ZUS-free contracts under fire
The Senate is scheduled this week to debate changes to the pension law that would force employers to begin paying steep contributions to the Social Insurance Office (ZUS) on previously exempt creative contracts.
If the Senate passes an amendment to the pension law and President Aleksander Kwasniewski signs it, employers will no longer be able to hire full-time employees under ZUS-free creative contracts. The contracts, which are used in many fields such as higher education and media, have become popular because they enable employers to avoid paying ZUS taxes of 45% on top of employees' gross salary, enabling them to flow more money toward employee salaries.
The Sejm passed the measure a week ago. Deputies and government officials said changing the tax should bring extra money to ZUS, which has struggled under the demands of pension reform this year. Under the reform, ZUS has had to flow a portion of employee contributions to private funds for all individuals aged 18-30 and anybody aged 31-50 who chose to participate in the new system. That, however, has caused continuous cash shortages at ZUS and the agency has found it difficult to meet its existing obligations for pension payments. ZUS has also found it difficult to improve its rate of collection, as many major Polish companies, such as Polish State Railways (PKP) find the 45% tax too burdensome.
"The government is desperately looking for additional means to finance the bottomless ZUS," said Jeremi Mordasewicz, vice president of the Business Centre Club (BCC). "I agree that a situation in which employers evade paying ZUS is not normal but results from the fact that some of them cannot afford to pay such an enormous retirement contribution rate."
The contracts are almost standard practice in the media, where an employee often has a large portion of his salary on a ZUS-free creative contract and only a small portion on a fully taxed employment contract. Structuring employment in that way reduces costs.
Many observers, though, said that they doubted the change would actually result in more revenue for ZUS. They said it was more likely that forcing companies to pay ZUS on creative contracts, which are designed for temporary or project-based work, would result in a shift to the gray economy. The reason is twofold: First, employees on full ZUS contracts will see their income tax rates increase from an effective 10-20% to oftentimes 30% and above. Second, the employers themselves will fight having to pay the extra 45% tax on a gross salary. The result is that employees will either work illegally, or avoid ZUS payments by setting up their own companies.
ZUS, however, is already anticipating that the change will shift more workers into the gray economy. "I am sure that the State Labor Inspection Office (PIP) will tighten its control over companies on how they employ staff," said Anna Warchol, spokeswoman for ZUS. Under the amendment, creative contracts can still be used for part-time or piecemeal work. Full-time employees, however, will not be able to use the contracts and therefore will see their take-home pay reduced by the extra income taxes.
"The costs of work are growing and it's not in the form of wages but taxes to be paid on them," Mordasewicz said. "It literally pushes the laborers out into the gray economy."
