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The Warsaw Voice » Law » April 2, 2008
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Managers: Contractors or Employees?
April 2, 2008   
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It is commonly known that high taxes and social costs discourage well-paid specialists from entering into regular employment contracts.

The vast majority of managers whose profession allows them to become independent contractors set up as sole proprietors so they can benefit from a tax rate of 19 percent. Another option for high-earning specialists is a management contract, which is in fact an agreement for the provision of particular services, similar to a mandate agreement (umowa zlecenia). Few of them, however, are fully conscious of all the legal consequences. This article looks at some points to bear in mind before taking the plunge.

The regular employment contract is the most expensive option for both parties-the manager and the company. The "side costs" exceed 43 percent and the progressive tax scale eats up a huge chunk of earnings. Still, many managers, including management board members, are employees. Indeed, this is common practice in state enterprises, former public sector companies, banks and some multinational organizations. My personal view is that employment contracts go against the very nature of management board membership. Just think: employees are subordinated to the company employing them. Management board members manage their own employer and are independent in making all decisions concerning the company-it is the company that is subordinated. A second good reason why they shouldn't be employees is that termination of their contracts should be as straightforward a process as dismissal from the board. With regular employment, that could be impossible, especially if the company cannot find a valid reason for termination of contract.

On the other hand, an employment contract gives the greatest social safety to the manager in the event of long-term illness or maternity leave. The manager is entitled to sick pay at 80 percent of salary, and with maternity leave this rises to 100 percent. This is off limits to self-employed specialists and civil contractors.

Civil contractors hired under management contracts pay personal taxes in the same way as regular employees, although up to 20 percent of their income can go down as tax-deductible costs. Moreover, they can save an extra 2.45 percent by opting out of sick pay contributions, which would not in any event guarantee income comparable with their regular pay.

Civil contractors are entitled to sickness allowance after 180 days of uninterrupted sick pay insurance cover. It is paid by the Social Security Office for the period of the illness, but not longer than 182 days in a calendar year. The monthly allowance is 80 percent of the base figure used to calculate benefit entitlements. This base, in the case of people covered by voluntary sickness insurance, must not exceed 250 percent of the national average pay in the previous quarter. This means that the maximum monthly sick pay is approximately zl.5,400 gross. This amount is subject to income tax and social security deductions.

Self-employed managers are best placed in terms of "side costs." Thanks to the flat 19-percent tax rate and preferential regulations concerning social security, they can keep a significant part of their income in their pocket. They have to bear in mind, however, that their choice has major ramifications. First, in case of sickness or maternity leave, the social security system will not pay them the money they have got used to obtaining. Minimal contributions equal minimal benefits, and bad days can befall even the young and beautiful. It is worth thinking about putting money into investment funds, commercial insurance policies or other products offered by financial institutions.

Second, many managers forget that performing services within the framework of a sole proprietor business does not always allow them to apply a 19-percent flat tax rate. There is a regulation in the Personal Income Tax Act saying this is not applicable if the individual performs managerial functions. This means that if the self-employed person is a management board member, performs managerial services or manages the company (or a part thereof) and is paid for this work, the income obtained on that account will be taxed in accordance with the progressive tax scale, that is, 19 percent, 30 percent or 40 percent. Professional services of other types, such as consultancy, legal, financial, accounting, IT or logistics work, fall into another category. The remuneration obtained for that can be taxed at a flat 19-percent rate.

As you can see, there is no perfect choice for managers. Before choosing a type of contract, it is worth weighing up the pros and cons, calculating the "side costs" and social benefits that could be received in return, analyzing personal situations and assessing the need for financial security. It is a good idea to ask a professional adviser who, almost certainly, will have considered them all before they finally decided to become an employee, civil contractor or self-employed contractor.

Aleksandra Minkowicz-Flanek
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