NEWSLETTER 11/2009
CUTTING LABOUR COSTS IS BECOMING MORE CRUCIAL, PARTICULARLY DURING AN ECONOMIC SLOWDOWN. ONE WAY TO REDUCE LABOUR COSTS IS THROUGH "SELF-EMPLOYMENT" OF STAFF.
Given the high costs of labour in Poland, many employers are looking for ways to cut costs. One option is "self-employment" of staff. This involves terminating the employment relationship between employer and employee, followed by the former employee's registration as a business entity in the local business register, and finally, conclusion of civil-law contracts between the former employer and former employee.
For this procedure to be effective, it must be done in compliance with applicable law. Regulations in this respect are designed to prevent evasion of the obligation to enter into employment contracts (or other means of entering into an employment relationship) when the criteria set forth in Labour Code Art. 22(1) are met; that is, when work is performed for the employer under the employer's direction at a place and time set by the employer.
However, under the general principle of freedom of contract, entering into civil-law contracts as such (e.g. an outsourcing contract or other service agreement) between a former employer and a former employee is permissible.
Tax aspects of self-employment of staff
When entering into a civil-law contract with a former employee who has registered as a business entity, it is important to pay attention to tax regulations, particularly Art. 5b of the Personal Income Tax Act. If hiring a former employee under a civil-law contract is to make economic sense, i.e. result in a reduction of labour costs through taxation of the former employee under the rules applicable to business entities, all three of the following conditions cannot jointly apply:
a) liability toward third parties for the performance and effects of the activities (other than tort liability) is borne by the outsourcer (employer),
b) the activities are performed under the direction of, and at a place and time set by the outsourcer (employer),
c) the person performing the activities does not bear the economic risk associated with the activity conducted.
These criteria are not terribly precise, and thus they carry a certain degree of risk for the parties. With respect to criterion (c), which may give rise to the greatest concern, the Finance Minister stated in an interpretation dated 16 November 2006: "It follows from the nature of conducting business activity that a person who is in business (including a self-employed person) does business for his own account and at his own risk. The economic risk associated with conducting business activity is different from the risk borne by an employee under an employment relationship. Economic risk ... involves, for example, investment risk, that is, the probability of failing to achieve the expected (or hoped-for) economic and financial results from the business or undertaking."
Income tax on self-employment
In the case of self-employment, if the former employee performs activities for the former employer similar to the activities he performed as an employee, he must pay personal income tax according to the regular tax brackets (18% and 32%) for the first year of self-employment (PIT Act Art. 9a(3)). Thereafter, the former employee may elect to pay PIT at the flat rate for business entities (19%).
Pension contributions for self-employment
Some individuals who are starting their own business may qualify for reduced retirement and disability pension contributions for the first 24 calendar months, but this option is generally not available in the case of self-employment of a former employee. The reduction allows qualifying individuals to pay pension insurance contributions on a basis equal to 30 % of the legal minimum wage for the given calendar year. The reduction would be available in the case of a former employee only if the self-employed person does not perform business activity for a former employer for whom the individual performed activities of the type performed in the new business under an employment relationship prior to starting the business, within the same calendar year or the previous year (Social Insurance System Act Art. 18a).
Andrzej Kulczycki
attorney-at-law
The Newsletter is published free-of-charge and is designed chiefly for clients of the law firm of Mikulski & Partners. The articles are written by lawyers at the firm, but do not constitute legal advice.