Self-employment trends in Poland
For many Poles, self-employment is the only alternative to unemployment. Moreover, self-employed people enjoy certain tax benefits. However, the self-employment formula is questionable in cases where employees are forced into such a move by employers. In many instances, enterprises regard subcontracting work to independent sole traders as a way of eliminating payroll taxes and other responsibilities associated with full-time employment and, thus, to improve profit margins. Putting employees into the position of having to establish a business activity in their own name and then continue working for the same enterprise is subject to certain legal restrictions, but practical enforcement of the applicable laws has not been very effective.
An important effect of the political and economic reforms in Poland since 1989 has been greater entrepreneurship among Poles, with a surge in the number of small and medium-sized enterprises (SMEs). Many of these enterprises consist of private individuals pursuing a business activity in their own name. However, the increased rate at which sole traders have been setting up businesses in recent years is not driven exclusively by entrepreneurial enthusiasm among Poles. This trend is also the result of amendments to the tax laws which reduced the fiscal burden on entrepreneurs as well as on self-employed individuals.
Legal conditions for self-employment
According to Polish law, self-employment falls under the general heading of ‘business activity’, as defined in statutes such as the legislative Act regarding freedom of business activity of 2 July 2004. Article 2 of this act provides that ‘business activity consists of for-profit production, construction, commercial and service activity, in prospecting for, exploring and extracting useful minerals, and in professional activity pursued on an organised and continuous basis’. Other definitions of business activity also exist in the legislative acts in relation to personal income tax, goods and services value-added tax (VAT), and the social insurance system.
A significant change in the establishment of new business enterprises came about with the enactment, in 2003, of the legislative act amending the act on personal income tax and other normative acts. Under this new law, legal entities may – as of 1 January 2004 – opt for a flat-rate tax of 19% on their aggregate income. In this way, many Poles working on the basis of employment contracts and subject to progressive taxation were given a legal avenue to significantly increase their net earnings, and many people availed of this opportunity. Nevertheless, choosing flat-rate taxation entails foregoing many of the tax exemptions available to entities paying progressive tax.
The option to avail of a flat-rate tax of 19% is also available to self-employed individuals. Thus, the benefits seem straightforward: a person employed on an employment contract may set up business as a sole trader, immediately switch to a more favourable tax regime and end the obligation to work exclusively for her/his employer. In fact, the practice whereby newly established sole traders continue performing the same work for the same employer is relatively widespread. By law, this is acceptable as long as the sole trader has one customer/client during the fiscal year other than the ‘former’ employer.
Forms and prevalence of self-employment
In many instances, the appeal of flat-rate taxation motivates employees to set up their own businesses; in other cases, they are forced into such a move by their employers. In this way, the employer discards all its obligations to the employee, including in relation to payroll taxes, or providing a work station complying with health and safety regulations. The former employee, meanwhile, gains more freedom – at least nominally – while losing the protections afforded by the Labour Code. The employee also loses the advantage of paid holidays, and is obliged to take over the payment of social insurance contributions according to statutory deadlines.
Data from the Central Statistical Office (Glówny Urzad Statystyczny, GUS) indicate that self-employment has been chosen as a career path by up to 27% of all working Poles, which amounts to more than 2.7 million people. This is the number of people registered as pursuing business activities. Many of them are in fact former employees who left regular contract-based employment in order to set up their own business, but the exact scale of this trend is unknown to date. The authors of a report on this subject commissioned by the Polish Agency for Enterprise Development (Polska Agencja Rozwoju Przedsiebiorczosci, PARP) in 2004 also avoid speculating about overall figures.
Some commentators have suggested that, of the 2.7 million self-employed people, up to two million may be self-employed as a result of coercion by the employer. A study carried out in December 2005 by the Warsaw School of Economics (Szkola Glówna Handlowa, SGH) for the Polish Confederation of Private Employers ‘Lewiatan’ (Polska Konfederacja Pracodawców Prywatnych ‘Lewiatan’, PKPP Lewiatan), meanwhile, indicates that 18% of respondents working with foreign companies and 10% of respondents working with medium-sized, privately-owned entities have encountered self-employment in their workplace.
To analyse self-employment in terms of the areas of specialisation of single-person companies, it would appear that it is an option most frequently chosen by drivers, couriers, journalists, office and administrative staff, waiters, cleaning staff, physicians, nurses and unskilled labourers. An unusual phenomenon may be observed in the Polish construction sector, where a single construction crew may legally be composed of several dozen affiliated companies.
The study commissioned by PKPP Lewiatan also provides other valuable insights into Polish self-employment trends. When asked about the advantages of this employment situation, the respondents most frequently indicated the benefit of working time flexibility (59%) and the possibility for reconciling work with family life (54%) or with educational pursuits (30%). Just over 10% of the respondents could not suggest a single advantage associated with self-employment, and almost 9% believed that self-employment does not offer any advantages.
Since early 2006, the Ministry of Finance (Ministerstwo Finansów, MF) has stated that a number of legislative adjustments need to be made which could contribute to changing the status of self-employed people. The Deputy Minister of Finance, Miroslaw Barszcz, argued that the definition of business activity must be amended. The existing inconsistencies and inaccuracies perpetuate a state of affairs where a sole trader, whose obligations to another business entity are, for all intents and purposes, those of an employee to an employer, still qualifies as self-employed in legal terms.
The proposal to amend the law for self-employed individuals has not been welcomed by those concerned. A number of single-person companies have come together to establish a Self-Employment Forum, affiliated to PKPP Lewiatan, with the aim of formulating a joint position in relation to the changes proposed by the Ministry of Finance. Members of the forum believe that such coordinated representation is required as these proposed changes affect the interests of 1.65 million business entities, according to forum estimates.
Reaction of employers and unions
Employer organisations, such as the Confederation of Polish Employers (Konfederacja Pracodawców Polskich, KPP), have criticised the justifications given by Ministry of Finance officials in support of their arguments; they maintain that it is unfair to regard self-employment as an abuse of the system just because it enables savings. Employer organisations fear that, if the possibilities for self-employment are legally curtailed, many unemployed Poles would end up with no possibility of work at all.
Trade unions, meanwhile, consider that the scale of self-employment has got out of control. Employees who terminate their employment relationship and become sole traders not only cast aside the protection of the Labour Code, they also reduce the membership base for unions.
Self-employment can legitimately be regarded in many different ways. There is a lack of reliable data as to its current scale and situations where employees are forced into self-employment by their employers. On the one hand, evidence suggests that many sole traders in Poland are closely associated with a single company. On the other hand, there is no way of knowing whether an attempt at eliminating abuse of the system by way of legislative amendments, as proposed by some politicians, will not deprive many people of the chance to start a legitimate business.
It may be concluded that self-employment has contributed to the good conditions enjoyed by many Polish enterprises today. Thus, a serious dilemma now arises of how to eliminate inefficiencies and irregularities in the system, without compromising the interests of bona fide entrepreneurs. Indeed, politicians should bear in mind that many self-employed Poles are actually relatively happy with their current status.
Piotr Sula, Institute of Public Affairs (ISP) and Wroclaw University (UWr)