Poland: Working on “Junk”

A chance for youngsters to get a first job or a dead-end street? Poland is in the middle of a lively debate on the merits of junk contracts. There is still no answer to the question of whether the government should limit them, or whether it would seriously harm the economy and broaden the grey economy. But the first changes in law have already started to appear.

Foto: CreativeCommons/ Myriadity

29-year-old Anna worked for four years in a Warsaw internet portal providing video content. She was employed on a civil contract, earning 3,000 zloty (700 euro) a month. It was her first job after finishing her studies. Now she is moving on to another company. “I was offered much bigger earnings, but no one even mentioned employing me under a labour law contract,” she says.

She will spend the coming years working under a civil law contract again, which means no guaranteed holidays, no limits on working hours, no overtime salary and very little money put aside for her pension. It will be much easier to terminate her employment compared to an employee working under a labour law contract. If there is a conflict with her employer, she will not be able to go to a labour court, which is considered favourable to an ordinary court. She cannot be a member of any trade union.

This form of employment also makes life harder outside of work; it is more difficult to get a bank loan or a credit card, not to mention a mortgage. “But still, I have a job,” Anna sighs.

Junk contracts on the rise

Anna is a member of a growing army of junk contract employees. “Junk contract” is not a legal term, although it is widely used to refer to contracts that enable employers to circumvent the guarantees offered in the labour code as social protection for employees. In sum, it is a type of contract used instead of a proper employment contract.

There are several kinds of contracts that can be classified as “junk” in such cases. The most common include:

  • civil law contracts (mandate contracts or contracts for the performance of a single task) used for continual work with a single employer;
  • self-employment, when used to conceal working on the above terms (e.g. issuing invoices each month for the same sum of money and the same sort of and amount of work);
  • fixed-term contracts of employment, to be renewed many times instead of replaced by an indefinite contract.

These kinds of contracts usually primarily benefit the employer; employees still have to pay taxes and national health insurance just as if they were employed under labour law, but the employer does not have to contribute to social security, including any pension fund, on their behalf. Companies prefer to employ people on junk contracts because the costs are lower, they can easily fire people, and they do not have to comply with all labour law requirements.

How many Poles are employed on junk contracts? It is not easy to find real numbers. According to estimates from the Ministry of Finance and the National Statistics Office (GUS), 0.9-1.35 million people work under civil law contracts – 6-9% of the total workforce. And the number of people employed this way is on the rise. The Ministry of Finance announced that the number has grown by 170,000 since 2007.

Another vulnerable group are the self-employed – 0.8-1.1 million (5-8%) – some of whom are really freelancers such as actors or consultants, but many of whom work for one employer on a regular basis and should therefore be employed under a labour law contract.

According to GUS, 3.25 million Poles work under fixed-term labour law contracts (21%). The proportion of such contracts in Poland is one of the highest in Europe, with the EU average at 14%.

Of course, not everyone from this groups works under a junk contract. That is only the case when one of these forms of employment is abused to conceal the reality: work which should be covered by a labour law or indefinite contract.

The National Labour Inspectorate (Państwowa Inspekcja Pracy, PIP), the only authority in Poland which checks if employment is legal, can provide some relevant data. It audits around 40,000 jobs a year. In 2011 it challenged 15% of audited contracts, in 2012 16%, in 2013 18%. This means that at least one in seven civil contracts in Poland is a “junk contract”, and the scale of this phenomenon is growing.

Poland and Slovakia alike

The economic crisis which started in 2008 pushed many people in Europe out of the traditional labour market. However, in some countries the rules of employment have been growing more flexible since the 1990s.

In Germany, 7.5 million people are now employed on so-called “mini-jobs”, free of taxes and contributions, with salaries of less than 450 euro a month. 1.5 million self-employed work on civil law contracts, or scheinselbständigkeit. In Italy, about 2.4 million people work on junk contracts; there are 21 types of job contracts and 48 flexible ways of performing a job!

In the UK, several hundred thousand workers are employed on “zero-hour contracts”, especially in services and catering. The worker must be fully available and work for several hours a week. This kind of job – nul uren contract also exists in the Netherlands.

The situation in Slovakia is similar to the one in Poland, though the labour code there provides for more flexible forms of employment.

The number of self-employed in Slovakia during the crisis grew from 239,000 in 2008 to 275,000 in 2013, says Piotr Arak of the Polityka Insight think-tank in Warsaw. That is a 15% increase. Self-employed people account for 40% of workers in the construction sector and one-fifth in insurance.

The separate civil and labour law rules for workers are a specific phenomenon of Poland and Slovakia. Employees in Poland’s southern neighbour can also be hired for a specific task, a situation which corresponds to the Polish civil law contracts. In 2012, there were 520,000 of these employees; this represents 10% growth within a year. However, since 2013 the law has changed and employers hiring workers for a specific task are now required to pay social security contributions on their behalf, significantly reducing the incentive to hire people on junk contracts.

Business: employment first

Economists and the business lobby say that limiting junk contracts could be extremely dangerous for the economy. “Such a change in Poland would surely make unemployment higher,” argues Ryszard Petru, chairman of the Polish Economists’ Society. “If you add a social security contribution to a small wage, there are two possibilities: either an employee gets less cash, or he will be fired. It has happened before.”

In Petru’s opinion, lack of “flexible contracts” is a reason for high unemployment, for example among young people in Spain. “People prefer to work on ‘junk contracts’ rather than not work at all. You can’t increase the social burden on workers and entrepreneurs while leaving employment at the same level.”

However, taking into account the state of the Polish economy, any changes should be enforced cautiously. 2013 was worse for Poland than 2009, the apex of the financial crisis in the world as a whole. Last year, the Polish economy was on the brink of recession, with unemployment over 14%.

Creating stricter rules for employment could also broaden the grey economy, which is still significant in Poland. Businesses say that civil law contracts are very often the only way for a young person to find a first job, and thanks to them, companies have created more jobs. Without this kind of contract, many people would face a choice: working in the grey economy or staying unemployed.

“Students should be the most afraid of any changes. They will not be able to find a job, or else they will be paid less,” says Waldemar Sokołowski of the business organisation Just Company.

An opportunity or a dead-end street

The most recent data, however, challenges the common wisdom that a junk contract is a good way for young workers to enter the labour market. According to a POLPAN survey quoted in the daily “Gazeta Wyborcza”, 60% of young people who worked on civil law contracts five years ago are still employed in the same way or don’t work at all. Only 37% have found an indefinite labour law contract.

Only one in three young people in Poland has an indefinite labour contract, compared to three-quarters of the older workers.

According to the Ministry of Labour, the likelihood of moving within one year from a temporary to an indefinite contract is around 30%. However, in the case of part-time work, the probability falls to about 18%, while for the unemployed it is around 8% and for the self-employed about 6%.

The National Labour Inspectorate is not able to regulate the working conditions for these employees, which are sometimes far below standard. It is also more difficult for them to get compensation in case of an accident at work. With respect to workers’ rights, junk contracts mean moving backward in history almost two centuries.

There are also costs for the state, especially the pension system. Working on civil law contracts means that a person saves less or doesn’t save at all for retirement. This results in less money for the pension system at the moment and problems in the future: social security will have to pay for these people when they retire, because they will have very small pensions or none at all.

For all these reasons, junk contracts have become the subject of a lively public debate in Poland. Prime Minister Donald Tusk says he will not do anything that could harm employment in Poland, but in the long term he is a supporter of enforcing the same rules for all kinds of contracts. The first real changes started this year.

Single contract in the future?

The Polish government is discussing a new law to decrease the scale of junk contracts in Poland and mitigate their negative consequences. According to the draft law, which was sent to the parliament last month, people employed on contracts of mandate should pay contributions ensuring at least a small pension.

If someone’s total income from the contracts exceeds the minimum wage (1,680 zloty, 400 euro), he will have to pay a social insurance contribution (Zakład Ubezpieczeń Społecznych, ZUS) on the amount. For instance: at the moment, a person employed on two contracts of mandate – for 200 zloty and 3,000 zloty a month – only has to pay a contribution on the lower one, which would be 42 zloty. Following the changes, he will need to add up the income from different sources and, since he will then exceed the minimum wage, he will have to pay 340 zloty.

The Ministry of Finance proposes expanding this regulation so that social insurance contributions are also paid for contracts to perform a specific task. This idea is strongly opposed by employers. Furthermore, the ministry suggests that beginning in 2017, all civil law contracts should have contributions paid on their entire amount. This idea could re-emerge soon, when the government draft is debated in the parliament.

However, deep changes in the system are not likely until the Polish economy seriously picks up. As the country faces general elections next year, it is probable that the next government and the new parliament will have to deal with this issue.

Łukasz Lipiński

Łukasz Lipiński

is the vice-director of Polityka Insight, a centre for political analysis based in Warsaw. From 1998-2012 he was an editor on the national, foreign and economics desks of the Polish daily Gazeta Wyborcza.