Tax Alert: The PIP Act Signed by the President

The Act will enable the PIP to reclassify civil law contracts, including so‑called B2B contracts, into employment contracts. This will have significant consequences not only under the Polish Labour Code but also in the areas of personal income tax (PIT), social security contributions (ZUS), and even VAT. Financial penalties are also provided for each reclassified contract. At the same time, the Act provides for an amnesty for entities that adjust their contracts before the Act enters into force or shortly thereafter.

The President has announced that he will file a motion with the Constitutional Tribunal to review the Act for compliance with the Constitution. It is not yet known when the motion will be submitted to the Tribunal or when it will be reviewed. Importantly, the procedure chosen by the President is a so‑called ex post review, which does not suspend the publication of the Act or its entry into force. As a result, the new provisions will take effect three months after their publication in the Journal of Laws, i.e. from July.

Reclassification of the form of engagement

If irregularities are identified in a civil law contract, the regional labour inspector will issue an instruction to the parties ordering the removal of the violations. Failure to comply with such instruction will provide grounds for issuing an administrative decision reclassifying the civil law contract into an employment contract. When issuing the decision, the inspector may take into account the intent of the parties, but only insofar as such intent is lawful and does not aim to circumvent the law. In practice, this means that the parties’ intent should be decisive where the characteristics of civil law engagement and employment are evenly balanced.

The parties will be entitled to appeal a PIP decision to a district court. For the duration of the court proceedings, the individual performing work will benefit from protection against dismissal and changes to working conditions, on terms applicable to employees. In certain cases, the court may also regulate the principles of cooperation between the parties for the duration of the proceedings.

A PIP decision will take effect upon the final court judgment in the case, with effect from the date the decision was issued. An exception applies to individuals subject to special statutory protection against dismissal under the Labour Code— in such cases, the decision may be given immediate enforceability.

Alternatively, instead of issuing a decision, the regional labour inspector may apply directly to the labour court for a declaration that an employment relationship exists. In such cases, the court’s judgment may have retroactive effect, which could result in the need to correct tax and social security settlements for periods reaching back to the statute of limitations.

Consequences of contract reclassification

A final PIP decision will have effects for income tax purposes from the date it is issued. This means that if appeal proceedings are prolonged, tax arrears may arise together with the obligation to pay late‑payment interest. In contrast, for social security purposes, the consequences of the decision will apply from the date the decision becomes final, and social security contributions paid during the proceedings under a civil law basis will be automatically credited towards the employment title.

Other changes

The National Labour Inspectorate will implement a data‑exchange mechanism with the Social Insurance Institution (ZUS) and the National Revenue Administration (KAS), enabling more effective selection of entities for inspection. In the first year of the reform, the PIP plans to inspect 200 entities based on data obtained from ZUS and KAS, with the number of inspections increasing in subsequent years.

The Act will also authorise the Chief Labour Inspector to issue individual interpretations concerning the existence of an employment relationship. Such interpretations will be issued based on the factual description provided by the applicant, and appeals against unfavourable interpretations will be reviewed by a regional court.

How to prepare?

The Act provides for an amnesty for entities that voluntarily reclassify improper civil law contracts into employment contracts within one year from the entry into force of the new rules. This amnesty will protect such entities from increased fines of up to PLN 60,000 for entering into a civil law contract on employment‑like terms.

The new regulations will allow the PIP to review civil law contracts in force on the date the Act enters into force, regardless of when they were concluded. Therefore, the next three months should be used to review existing civil law engagement arrangements, so that the new powers of the PIP are met with contractual provisions mitigating the risk of reclassification into employment contracts.