as to providing services to other potential contractors.
Under the Tax Code the employer is a tax remitter and is liable for
calculation and payment of taxes and social security contributions. If
the self-employment contract is reclassified into an employment
contract, the service recipient (employer) runs the risk of covering
all underpaid taxes and social security contributions together with
penalty interest, unless the employee is held guilty for the
underpayment of tax (which seems unlikely). Moreover, the employer
could be fined under the Fiscal Penalty Code (the average fine in
Warsaw region amounts to PLN 9,000).
The Personal Income Tax Law amendment for 2007 provides the criteria of
self-employed activity that will be used to reclassify such business
relations into employment contracts. The criteria provided in the new
law seem reasonable and follow to a great extent the criteria provided
above.
To sum up: Polish law does not forbid self-employment. It is crucial,
however, to follow its nature and avoid typical employment
relationships being embedded in such a contract, as it can be
questioned by labour and tax inspectors or the courts.
Authors addressed the issues during morning workshop in BPCC Tuesday with a lawyer series of evnets on 7 November 2006.
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