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Entrepreneur test in IT

One of the most popular solutions practiced in the labor market is hiring self-employed personnel based on b2b model. This model benefits both the principals and the contractors, making it extremely popular in IT sector. It is, therefore, no wonder that software houses were overtaken by fear when it was announced at the turn of 2019 and 2020 that state authorities would conduct the so-called entrepreneur test, i.e. verifying whether the self-employed are indeed entrepreneurs, or whether we are dealing with unlawful tax optimization that affects the interests of the Treasury. In some publications, there was even information about new legislation that allows such a test, meanwhile such legislation... has long existed in the Polish legal system.

Article 5b (1) of the Personal Income Tax Act of July 26, 1991, shows the legal conditions, the fulfillment of which will cause a self-employed person to "fail" the entrepreneur test, as a result of which there will be a risk of establishing an employment relationship, or at least undermining that the self-employed person is an entrepreneur.

According to this provision, "Activities are not considered as non-agricultural business activities if all of the following premises are found:

liability to third parties for the result of these activities and their performance, excluding liability for committing torts, is borne by the ordering party;
they are performed under the management and at the place and time chosen by the ordering party;
the one who performs these activities does not bear the economic risk associated with the conducted activity".

If there is a typical change in the form of employment from an employment relationship to b2b relationship, there is a high likelihood that all of the aforementioned conditions will be met, and - in case of an audit - state authorities could question the entrepreneur status of the self-employed personnel. This is a risk that many self-employed people are inconsiderate towards – they assume that all they need to do is sign another contract, and register in CEIDG (Polish business register for natural persons) and they will be able to calmly enjoy the benefits of running a business.

The first premise, i.e. the lack of responsibility for the activities performed in relation to third parties (specifically, the principal's customers) is a classic of the genre in the reality of cooperating with personnel on a b2b basis. This protection from third-party claims in the case of damage caused to them as a result of improper performance of the contract is characteristic of the employment relationship and is guaranteed to the employee by the Labor Code. According to Article 120 § 1 of the Labor Code, "If an employee causes damage to a third party during their employee duties, only the employer is obliged to compensate for the damage." The self-employed would be willing to see such solution in their cooperation agreements, and their expectations are usually met. In practice, however, it is the software house that is bound by a contract with the larger customer, and it is the software house that is directly liable for damages for non-performance or improper performance of the contract, while a self-employed person involved in rendering services to the customer is liable only to his/her principal (software house). However, fulfilling only this one condition does not determine the lack of entrepreneurial status, as two remaining conditions have to be met.

The second premise is that the self-employed person performs under the management and at the place and time chosen by the principal. Again, this is a feature taken directly from the employment relationship, namely Article 22 § 1 of the Labor Code, according to which "Through the establishment of an employment relationship, an employee is committed to performing work of a specific type for the benefit of the employer and under his supervision and at a place and time chosen by the employer, and the employer - to employ the employee for remuneration." Most often, we do not deal in cooperation agreements with provisions that would fall under this premise, however sometimes there are some provisions – sometimes backbreaking in their wording - on the place and time of service provision. The problem, however, is the reality of a certain cooperation, because often the self-employed person is subject to the management of people within the software house's structures, and is obliged to carry out orders that are not discussed with him/her. Then, the risk of demonstrating the management of the ordering party is very high. The pandemic, forcing work on a home-office basis, has made collaboration with self-employed personnel more flexible, so that setting the time and place of work has progressively become the domain of the self-employed contractors, but the trend back to offices is increasing, and with it, the temptation of principals to take this domain away from personnel. It is worth paying attention to the conjunction "and" linking subordination to management (issuing orders) with determining the time and place of work - it seems that all three elements must occur together for us to speak of the fulfillment of the second premise.

The third premise - the self-employed person's performance of activities without bearing the economic risks related to his/her business - is also a very common feature in the reality of the IT sector. If a self-employed person actually issues only one invoice, because (s)he provides services to a single customer (often still a former employer), which (s)he is sometimes obliged to do under far-fetched non-compete obligation, his/her liability for damage caused to the principal is limited, (s)he provides services using equipment and infrastructure provided by the principal, it is difficult to say that (s)he is an actual entrepreneur and bears the economic risk of his/her business. Authorities may be making the correct assumption that an entrepreneur is an entity that aims to have as many clients as possible, hires employees, and would never allow themself to be bound by a non-compete, and that accepting orders from various customers increases risk of liability to them. Likewise, the entrepreneur incurs expenditure for their business, no one lends them equipment or space free of charge, and in the reality of the free market, the customer rarely agrees to far-reaching limitations of liability for the services provided by the entrepreneur. This premise is, in practice, the most difficult to demonstrate, and it is the one that will most often serve as a rescue from questioning an entrepreneurial status. A poorly constructed cooperation agreement, however, could sink this lifebelt as well.

In connection with the fact that we have legislation that allows us to conduct an entrepreneur's test, and it is not needed to wait for an amendment preceded by a parliamentary discussion, because a proper order from the government addressed to the National Tax Administration and Social Security authorities is sufficient to initiate an audit, it is worth to pay attention not only to ensure safe provisions in the contract with the self-employed person, but also to comply with the rules of cooperation that will be compatible with this (properly structured) contract.