The Supreme Court has recently enacted two decisions that are significant in social security terms (III UZP 3/21 and III UZP 6/21). Both decisions concerning the interpretation of Article 8(2a) of the Social Security Act of 13 October 1998 (“Act”) are not favourable for entrepreneurs.
We would recall that pursuant to Article 8(2a) of the Act, an employee is also someone who works under an
- agency agreement,
- commissioning agreement,
- another services provision contract,
when pursuant to the Civil Code these are governed by provisions relating to commissioning or specific work contracts, if such contract is concluded with an employer, the person works for an employer with whom he is in an employment relationship under such a contract.
While the first part of this provision, namely entering into a civil law contract with one’s own employer, is clear, the second part, namely working for one’s own employer, has caused interpretational difficulties from the very outset. The first important decision of the Supreme Court whose aim was to clarify these difficulties was issued on 2 September 2009 (II UZP 6/09). The Supreme Court decided that an employer whose employee works for him pursuant to a specific work contract concluded with a third party is the payer of contributions pursuant to this contract. Since this decision was issued, jurisprudence of both the common courts and the Supreme Court in subsequent decisions has opted for an increasingly broader interpretation of the permissibility of applying that legal norm. The last two Supreme Court decisions confirm this line of case law.
Purpose of introducing Section 8(2a) of the Act
The purpose of introducing this provision was to limit employers’ use of civil law contracts to employ their own employees to perform the same tasks as those performed under an employment relationship between the parties, as well as to protect employees from the effects of a change in employer.
That means this provision is intended to stop employers from circumventing mandatory provisions, in particular labour law provisions (including on overtime) or avoiding charges for social insurance contributions on such contracts. This standard should, therefore, be applied when it is demonstrated that the employer’s intention was to circumvent the law. Meanwhile, jurisprudence, including the aforesaid Supreme Court decisions, has indeed gone beyond this goal, allowing the use of this tool in almost any situation, regardless of whether the entrepreneur has intentions that are bad or indeed contrary to the provision’s purpose, or not. This approach leads to an expansive interpretation of social security regulations, which should not take place in such matters
Employer financing contractors’ remuneration
In its decision ref. III UZP 6/21, the Supreme Court on the one hand upheld its previous position, according to which the mere fact that the employer finances remuneration for work performed for it by an employee under a civil-law contract concluded with a third party supports the application of Article 8(2a) of the Act. At the same time, the court went a step further and held that the lack of such financing does not mean that this provision does not apply. The decisions of the Supreme Court and common courts issued prior to this decision essentially indicated that the financing of remuneration under civil law contracts by the employer is a condition for applying the provision in question, and consequently that lack of financing should result in refusal to apply the provision.
The Supreme Court’s approach presented in this decision has significantly sharpened the hitherto approach to the issue of financial flows between cooperating entities.
Working for the employer
In the decision ref. III UZP 3/21, the Supreme Court supported positions presented earlier in case law, according to which the phrase “for the employer” should be understood as “in the interests of the employer”, i.e. the use by the employer of the results of work performed by a contractor. This means that any benefit, whether direct or indirect, obtained by the employer (irrespective of the time at which it was obtained) from the activities performed by its employee pursuant to a civil law contract concluded with a third party may be the basis for the application of Article 8(2a) of the Law.
The Supreme Court also held that it is irrelevant whether the insured was under the direction and control of the employer, or whether he used the tools and materials provided by the employer, when performing the civil law contract. It is also irrelevant that the insured performed the activities under the civil law contract in a place other than the employer’s workplace, outside working hours resulting from the employment, and that the employer had no influence on the amount of the insured’s remuneration, as well as the fact that the subject of the civil law contracts was different activities other than employee duties, and that both entities carry out different business activities. For the Supreme Court, the most important issue is whether the employer was the beneficiary of the insured’s work, i.e. whether it ultimately derived a benefit from the activities performed by the insured. It cannot be excluded that such an interpretation may lead to automatic (without analysing circumstances of the case) application of Art. 8(2a) of the Act.
The Supreme Court’s interpretation of “performing work for the employer” is, therefore, very broad. In practice, the social security authority may apply this provision to almost every cooperation by entrepreneurs if employees of one company enter into civil law contracts with another company. This is because the purpose of doing business and establishing cooperation between entities is always to benefit from it.
However, such an approach is detached from market practice, especially since according to the Supreme Court, it is irrelevant for application of this provision whether both business entities are at all aware that an employee of one is entering into a civil law contract with the other. According to the Supreme Court, a solution to this problem may be to add a provision to the cooperation agreement guaranteeing the employer influence over the selection of contractors from among its employees. In the case of larger businesses, however, compliance with such a provision is very difficult.
Ties between entrepreneurs
In its decision ref. III UZP 3/21, the Supreme Court held that the capital, organisational, economic and personal ties between the employer and a third party entering into civil law contracts with the employer’s employees are significant for the admissibility of applying this provision. According to the Supreme Court, the stronger the ties, the easier it is to conclude that the insured’s work is performed in the interest of, and thus for, his/her employer. In time, such an approach may lead to an automatic assumption that the mere fact of ties between the entities admits application of Article 8(2a) of the Act.
Juxtaposition of this view with the above understanding of the concept of “work for the employer” means that in practice, the specified provision could be applied almost automatically in the event of ties between entities that use the described model of cooperation. Such an approach is contrary to both the wording of the provision and its purpose. Moreover, it allows for the application of this provision almost always, automatically and independently of the facts of a given case.
Does this mean that entrepreneurs should not use this model of collaboration at all? Not necessarily. The answer to this question depends on many factors, including the way this cooperation is organised and whether the entities operate within a capital group. It is also important to have a well-written cooperation agreement between entrepreneurs and proper protection for the employer in the event that its employees enter into civil law contracts with another entity.