PIP Empowered to Reclassify Civil-Law Contracts as Employment Relationships from July

The President has signed the amendment to the Act on the State Labour Inspectorate (Państwowa Inspekcja Pracy, “PIP”), granting labour inspectors the power to reclassify civil-law contracts as employment contracts. PIP has already begun preparations for workplace inspections, as the Act enters into force at the beginning of July. The first inspections can be expected at that time.

What were the rules until now?

Article 22 §1² of the Labour Code prohibits disguising an employment relationship under the guise of a civil-law contract such as a contract of mandate (umowa zlecenia) or a B2B arrangement. Under the current framework, however, only a labour court has jurisdiction to reclassify a civil-law contract as an employment relationship. The court may do so exclusively by granting a claim for a judgment establishing the existence of an employment relationship, filed by:

1. the engaged individual;
2. a labour inspector; or
3. a person with a so-called legal interest e.g. an heir of a deceased engaged individual).

In practice, court proceedings to establish the existence of an employment relationship are complex and can take several years, including the appellate stage.

How will the reclassification procedure work?

The most significant reform concerns the power of labour inspectors to reclassify civil-law contracts – i.e. contracts of mandate, B2B arrangements or contracts for specific work (umowy o dzieło) – as employment contracts. Inspectors will effect the reclassification by means of an administrative decision.

The procedure has changed considerably since the initial draft of the Act – in favour of employers. It will proceed as follows:

1. During an inspection, the inspector determines whether a civil-law or B2B contract displays the characteristics of an employment relationship.
2. Before issuing an order, the inspector is required to hear both parties; their intentions are taken into account in the further proceedings.
3. The inspector issues an order to remedy any identified irregularities.
4. At this stage the parties may enter into an employment contract – if the inspector approves, the matter is closed.
5. Alternatively, the parties may amend the terms or the manner of performance of the civil-law contract so as to eliminate the characteristics of an employment relationship.
6. If the order is not complied with, the district labour inspector initiates administrative proceedings.
7. The proceedings may result in an administrative decision establishing the existence of an employment relationship or in the filing of a claim before a court.
8. The employer has 30 days to appeal – first to the Chief Labour Inspector, and if the Chief Labour Inspector upholds the decision – to the labour court.
9. The decision becomes enforceable on the day following the expiry of the time limit for lodging an appeal. If an appeal is lodged, the decision becomes enforceable only upon the date on which a final and binding court ruling is issued.
10. However, a decision may be given an order of immediate enforceability – although this will not occur automatically.
11. In the course of appellate proceedings, the court may grant interim relief protecting the employee against the termination or amendment of the contract outside the employment law regime.

PIP anticipates that the majority of proceedings will be resolved amicably at the order stage (point 4 above), without the need to initiate administrative proceedings.

What characteristics distinguish an employment relationship from a contract of mandate or a B2B arrangement?

Under Article 22 §1 of the Labour Code, an engagement constitutes an employment relationship where it exhibits the following characteristics:

1. The work is performed for remuneration;
2. The work is performed in person;
3. The individual is subordinated to the employer’s instructions as to the time, place and manner of performing the work (subordination);
4. The risk is borne by the employer;
5. The work is performed on a continuous basis.

Pursuant to Article 22 §1¹ of the Labour Code, an engagement displaying the above characteristics constitutes an employment relationship regardless of the designation of the contract concluded by the parties. The crucial element is subordination, i.e. the performance of work under the employer’s direction – without this characteristic, an employment relationship cannot be found. The case law of the Supreme Court indicates that where a contract displays characteristics of both an employment contract and a civil-law contract, the decisive factor is which characteristics predominate (Supreme Court judgment, case no. I PKN 334/98).

Important note: In practice, the assessment is based on an analysis of the actual course of the engagement, not solely on the wording of the contract. When conducting an internal audit, it is therefore advisable to examine not only the contractual terms but also the practices adopted by managers. Even with a carefully drafted contract, it is not uncommon for contractors to be integrated into the company’s organisational structure on the same basis as employees, with their treatment being no different from that of employees. Examples of red flags include situations where the principal provides the contractor with all tools and equipment for work, the contractor takes leave on the same terms as employees, or the contractor is subject to the same timekeeping system.

The subordination criterion operates somewhat differently in the case of managerial employees – in such cases, what is known as autonomous subordination may apply. It consists of the employer assigning tasks to the employee without interfering in the manner in which those tasks are performed. Autonomous subordination does not preclude the existence of an employment relationship.

Consequently, if during an inspection a labour inspector determines that the engagement under a civil-law contract satisfies the above criteria, it will be treated as an employment relationship.

If a contractor independently determines their own time or place of providing services, merely notifying the principal, this is a circumstance characteristic of a civil-law relationship. It should be borne in mind, however, that this is only one of many factors taken into account – even if the time and place of service provision are properly addressed in the contract and in practice, the presence of other characteristics of an employment relationship may still give rise to a reclassification risk. Conversely, where the actual freedom to choose the place or time of service provision is restricted and those conditions are effectively imposed on the contractor, a material risk arises for the company.

The issue of personal performance of work is also significant – if the contractor is not always required to perform the work in person (e.g. is free to delegate certain services to subcontractors), the engagement will, as a rule, not qualify as an employment relationship.

What are the tax and social security consequences of the decision?

In respect of taxes, social security contributions, health insurance contributions and mandatory fund contributions, the new obligations will arise as of the date on which the decision becomes enforceable.

Other important changes

The Act significantly increases the penalties for offences under the Labour Code. The fine brackets for offences against employees’ rights are increased from PLN 1,000–30,000 to PLN 2,000–60,000. An example of such an offence is entering into a civil-law contract under circumstances in which an employment contract should have been concluded. Similar increases apply to other fines for acts prohibited by the Labour Code, including failure to pay remuneration in a timely manner or non-compliance with occupational health and safety regulations.

Important for employers: The Act provides for a 12-month transitional period. Employers who, during this period, voluntarily conclude an employment contract with a given individual will not be subject to sanctions under the Labour Code. This is a window of opportunity to regularise engagement structures without the risk of penalties.

Employers gain the right to request individual interpretations from the Chief Labour Inspector. These interpretations will address whether a given engagement displays the characteristics of an employment relationship.

The Act also enables the exchange of data between PIP, the Social Insurance Institution (ZUS) and the National Revenue Administration (KAS) in order to streamline inspections.

A further novelty is the possibility for labour inspectors to conduct remote inspections via platforms like Zoom or Teams.

Caveat: the Act has been referred to the Constitutional Tribunal

Upon signing the Act, the President referred it to the Constitutional Tribunal for ex post constitutional review. The Tribunal will examine whether the powers conferred on the State Labour Inspectorate are compatible with the Constitution. As a result of the Tribunal’s review, certain provisions may be amended.

What can you do today?

The new provisions will enter into force in July, and PIP inspections will commence almost immediately. For many businesses, this entails a real risk of reclassification of contractors as well as significant financial consequences.

It is advisable to act in advance.

At RK Legal, we support businesses in preparing for the changes – we identify risks and recommend concrete measures.

We can assist you with, among other things, a comprehensive audit of engagement structures for reclassification risk, a review and adjustment of contracts, internal regulations and actual cooperation practices, as well as preparations for a potential PIP inspection. Our Labour Law and Litigation Department regularly advises businesses on matters related to the classification of engagement relationships.