Business-to-business contracts, also known as B2B contracts, have been popular in Poland for quite a while. Such agreements have many undeniable benefits, both for developers and the companies that hire them (even though the former are not treated as employees). But IT contracting in the Polish B2B sector also has its cons, and you should weigh them carefully before you choose this solution.
So is a B2B contract good or bad for a developer? Does it make sense for the companies that want to hire IT professionals? If you’re wondering how to become a B2B contractor in Poland or if you want to hire developers from Poland, here’s a summary of the key pros and cons of B2B contracts in the Polish IT sector.
First, we should explain what we mean by “employment” based on a B2B contract. Here, we’re talking about a civil-law contract, more specifically a contract for the provision of services governed by the provisions on the contract of mandate (in Polish: umowa zlecenia) between two business entities: the client, usually a company or a partnership (which I will call “the employer”), and the developer, who conducts business as a sole proprietor (“the developer”). A B2B contract is the most common alternative to a standard contract of employment (which is governed by the Polish Labor Code).
Why are B2B contracts so popular in the Polish IT sector? First of all, they’re financially beneficial to both sides: the employer and the developer. Let’s consider the following example:
For a developer earning a gross salary of 10,000 zlotys under a contract of employment, the take-home pay will be 7,140.39 zlotys. But the employer will also incur 2,048 zlotys in what are referred to as the employer’s costs. In other words, the total cost of the developer’s work will be 12,048 zlotys.
From the employer’s perspective, 12,048 zlotys is the same cost, regardless of whether it is generated by a contract of employment or an invoice issued by a developer hired under a B2B contract.
If you are a developer, however, the difference is significant. Suppose you issue an invoice for 12,048 zlotys (net of VAT). In that case, you are left with 8,323.24 zlotys, after deducting social security contributions (in the full amount of 1,457.49 zlotys, instead of the preferential contributions for business start-ups, namely 647.59 zlotys) and income tax. If you factor in tax-deductible business expenses, your income may be even higher.
|GROSS AMOUNT||NET AMOUNT (FOR THE DEVELOPER)||EMPLOYER’S COSTS||TOTAL EMPLOYMENT COST|
|CONTRACT OF EMPLOYMENT||10,000 PLN||7,140.39 PLN||2,048 PLN||12,048 PLN|
|B2B CONTRACT||12,048 PLN||8,323.24 PLN||0 PLN||12,048 PLN|
(all calculations are based on the social security contributions and taxes applicable in Poland in 2021)
If you analyze this example, you’ll see that a developer engaged on the basis of a B2B contract in Poland will receive almost 1,200 zlotys more in take-home pay than under an employment contract. Obviously, employers also benefit because they may offer higher net remuneration while keeping their costs at the same level.
Some savvy employers offer to split the “surplus” with developers. In this way, they can lower their costs and pay developers more than they would under a contract of employment.
In addition, if you are a developer and earn upwards of 85,528 zlotys, the taxes you’ll actually pay will be lower than under a contract of employment because as a sole proprietor you can choose a flat tax rate (which is 19% in Poland, regardless of your income). In this way, you’ll avoid moving into the 32% tax bracket.
In summary, B2B contracts allow employers to offer higher take-home pay as well as to keep their costs at the same level and deal with fewer formalities, while the developer above all earns more.
A step-by-step guide
What are other advantages of employing developers based on B2B contracts in Poland?
Concluding a B2B contract is a lot simpler (and definitely requires fewer documents to be signed), and making payments is less complicated than under an employment contract. All it takes is a single invoice and a single bank transfer. If you’re an employer, you don’t need to remember to pay your contractor’s social security contributions in a timely manner. It is the developer that must pay all contributions and taxes and face the consequences of any negligence in this respect.
In addition, a B2B contract in Poland means no periodic medical checkups and occupational health and safety training, all of which are mandatory in the case of those engaged based on a contract of employment. If you only engage one developer under a B2B contract in Poland, this may seem irrelevant. But if you hire 50, 100, or even more developers, you’ll suddenly realize that going through all the formalities prescribed by the Polish Labor Code takes a lot of time. But if you have never employed anyone based on a contract of employment before, even a single agreement of this type will generate considerable costs.
Another advantage is that a B2B contract gives you greater flexibility in determining the duration of the contract and the number of hours worked per month. You can include almost any provision you want in a B2B contract because it’s a civil-law contract. Examples include non-disclosure and non-competition clauses as well as provisions governing the developer’s liability for the damage done to the employer. By contrast, there are numerous restrictions that apply to the wording of employment contracts. Such limitations are often out of touch with the reality of the IT sector, especially if the developers you may want to engage enjoy a relatively high degree of independence.
In addition, the traditional solutions enshrined in the Labor Code, which naturally protects employees, may be seen as too restrictive by developers who cherish their independence and value flexible working hours and the possibility of working remotely (either from home or when traveling, whether in Poland or abroad). After all, market conditions and expectations are always a few steps ahead of amendments to the Labor Code, which was adopted in 1974.
Flexibility also means that as an employer you may conclude several consecutive six-month contracts with a developer, for example when your clients renew contracts with you or depending on the projects you’re working on. Once a project is completed, you don’t have to conclude another contract with the developer. In the case of a contract of employment, however, if you sign three fixed-term contracts, the fourth contract must be permanent (or automatically becomes a permanent contract).
You should also remember that a B2B contract in the IT sector offers you greater flexibility also if you are a developer. For example, you may take on extra jobs, work on your own projects, and issue invoices to other clients unless you and your employer decide to put non-competition clauses in your contract.
The same holds true for the number of hours worked per month. The Polish Labor Code imposes a strict standard, namely a 40-hour workweek. Anything above this limit is overtime and paid at 150% of the standard hourly rate.
What about B2B contracts? If payments are made at an hourly rate, any extra hours are simply invoiced at the same rate as other hours. And conversely, if the developer is paid by the hour and works less in a given month, the employer only pays for the number of hours actually worked.
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If B2B contracts bring undeniable benefits to employers, why do some see them as risky?
The answer lies in the very phrase “employment based on a B2B contract.” If we wanted to use correct terminology, we should say “work done on the basis of a B2B contract” or “the provision of services under a B2B contract” and use the word “employment” only to refer to a contract of employment. Much to the dissatisfaction of many advocates and users of B2B contracts, similar interpretations are often adopted by the public authorities in Poland, such as the tax authorities, the National Labor Inspectorate (PIP), and the Social Insurance Institution (ZUS). This means above all that the employer may face fines and be forced to pay the difference between the contributions and taxes paid by the developer and the amounts that would have been paid if the parties had entered into an employment contract.
In this case, a win-win deal may quickly become a lose-lose situation.
Let’s take a look at the specific elements of the B2B contracts typical in the Polish IT sector that are considered particularly risky.
Paid time off proves problematic under a B2B contract. Why? Because this is one of the key elements that are considered to decide if the contractual arrangements between the parties should be classified as a B2B contract or as an employment contract. Simultaneously, developers who change jobs are increasingly likely to want to keep the right to paid vacation and sick days but also work under B2B contracts.
That said, if you are an employer, you should not allow such rights to be written down in a B2B contract. This is because you won’t be able to explain why a B2B contractor (who is a sole proprietor theoretically not linked to your company) has the right to vacation and paid sick days. This sounds at least suspicious.
In the first case, the contract may include provisions allowing the developer to stop the performance of services for X business days per year and retain the right to remuneration. X usually means 20 or 26 days and includes the situations in which the developer wants to go on a family vacation or is down with flu.
Of course, this solution immediately resembles the arrangements described in the Labor Code. If such an agreement is examined by a court or a public authority, this will be an argument in favor of the agreement being categorized as an employment contract.
The second solution involves paying the developer based on the number of hours or days actually worked. In this case, the contract includes no clauses on “days of non-performance,” but employers expect developers to include vacation days when calculating their hourly rates. In other words, developers are paid based on the time they spend working and the tasks they actually complete, which better reflects the nature of the services they provide as sole proprietors.
In this case, developers engaged on the basis of B2B contracts provide their services as sole proprietors, which means that they act on their own account and at their own risk, not under a sham contract of employment. However, such a solution doesn’t allow the employer to simply “force” the developer to be present in the office during work hours. If the developer is absent from work for longer than he or she should, the employer can only terminate the contract, unless the deadlines for the completion of specific tasks are defined in additional contractual provisions.
In the case of the third solution, the parties expect that the developer will be absent from work or out of the office for a specific number of days, but the wording of the contract does not reflect this in any way. However, developers may be reluctant to sign contracts requiring them to work on all business days, no matter if they are ill or want to go on vacation.
All in all, despite several solutions regarding vacation and paid sick days, software developers engaged under B2B contracts may be left without remuneration when they go on vacation or are sick, especially for a prolonged period of time. For reasons related to the amount of the contributions they declare and pay, self-employed developers receive very low social security benefits compared to the ones they would get if they were employees.
Another important problem is posed by benefits in kind, which may be provided voluntarily by the employer (such as the Multisport Card) or arise directly out of statute, such as the Company Social Benefits Fund (ZFŚS). For most developers, the absence of an employment contract means that they will receive no perks. It might appear that developers should know that if they choose to provide services as B2B contractors in Poland, they will receive no such perks. They are compensated above all by higher pay or other benefits that result from their status as sole proprietors, such as car leasing or the possibility or writing off many purchases as business expenses.
However, some managers signal that over time B2B contractors tend to forget about these benefits and start demanding the perks that are normally offered to employees.
B2B contractors in the Polish IT sector are now increasingly likely to be offered gym membership cards, private health insurance, or company laptops and phones. Still, the scope of such benefits is much narrower than in the case of employees. If you’re an employer, you can solve this problem in several ways: by covering the costs of such benefits (developers recharge such expenses to employers), by choosing not to offer such benefits, and by communicating your strategy clearly.
I believe that the safest scenario is the last one, which means communicating properly and continuously the differences between a B2B contract and an employment contract and the related benefits. If you’re an employer, it will be easier for you to argue why certain benefits are not available to those engaged under B2B contracts. Secondly, it will be easier for you to prove to the public authorities that the B2B contracts you conclude with developers are not sham employment contracts.
However, B2B contracts may provide for a one-off payment (additional remuneration) aimed at compensating developers for the fact that they have no access to the benefits normally enjoyed by employees.
Key facts & figures in 1 extensive article
I’ve asked Piotr Ochwat, a lawyer who works with Humeo, what other aspects of B2B contracts we should take into account and how we should draft such agreements.
No. If a B2B contract is badly or imprecisely drafted or, more broadly, if the relationship between the parties is badly or imprecisely structured, this may result in the developer’s status as a sole-proprietor being regarded as fictitious.
The registration of the developer’s sole proprietorship with Poland’s Central Register and Information on Economic Activity (CEIDG) alone does not guarantee that the contract concluded by the parties and the solutions they adopt will be deemed lawful.
Moreover, public authorities may ascertain the actual legal relationship between the parties by acting either upon their own initiative or in response to a dispute between the employer and the developer. In other words, they may establish that the relationship between them is in fact an employment relationship, and the B2B relationship was fictitious.
More likely than not, the fact that the parties agreed in full to such a contract will be irrelevant. In this case, the employer may be forced to pay the unpaid social security contributions or may even face criminal liability for the violation of employee rights.
As for developers, the purchases that they’ve written off as business expenses may be called into question, so they may be forced to pay the input VAT that they deducted. Another thing that may be disputed is the application of the 19% flat tax rate in personal income tax payments, because employees may not use such a tax rate.
An employer that is forced to pay the full amount of social security contributions may later claim them back from the developer proportionally to the amount that would have been deducted from the developer’s salary as an employee. Both parties may have to make any overdue payments, but making a large one-off payment may prove more burdensome for the developer.
In order to be a sole proprietor, a developer must conduct business activity, and the laws currently in force allow the application of a “business activity test.” In accordance with the Polish Personal Income Tax Act, activity is not regarded as business activity if the following three conditions are met simultaneously:
Article 22 of the Polish Labor Code, in turn, stipulates that by establishing an employment relationship, the employee undertakes to perform work of a specific type for the employer and under the direction of the employer as well as in the place and at the time specified by the employer, and the employer undertakes to employ the employee against remuneration.
In summary, the main criteria allowing us to classify the relations between an employer and an employee as an employment relationship are:
1. performing work under the direction of the “employer,”
2. performing work in the place and at the time specified by the “employer,”
3. no relation between the quality of work or the manner of performing it and remuneration.
By the same token, if a contract specifies that the developer must obey the instructions received from “the employer,” performs services under the direction of “the employer,” and has a certain place within the company’s organizational structure (organizational hierarchy), indicates when and where the work should be done (the employer’s premises), and the developer is not free to choose when to perform services, there is a very high risk that such a relationship will be regarded as an employment relationship. In this case, compliance with the provisions regulating the payment of social security contributions, taxes, and other levies on the part of both the developer and the employer will be called into question.
We should bear in mind that tax inspectors have considerable powers, so the wording of the contract alone, important though it is, will not be sufficient to protect in full the interests of both parties. Public authorities may establish facts using all legally allowed methods and means.
Such decisions are usually made following inspections launched by the ZUS and, to a lesser extent, by the tax authorities. In the event of a dispute, for example over the employer’s failure to pay the agreed remuneration, the developer may ask the court to establish the existence of an employment relationship. It is as a result of the court’s decision that other public authorities may then initiate other proceedings.
Employers will have to pay the unpaid personal income tax advances together with interest and the unpaid social security contributions on the terms resulting from a contract of employment.
They may also be required to correct the VAT returns filed in connection with their transactions with the developer. Also, they will be forced to meet all the obligations that they would have had to meet if the developer had been employed under an employment contract from the outset, including those related to annual leave.
The client as the “bigger” business entity should propose an agreement that will reflect the true nature of the business relationship, namely the provision of services by a self-employed developer that will not be aimed only at cost optimization.
Such a contract may not include any of the elements listed above that are typical of an employment relationship. Moreover, we should avoid situations in which a person previously employed under a contract of employment sets up a sole proprietorship and starts providing services to the former employer on the basis of a B2B contract. It is extremely important that a self-employed developer should provide services and issue invoices to various clients, not just only one.
Also, you should bear in mind that if you insist on a contract that puts the other side at a considerable disadvantage, both financially and through non-competition clauses or provisions on the developer’s liability, this increases the risk of a dispute, which means that the nature of the contract may be challenged. Also, if you are a self-employed developer about to sign a contract for a large sum of money, you may want to spend a few hours of your time to make sure that the contract is properly drafted, because this may translate into significant benefits.
He graduated in law from the Jagiellonian University after successfully defending his master’s thesis at the Chair of Intellectual Property Law. His thesis received the Polish Economy Minister’s award for the best scientific thesis on intellectual property.During his legal training, he worked with law firms in Kraków and Nowy Targ. He is a PhD student at the Chair of Intellectual Property Law, Faculty of Law and Administration, Jagiellonian University.
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