FORMS OF EMPLOYMENT IN A STARTUP

Every startup will sooner or later face the challenge of procuring more persons for the team. Selection of an appropriate form of employment is of key importance, at least because a form inappropriate in terms of type and manner of the performed duties may cause many technical, legal and financial problems. You should always remember that it is not the title but the content of the contract which determines its type. Hence, it is worth becoming familiar with most important differences between the forms of employment in a startup, i.e. contracts, on which such employment is founded.

Civil-law contracts:

Civil-law contracts which are without doubt most popular when it comes to employment in startups are a specific task contract and mandate contract. Both are regulated in the Civil Code (subsequently: CC).

By a specific task contract the person accepting the order (contractor) commits to perform a specific task and the orderer to pay the remuneration,

By a mandate contract the person accepting the mandate (mandatary) commits to perform a specified legal act for the person assigning the mandate (mandator)

P.S. A mandate contract is often identified with a contract for services. Not without reason–provisions pertaining to a mandate are accordingly applicable to a contract for services.

What differs the mentioned contracts is primarily the fact that a specific task contract is an agreement of result, while a mandate contract is an agreement of due diligence. What does it mean? In the case of an agreement of result (i.e. a specific task contract), a person accepting an order is obliged in such a manner that his/her actions lead to a specified, verifiable result, which is performance of a task specified in the contract.  An agreement of due diligence also assumes obtaining a result (which is performance of a specified act), yet if the mandatary fails to obtain the result but exercised due diligence while performing the act, he/she is not liable for non-performance of the obligation.

A specific task contract, that is an agreement of result: creating a graphic design of a poster, preparing econometric analysis, preparing financial statements for the fiscal year 2015 by an accounting office, making two shirts according to a pattern

A mandate contract, that is an agreement of due diligence: managing social media channels, updating databases, corporate accounting services, making tailor adjustments

A mandate contract is also different form a specific task contract in terms of the personal trust aspect between the parties which is absent in a specific task contract. As a consequence, the mandatary is obliged to perform a mandate contract personally. A person accepting a mandate may exceptionally entrust a third person with its performance but only if this results from the contract or if he/she is forced to do this by certain circumstances. By contrast, within the frames of a specific task contract a person accepting an order does not have to perform the contract personally, unless the contract states so.

For some persons it is also very important that  the provisions setting up the minimum remuneration do not apply to civil-law contracts. What is more, if the parties failed to state the number of off-work days in the contract, then the mandatary as well as the person accepting the order under the specific task contract do not enjoy such entitlement.

When signing either of the civil-law contracts you have to ensure that it is the appropriate form of employment also with regard to consequences under the social security law.  A mandatary is subject to compulsory old-age pension, disability and health insurances and a voluntary work accident insurance. The obligation of social insurance does not however cover persons employed under a specific task contract.

We should also remember that persons employed under a mandate contract, or contract for services to which the provisions related to mandate are applied accordingly, are not subject to the compulsory old-age pension and disability insurances if they are students of lower-secondary, upper-secondary or secondary schools or are students until the age of 26. 

In terms of taxes, for both a mandate contract and specific task contract the deductible income rated 20% is applicable. Obviously, sometimes the deductible income rated 50% can be applied–mainly in the case of contracts related to activities prescribed by the Act on copyright and related rights, what is discussed in details in the act on PIT.

A few tips on how not to conclude a mandate contract instead of a specific task contract:

1. appropriately specify the subject matter of the contract, that is which specific task is to be the result of contract performance (you can make this through e.g. quality and technical specification);
2. do not determine the task as a simple repeated activity;
3. do not direct or supervise the works of a contractor;
4. demand the task to be autonomous–the final result of the contract should be exploited upon its completion without the contractor’s participation being required;
5. emphasize the verifiability of the task (e.g. when you can refuse to accept it due to failure to fulfill certain parameters or demand amendments to the task) closed by signing a hand-over report;
6. make the remuneration dependant on the result of contract performance.

Employment contract:

Another form of employment is an employment contract regulated in the Labor Code (subsequently: LC). According to Article 22 § 1 LC:

By establishing the employment an employee commits to perform work of a specified type to the benefit of the employer and under his/her direction and in a place and time indicated by the employer, and employer commits to employ the employee against remuneration.

When deciding to employ a particular person under a civil-law contract, you should remember that employment in the circumstances prescribed in Article 22 § 1 LC de facto is based on employment relation, notwithstanding the name of a contract concluded between the parties. In other words, it is not permitted to replace an employment contract with a civil-law contract while keeping the work performance conditions prescribed in Article 22 § 1 LC. Violation of those provisions constitutes a minor offence against employee’s rights, while the employer is subject to a fine of PLN 1,000 to PLN 30,000.

Without doubt, an employment contract is the most desired form of employment. LC guarantees privileges and broader protection for an employee. Starting with working time standards, off-work days, minimum remuneration and to end with protection against mobbing or discrimination, as well as protection during pregnancy.

The basic difference between both forms is that the employment relation is distinguished by the employee’s subordination to the employer, while the feature of civil-law contracts is equality of the subjects of the relation towards each other. What is more, the employee is obliged to perform work personally in a specified time and is always entitled to remuneration.

With regard to the social security law, you should remember that the employment relation constitutes the basis for the compulsory old-age pension, disability, health and work accident insurances. The employer is also obliged to carry out OHS training, as well as to cover costs of pre-employment, periodical and follow-up examinations of the employee.

In the case of termination of an employment contract, it is crucial to abide by applicable notice periods. By contrast, civil-law contracts are distinguished by a greater freedom in terms of possibilities to terminate the legal relation between the parties.

A few tips on how to distinguish a mandate contract from an employment contract:

1. give the contractor freedom and independence with regard to organizing his/her work,
2. do not determine the time basis for the contractor to fulfill his/her obligations in hours,
3. do not specify the place of performing works,
4. do not reserve your direction over contractor’s works,
5. state that the contract does not have to be performed personally, with a proviso that you will give a prior written consent to a substitute,
6. make the remuneration amount dependant from the actual time of service provision.

Employment contract:

Another form of employment is an employment contract regulated in the Labor Code (subsequently: LC). According to Article 22 § 1 LC:

By establishing the employment an employee commits to perform work of a specified type to the benefit of the employer and under his/her direction and in a place and time indicated by the employer, and employer commits to employ the employee against remuneration.

When deciding to employ a particular person under a civil-law contract, you should remember that employment in the circumstances prescribed in Article 22 § 1 LC de facto is based on employment relation, notwithstanding the name of a contract concluded between the parties. In other words, it is not permitted to replace an employment contract with a civil-law contract while keeping the work performance conditions prescribed in Article 22 § 1 LC. Violation of those provisions constitutes a minor offence against employee’s rights, while the employer is subject to a fine of PLN 1,000 to PLN 30,000.

Without doubt, an employment contract is the most desired form of employment. LC guarantees privileges and broader protection for an employee. Starting with working time standards, off-work days, minimum remuneration and to end with protection against mobbing or discrimination, as well as protection during pregnancy.

The basic difference between both forms is that the employment relation is distinguished by the employee’s subordination to the employer, while the feature of civil-law contracts is equality of the subjects of the relation towards each other. What is more, the employee is obliged to perform work personally in a specified time and is always entitled to remuneration.

With regard to the social security law, you should remember that the employment relation constitutes the basis for the compulsory old-age pension, disability, health and work accident insurances. The employer is also obliged to carry out OHS training, as well as to cover costs of pre-employment, periodical and follow-up examinations of the employee.

In the case of termination of an employment contract, it is crucial to abide by applicable notice periods. By contrast, civil-law contracts are distinguished by a greater freedom in terms of possibilities to terminate the legal relation between the parties.

A few tips on how to distinguish a mandate contract from an employment contract:

1. give the contractor freedom and independence with regard to organizing his/her work,
2. do not determine the time basis for the contractor to fulfill his/her obligations in hours,
3. do not specify the place of performing works,
4. do not reserve your direction over contractor’s works,
5. state that the contract does not have to be performed personally, with a proviso that you will give a prior written consent to a substitute,
6. make the remuneration amount dependant from the actual time of service provision.

The legislator proposes multiple legal forms to establish an employment relation–from employment contracts to various types of civil-law contracts.  Before undertaking specific steps to employ a particular person, it is worth ensuring that you do not make a mistake which may be detrimental to our company in terms of not only image but also finances.

If you want to be sure as to the legal form on the basis of which we employ our employee, you can refer to the Social Insurance Institution (ZUS) to get a written interpretation of a particular contract. Such interpretation costs PLN 40. This is not much, but it will allow us to avoid a possible penalty.