Restrictions on “junk” contracts will increase the rigidity of the Polish labour market

The Polish government has entered bargaining with employers and trade unions regarding possible restrictions on civil law contracts.

All such contracts would be subject to the same social insurance contributions as the classic contract of employment. Trade unionists claim that this step would give ZUS [the Social Insurance Institution] between PLN 5.5 and 6 bn zlotys a year. Employers, however, argue that this is an illusion and that instead of higher revenues, the State will get more unemployed citizens.

The Polish labour market is seeing new, bleak records being broken. The latest Labour Force Survey (LFS) carried out by the Central Statistical Office (GUS) shows that in  Q2 of 2012, the number of discouraged workers reached 478 thous., i.e. as much as 10%  over the corresponding period of the previous year and 27% over 2010.

It is not much of a surprise if we take into account the average time of waiting for employment. In Poland, it is currently as much as 11.4 months. While it is assumed that the maximum time limit after which one becomes discouraged by an unsuccessful job search is one year, as many as 629 thous. people had remained unemployed for over 13 months in June this year. Again – this represents a 17% increase over Q2 of 2011, and a staggering 50% more than 2 years ago.

More and more Poles, including the working population, dream of employment in the public administration or in state-run enterprises. According to a survey conducted by the ARC Rynek i Opinia Research Institute, while assuming the same level of income, most Poles would preferably run their own business (30%) or find employment in state administration (24%). Other sectors fall far behind.

Respondents pointed to stability, job security and a fixed, timely disbursed salary (as well as a number of other perks) as the key advantages of working for the civil services.

The report of the Central Statistical Office on Poles’ earnings from the beginning of 2012 also shows that the public sector has remunerated its workers better than the private one. Salaries are on average 13%higher, and if we take into account the hourly wage, the difference can be as high as 30% .

In addition, public employers tend to hire employees under employment contracts and pay their pension contributions. They are, however, moving away from this model. Instead of choosing permanent employment, many employers opt to self-employment basis or civil law contracts, e.g. mandate agreements or contracts for specific work.

Quoting after the Polish Ministry of Finance, last year saw as many as 894.3 thous. civil law contracts concluded as the only source of revenue for contractors. No one knows what proportion of those contracts was subject to social insurance contributions (such contributions are facultative with respect to contracts for specific work). No such statistical data have ever been compiled. Nevertheless, the report on the activities of the National Labour Inspectorate (PIP) for the previous year may cast some light on ​​the scale of abuse of civil law contracts by employers: out of the 34 thous. contracts audited in 2011 by the PIP inspectors, 13% were concluded on terms that apply to contracts of employment. In other words,  increase in the proportion of challenged contracts rose by 15% over 2010.

Trade unions in defence of the young

According to the NSZZ Solidarność trade union, if social insurance contributions applied to all civil contracts, allowances and pre-retirement benefits as well as management contracts, as is the case with contracts of employment, then — assuming that the rate of such benefits would be determined on the basis of 60% of the average salary in the economy — the additional annual receipts of the Social Security Institution would amount to at least PLN 6 billion. Out of this amount, PLN 5.5 billion would go towards pension contributions and an additional PLN 0.5 billion would go to the Labour Fund.

The same figures were used to support the union’s draft of an act amending the act on the social security system, which is currently being considered by government experts.

– The proposed amendments are being examined by the Problem Team for Labour Law and Collective Agreements operating as part of the Trilateral Commission for Social and Economic Affairs. The Team has undertaken to enter bargaining to settle the legislative arrangements for the stability of employment in the environment of fixed-term contracts, civil law contracts, self-employment and temporary work – we read in a letter sent to our editorial office by Janusz Sejmej, press spokesman for the Ministry of Labour and Social Policy.

Mr Sejmej assures us that subsequent meetings of the Team will address the issue of eliminating the abuse of civil contracts and fixed-term employment contracts and creating solutions that will reconcile the interests of employees with those of employers.

– The results of this work will impact prospective legal arrangements for the employment of workers under different types of contracts – says Janusz Sejmej.

Why are the NSZZ Solidarność unionists so determined to force through the idea of ​​restrictions on civil law contracts in the context of growing unemployment, especially among young people, and a collapse in the labour market? Henryk Nakonieczny, a representative of NSZZ Solidarność in the Trilateral Commission, explains this position reflects taking responsibility for the state of public finances and for the future of young people who work exclusively under civil law contracts and cannot accumulate any capital for future retirement benefits. They also lack protection against the effects of unemployment or accidents at work.

– Today’s thirty-year-olds are constantly starting from scratch, they have no financial stability or the ability to take out a housing loan. As a result, they delay the decision to establish a family – says Henryk Nakonieczny.

In his opinion, the Polish labour market has gone too far towards flexible solutions. Employers will shortly have to radically change their behaviour (for demographic reasons, i.e. the aging of the population).

– We can rely on low labour costs to compete against the global economy for a limited period only — Mr Nakonieczny points out. – Polish employers need a shock therapy to finally start being competitive in the field of innovation and better organisation of work. Facilitating everything they want and meeting all their demands leads to stagnation in development and exclusion of thinking. Flexibility of the labour market must also translate into security for employees. Whereas employers do not wish to guarantee their security, the government has to do it – says the union’s representative.

Employers speak critically

Such arguments are facing strong opposition from Polish employers. They are taking recourse to heavy weapons in the dispute about the statutory tightening up of the labour market. According to Jeremi Mordasewicz, advisor to the Management Board of the Polish Confederation of Private Employers Lewiatan and its representative in the Trilateral Commission and former member of the Supervisory Board of the Social Security Institution, the trade unionists’ estimates concerning additional receipts from contributions are grossly exaggerated.

– The decision to deduce social security contributions from all civil law contracts is very serious. It is vital to realize that these 5.5 or 6 billion zlotys will translate into additional costs of Polish labour – says Jeremi Mordasewicz.

He argues that following the introduction of mandatory contributions from all contracts the situation in the labour market will not improve – it will only make it worse, as employers may reduce their demand for labour – and then some contractors will lose their only source of income or will seek employment in the grey market, without any contract at all. It also won’t pay off for contractors to work for a reduced salary (after contributions have been deducted). He warns about the prospective results: poverty will become more acute, consumption will decline and the state of our economy will deteriorate.

Jarosław Adamkiewicz, president of the Association of Employment Agencies and president of Wadwicz company, shares this opinion. In his view, the idea of subjecting all contracts to ZUS contributions would be a “a nail in the coffin”.

– The proportion of earnings generated in the grey market would soar, since the costs of social security insurance in Poland are among the highest in Europe – says Jarosław Adamkiewicz. – This would also stop young people, especially higher school students, from earning extra money. If employers who hire students were to incur the same costs as in the case of full-time employees, they would choose an experienced candidate to save on the costs of training.

However, the trade union members have planned for this scenario as well. Under their draft act, all young people under the age of 26 who are studying would be exempt from compulsory contributions paid from mandate agreements. Employers would only be under an obligation to pay for their accident insurance, while health insurance would be voluntary.

Employers are not saying “no” to this solution, but in return for giving the green light to contributions paid in respect of civil law contracts they are putting forward their own demands. They want, i.a., the government to introduce a single, universal and transparent system of social insurance without trade privileges, with one fund and common rules for all the insured.

Another concession on the part of the government would have to be the introduction of payroll processing on an annual basis. It is mainly large industrial enterprises that seek this solution.

– It would allow employers to respond quickly to significant declines and increases in orders. They would not have to pay overtime or demurrage to their employees – says Jeremi Mordasewicz.

But that’s not all. Some employers are calling for the repeal of the provision requiring employers to explain in writing the grounds for termination of permanent employment contracts. It is already known that neither trade unions nor parliamentary opposition will agree to such solutions.

– The position of the Polish employee is already very weak. As an opposition party, we see no reason for facilitating lay-offs to employers or for extending the payroll processing period – claims Stanisław Szwed (Law and Justice – PiS), deputy chairman of the Parliamentary Commission for Social Policy and the Family.

Locally rather than centrally

Some labour market experts believe that the demands put forward by employers are a little over the top. They point out to the government’s policy of appeasement with reference to employers, the inefficiency of both the Polish legal system and the public services set up to monitor the labour market.

– Many of the problems in the labour market can be solved without amending the law. It would be enough if public services, such as labour inspection or district labour offices, were more effective in terms of law enforcement and short-term support for the unemployed — says Iga Magda, an economist and assistant professor at the Department of Economics of the Warsaw School of Economics (SGH), and a labour market expert with the Institute for Structural Research.

In her opinion, the government should think about more effective legal protection for those employed under fixed-term contracts or civil law contracts, but without completely prohibiting the latter. Especially now, when economic forecasts indicate that in 2013 the situation in the labour market will get even worse.

Iga Magda argues that although, on the whole, the demands of employers are too radical, some of them should be taken into account. For example, termination by written notice and statement of grounds for termination of employment contracts could depend on the age of the employee and the total duration of the service with a given employer. As regards flexible forms of employment, they could be allowed with respect to employees who are under 26 years of age and would later have to be replaced by contracts of employment. There should also be no restrictions on civil law contracts e.g. among self-employed professionals.

– There are no simple solutions that could guarantee success in the labour market in the country as a whole. We should look for solutions that are tailored to specific situations in the local markets. The individual voivodeship marshals (provincial chief executives) should have the power to use specific and “customised” instruments, including those aimed at activating the unemployed, as well as to determine minimum wages in their respective areas. These could be lower for younger people without any professional experience than for other employees – suggests Iga Magda.


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