The group company benefitting from the results of an employee’s work—not the corporate group as a whole—is the employer
To charge an employer with paying social insurance contributions on the income of its employees earned under non-employment contracts with a third party, it is not enough to determine that the effects of the work benefit the employer’s overall corporate group.
For purposes of the Polish Labour Code, an employee can only be a person who is in an employment relationship, but for social insurance purposes the notion of an employee is understood much more broadly. There, an employee is understood to mean also a person performing work pursuant to a civil-law (non-employment) contract with the person’s own employer, or even a person working under a civil-law contract with an entity other than his employer, if under the civil-law contract work is performed for the benefit of the entity with which the worker is in an employment relationship (Art. 8(2a) of the Social Insurance System Act).
The employer is the remitter of contributions under civil-law contracts
Although Art. 8(2a) of the act has remained unchanged since 1999, it only began to be commonly applied in practice to civil-law contracts with a non-employer after issuance of the Supreme Court of Poland resolution of 2 September 2009 (Case II UZP 6/09). There it was confirmed that an employer whose employee performs work for it under a civil-law contract with a third party is the remitter of contributions, and thus must calculate and withhold contributions for social insurance not only from income obtained by the employee under the employment relationship, but also from the employee’s income under the civil-law contract with a third party.
Since then, the application of Art. 8(2a) of the Social Insurance System Act has been the subject of numerous decisions in this respect by the Social Insurance Institution (ZUS), and consequently, also the subject of numerous judgments by the courts. There can now be said to be an established line of rulings confirming that for social insurance purposes, the decisive factor for recognition as an employee of a person performing work under a civil-law contract for the benefit of the entity with whom he is in an employment relationship is that under the civil-law contract, the person actually performs work for his own employer, which means that the employer obtains the results of the work.
A finding that tasks performed by a person under a civil-law contract are essentially work on behalf of the person’s employer entails serious financial consequences. Income payable under the civil-law contract in this situation is subject to the same charge for contributions for social insurance, health insurance and the labour fund as income from the employment relationship, whereas, as a rule, only contributions for health insurance are charged on a civil-law contract with a person who is also in an employment relationship. As a result of a finding that Art. 8(2a) of the act applies, the entity which has concluded an employment contract with the person is required to pay full social insurance contributions on the income obtained by its employee for performance of the civil-law contract which the employee has concluded with a third party, and an overpayment of health insurance contributions will arise on the part of the third party.
If such a finding is made after the deadline when the contributions should have been paid, e.g. as a result of a decision issued by ZUS following an inspection, in addition to having to pay interest on the delay the employer will also be charged with paying the full amount of the overdue contributions—including also the portion that would have been paid by the insured and withheld from the employee’s pay if the contributions had been correctly calculated at the time they were due. Because the contributions end up being paid after the employee has already been paid in full—and received what now turns out to have been an inflated salary, because the contributions were not withheld—the remitter is required to pay the full amount of the contributions to ZUS. In order to recover those contributions which the employee should have paid originally, the employee must consent to contribution or setoff out of his current salary going forward to cover the portion of overdue contributions remitted by the employer on the employee’s behalf. If such an agreement cannot be reached, the employer could seek reimbursement of those amounts from the employee on the basis of a claim for unjust enrichment.
Holding group as an employer?
Companies operating in a capital group are particularly exposed to the risk of application of Art. 8(2a) of the Social Insurance System Act, as within such organisations the employees of one group company are often hired additionally on the basis of civil-law (non-employment) contracts by companies affiliated with their employer. These affiliations may raise doubts concerning which entity from the group truly benefits from the work performed under civil-law contracts: the company with which the contract is concluded, or perhaps another company from the group which uses services provided by the company hiring that person. Considering that in corporate groups, a specialised company often provides services to all companies in the group, the actual benefit from the work of persons hired by such a company is obtained by all the other companies in the group, or even by the group as a whole. In this situation, a doubt may arise over the extent to which Art. 8(2a) of the act should be applicable, if the company that is the employer is one of many entities obtaining the benefit of the work performed under the civil-law contract, or if the employer company benefits only from some of the tasks performed by its employee under a civil-law contract with another company in the group.
The problem of determining the entity benefitting from the results of work performed under a civil-law contract with one company in a capital group was the subject of the resolution by the Supreme Court of Poland of 16 June 2016 (Case III UZP 6/16). Considering a legal issue raised by an appellate court, the Supreme Court held that the employer for purposes of Art. 8(2a) of the Social Insurance System Act is the company which is a member of “a holding organisational structure of companies,” and not the structure (the holding company or capital group) as a whole.
Under the facts of the case, a staffer hired under an employment contract with one of the companies in the capital group performed work pursuant to a civil-law contract with another company in the group connected with implementation of an IT system which was to be used by the entire group. As a result of an inspection, ZUS found that the work performed by the employee under the civil-law contract was essentially performed for the benefit of the company which was her employer, that is, on its behalf. In the opinion of ZUS, this justified charging the employer company with the obligation of paying social insurance contributions on the pay received by the employee under the civil-law contract between her and another company in the group. On judicial review, the court of first instance held that the results of the work performed under the civil-law contract were obtained entirely by the company that concluded the civil-law contract. In an appeal by ZUS from this ruling in favour of the employer, the appellate court submitted a legal question to the Supreme Court, raising doubts about the correctness of ZUS’s position and considering whether the concept of an employer for purposes of Art. 8(2a) of the Social Insurance System Act should be closely tied to the concept of an employer under Art. 3 of the Labour Code, or should be interpreted more broadly, based on the ownership model connected with the holding organisational structure of the companies in question.
The doubts raised by the referring court fall within the issue of the identity of the employer which has been debated for a long time and has great practical importance under both individual and collective employment law. The definition of an employer under Art. 3 of the Labour Code, as an organisational unit or natural person employing workers, in many instances does not reflect contemporary economic realities. With the growth of corporate groups, decision-making competencies concerning the functioning of specific group companies are concentrated in the headquarters of the capital group, while formally the employer is one of the subsidiaries in the group. This can cause difficulties in effective execution of the employers’ obligations toward their employees.
The issue of organisational diversification of business operations has been noted by lawmakers, and in the past two decades there have been developments in the regulations addressing this issue. This trend is apparent also in Art. 8(2a) of the Social Insurance System Act, which imposes an employer’s obligations on entities enjoying the results of work of their employees even when it is formally performed for other entities under separate civil-law (non-employment) contracts.
But the Supreme Court’s ruling of 16 June 2016 confirms that under current law, there is no basis for regarding a structure of enterprises as an employer.
The ruling in Case III UZP 6/16 does not introduce any revolution in the existing understanding of Art. 8(2a) of the Social Insurance System Act. As before, application of this provision requires a determination that a specific company within a group obtains the results of the work of its employee, even though formally the work is performed under a civil-law contract with another entity.
All of the issues accompanying the application of the broad concept of an employee under social insurance law remain current, including the need for the employer to obtain timely information about work performed by its employee under a civil-law contract with another entity and the amount of income earned under that contract which should be included in the basis for calculating employment-related social insurance contributions.
Dr Marta Derlacz-Wawrowska, Employment Law Practice, Wardyński & Partners