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As you expand your company to Poland, you’ll build teams of dedicated employees to help you carry out day-to-day business practices. These teams form the backbone of your operations, working consistently to help your company achieve its objectives. The number of Polish employees has risen steadily over the past two decades, from 9.9 million in 2003 to 13 million in 2020. Self-employed workers and contractors add another 3 million people to the labor force each year.
If your company works with contractors in addition to employees, you’ll need to fulfill a few essential responsibilities. The first is to ensure you classify your contractors correctly, researching the law to determine what criteria qualify workers as contractors. Once you’ve established a relationship with your contractors, you’ll also need to know the correct way to pay them, since the standard payroll processes you use for your employees will not apply. Paying your contractors correctly helps ensure a harmonious long-term working relationship that allows your new Polish team to flourish. Fortunately, paying a Polish contractor is relatively simple once you know how these payments must work.
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What is the difference between employees and independent contractors?
The differences between hiring an employee and working with a contractor primarily come down to payroll and taxes. When your company hires employees, you are responsible for withholding payroll taxes and social security contributions from their paychecks and paying employer taxes into government social security funds. You also usually provide benefits like holidays, retirement plans, and paid time off. On the other hand, when you partner with independent contractors, you do not withhold or pay any taxes or social security contributions, or provide any employment-related benefits to contractors.
Additionally, Polish labor laws apply to employees but do not generally apply to contractors. Contractors are likely to be exempt from overtime and minimum wage laws, for instance.
In general, though not always, independent contractors can command much higher pay than employees, in part to make up for the fact that they must pay their own payroll taxes and go without employer-provided health insurance, paid time off, retirement pensions, and other benefits.
Criteria for classifying employees vs. contractors
As with most countries, Poland has stringent requirements that determine whether a company can classify workers as employees or contractors. These generally have to do with how much control the company has over the work, such as what workers do and how they do it, as well as how workers get paid, who provides supplies, and if the company offers any benefits.
What do these criteria signify in practice? Generally, they mean that employees work full- or part-time for a single company, receive instruction and management from that company, work employer-dictated hours per week, are part of the employer payroll, and receive the required employment benefits. On the other hand, independent contractors operate on a project or bid basis, manage their own work and time, are not part of company payroll, pay their own taxes, and often work for multiple clients on specific projects. Contractors usually submit invoices for completed work rather than receiving paychecks, and they pay their own taxes and social security contributions.
In other words, contractors are self-employed, whereas employees work directly for the company. Contractors typically have a large portfolio of clients, and your company is only one of them.
These distinctions between employees and independent contractors exist to prevent companies from taking advantage of their workers by treating them as employees but classifying them as contractors to avoid providing the required employee benefits.
Why companies should classify and pay their contractors carefully
If your company works with independent contractors, you will not provide them with benefits, and you will not pay payroll taxes or contribute to social programs on their behalf. The hourly restrictions that apply to your employees will not apply to your contractors, so they can work overtime without being entitled to overtime pay. This arrangement is highly favorable for many employers, simplifying their logistics and reducing their expenses.
In some cases, companies misclassify employees as independent contractors. Misclassifying workers in this way carries serious risks. If courts determine that the workers classified as contractors are employees, the company can be liable for years’ worth of back taxes and back pay for overtime and paid time off. These built-up expenses can ruin an operating budget and generate significant legal and logistical challenges.
However, in many cases, the work a company needs to have done is genuinely contract work, and partnering with independent contractors makes the most sense. Therefore, your company will need to know how to hire and pay contractors in compliance with the law.
Hiring an independent contractor in Poland
As in many parts of the world, contract labor in Poland is on the rise, especially in certain industries. Working relationships in fields like information technology and gig economy work often require business-to-business contracts rather than traditional employment contracts.
In Poland, while traditional employees have Labour Code contracts and protections under Polish labor law, contractors have business-to-business contracts known as civil law agreements. Under civil law agreements, workers function as contractors or freelancers. The contracts engage workers to perform specific tasks, and they operate outside the labor laws that generally apply to Polish employees.
In Poland, criteria specified in the Labour Code are useful for determining whether a worker is a contractor or an employee. The Polish Labour Code stipulates several different criteria that companies should use to differentiate their contractors from their employees. Workers are generally employees rather than contractors if they meet these criteria:
- They perform work of a specified type.
- They accomplish that work under direct employer supervision.
- They perform work at the place and time the employer dictates.
- The working relationship is relatively continuous.
On the other hand, workers who perform their jobs with minimal direct employer supervision, choose when and where they work, and take on a series of short-term projects of their choice are more likely to be classified as contractors.
Requirements that govern contractor pay in Poland
Polish law does not have many requirements on how companies must pay their contractors. For comparison, consider the requirements that govern employee compensation.
In Poland, employees are entitled to receive specific pay, benefits, and protections under Polish labor laws. They should work only eight hours per day, 40 hours per week. They may work overtime beyond those hours, though the employer must approve the overtime, and the overtime cannot exceed 150 hours per year. Employers must compensate the employees for their overtime hours with 150 to 200 percent of the employees’ standard pay or additional time off. Employees must also receive a minimum wage of at least PLNzł18.30 per hour or PLNzł2,800 per month.
Additionally, employees in Poland must receive 20 to 26 paid vacation days, depending on how long they have spent employed or in school. Paid leave time also includes four sick days employees can use as needed, and employees are eligible for up to 33 days of paid sick leave if they have a certified doctor’s note. Employees must also receive 13 paid public holidays and maternity or paternity leave for the birth of a child.
If a company in Poland wishes to terminate employees, the employees must receive notice and severance. If the contract is indefinite, the decision requires grounds for termination that would stand up in labor court. The notice period depends on the type of contract and the length of the employees’ service. Severance pay also typically depends on the length of the employees’ tenure with the company.
Additionally, companies in Poland must pay into the national Social Insurance Institution (ZUS) on behalf of its employees. The employer can make payments equaling up to 22.14 percent of each employee’s gross pay. In contrast, the employees themselves pay only about 14 percent of their gross remuneration.
Most of these requirements apply only to employees. Contractor relationships are not bound by most labor laws and are not entitled to receive ZUS benefits, paid time off, or a notice period before termination.
In the past, many independent contractors also earned significantly below the minimum wage. However, a 2017 legal amendment specifies that Poland’s minimum wage for employees also applies to contractors. The purpose of this law is to protect independent contractors from exploitation, ensuring that companies do not misclassify their employees as contractors merely to save money on wages paid.
Tax practices for hiring contractors in Poland
When you work with independent contractors in Poland, you will not add them to your payroll or pay payroll taxes. However, you may want to know the details of tax law so you can understand your contractors’ tax liabilities.
Social security contributions
Most independent contractors must contribute to ZUS, even though their employers are not responsible for contributing on their behalf. The contributions go toward retirement pension insurance, disability pension insurance, health insurance, and sometimes workplace injury insurance. Health insurance contributions are up to the contractor. Students younger than 26 do not have to pay into the compulsory social insurance or health insurance funds. Whether independent contractors make ZUS contributions depends on the specific civil law agreement they have.
As you build international teams in Poland, be aware that you will pay your contractors their full compensation without withholding any part of their pay for ZUS contributions. Your organization also will not pay payroll taxes toward ZUS on your contractors’ behalf.
Income tax
In Poland, contractors and employees calculate their income tax differently. Polish income tax applies only to employees and contractors who are 26 or older unless they make PLNzł85,528 or more per year, which is about US$23,165 or about EUR€19,005. Polish employees under 26 with incomes of up to PLNzł85,528 pay a 17 percent tax rate. Those whose incomes exceed that threshold are subject to a 32 percent tax rate. In contrast, contractors pay a flat tax rate of 19 percent.
Ways to pay contractors in Poland
Determining the best way to pay international employees and contractors is often a challenge. As you work with independent contractors, you’ll need to have an established process for paying them correctly and on time. Here are a few common payment formats and whether they are appropriate for paying your independent contractors.
- Payroll services: With contractors, you will not make payments through your payroll because your contractors are not part of your payroll. Only your employees are part of your payroll, where you remove the required withholdings from paychecks and pay the necessary payroll taxes. Instead of processing contractor payments through your payroll, have your contractors submit invoices for their work and process their payments through your accounts payable department. However, some payroll services companies have structures that allow you to pay your independent contractors using their services. These services can be costly, and they do not always support global operations.
- Banks: Your company might consider working with a bank to pay independent contractors. However, some Polish banks may not work with a company that has not officially registered in Poland, and the paperwork and requirements associated with opening a bank account may make this option impracticable.
- Money transfer services: Money transfer services enable your company to send funds to your contractors’ bank accounts. If you have set up a subsidiary in Poland, you will already have a bank account from which to transfer funds through your accounts payable department. This process is an excellent option for paying contractors in Poland because it is relatively quick and convenient, allowing you to reduce delays and maintain a good working relationship with your independent contractors. Money transfer services also often offer several transfer method options, high transfer limits, and dependable security. However, be aware that you will likely incur currency transfer fees if you pay contractors in currency other than Polish złoty. These fees are generally percentages, so large transfers may cost you more.
- Working with a hiring partner: If you work with a hiring partner, you often streamline your contractor payment processes significantly. A dependable partner can help you hire your contractors legally and pay them quickly, accurately, in the local currency, and in a way that complies with Polish regulations.
Build international teams in Poland with Globalization Partners
When you’re ready to expand your business operations into Poland and are considering hiring full-time talent from Poland, work with Globalization Partners. Using our comprehensive, AI-driven platform, we streamline the process of hiring and paying your Polish team members to ensure correct, timely payments and save your company time.
Request a proposal for our global employment platform today, or get in touch to learn more.
