28 September 2023
Employment Tax, Social Security
Impact: Medium
Summary
There are several reasons why employers willingly choose other forms of employment (i.e. civil law contracts) than employment contracts. This topic has recently become the object of increased interest of the authorities controlling the legality of employment, as well as of the employees themselves. From the employer’s perspective, the topic is important because negligence may have financial consequences not only in terms of taxes and social security contributions. Many companies in Poland engage people on the basis of civil law contracts, especially for less demanding or temporary activities. The issue of distinguishing between employment contracts and civil law contracts arises, especially since the work of employees and contractors/freelancers may not differ in detail.
The Detail
⮚ Establishing an employment relationship
Under Polish law, replacing employment contracts with civil law contracts, while maintaining the parameters that an employment relationship is met is prohibited. The establishment of the fact that a given civil law contract should be an employment contract is possible in court, and a lawsuit may be filed by both the National Labor Inspectorate Inspector (also without the employee’s consent) as well as the employee themself. Submitting such a lawsuit is free of court fees and is not subject to a statute of limitations. Recently, there have been numerous cases related to the reclassification of civil law relationships into employment relationships.
During the proceedings, administrative authorities and courts made their determinations based on actual employment conditions, and not on the content or a title of a given contract. In practice, it was often established that a given engagement took place under the terms and conditions of an employment relationship and should be treated as employment.
⮚ Employment contract vs civil law contract
The first issue that distinguishes the above-mentioned types of contracts are the relevant law provisions (i.e. Labor Code – employment contract, Civil Code – civil law contracts). The signing of an employment contract creates an employment relationship. Unlike a civil law relationship, an employment relationship is characterised by the performance of work under supervision, at specified time and places, for remuneration. In addition, the employee is entitled to various employee benefits. The civil law contracts assume greater independence of the contractor. In both employment contracts and civil law contracts, the employer acts as a payer, i.e. is responsible for the calculation and the payment of social security contributions and tax advances but not in every case, which may result in arrears in tax and social security liabilities if successfully challenged by the authorities.
⮚ Presumption of employment relationship – planned changes in EU law
The EU authorities are currently working on regulating the presumption of an employment relationship in the case of digital labour platforms. According to the draft of the EU Directive, there may be an automatic recognition of such a contract as an employment relationship between a digital platform and a person performing work for it, allowing for self-employment and civil law contracts to a very limited extent. There is currently no concept of presumption of the existence of an employment relationship in Polish law. It can therefore be assumed that the implementation of EU law may lead to significant changes in this area.
What this means
In case of any irregularities, the employer must be aware of a possibility of a fine. In addition, the employer may be obliged to pay overdue social security contributions (both the employer’s and the employee’s part), overdue tax advances, and interest on these arrears. Moreover, revising retroactively the social security and tax declarations may be an administrative challenge for the employer.
In case of claims by an employee, the employer is also obliged to pay other employee’s benefits due for the period of employment.
How we can help
The increased interest in civil law contract issues does not mean that organisations should completely resign from this form of engagement. The key issue here is to act in accordance with the law and comply with the implemented procedures regarding given forms of engagement.
Vialto Partners will be happy to assist with the review of the contracts and procedures, based on applicable regulations and practice, identify potential risk areas, and indicate issues that require the implementation of appropriate procedures.
If the employment relationship has already been established and the employer is obliged to pay outstanding social security contributions, tax advances under a reclassified civil law contract, we also will be happy to advise on how to make the appropriate settlement of liabilities.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
• Jadwiga Chorązka, Partner | jadwiga.chorazka@vialto.com
• Joanna Narkiewicz-Tarłowska, Director | joanna.narkiewicz-tarlowska@vialto.com
• Grzegorz Ogórek, Senior Manager | grzegorz.ogorek@vialto.com
Further information on Vialto Partners can be found here: www.vialtopartners.com
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