Polish tax optimization in connection with the new tax regulations for business and regulations increasing the cost of employing employees in Poland in 2022 – The legal possibility of reducing the salary of a Polish employee and the new tax regulations called “Polish Deal”

At the beginning of 2022, a reform of tax regulations entered into force in Poland, which, in particular, significantly increases the cost of employing a Polish employee. In practice, the new law is called the “Polish Deal” and it is precisely the Act of October 29, 2021 amending the Act on personal income tax, the Act on corporate income tax and some other acts (Polish Journal of Laws, item 2105 with subsequent amendments). The Polish Deal, in particular, increases the operating costs of foreign entrepreneurs employing Polish workers on a large scale under an employment contract under the Polish Labor Law. In such a case, the foreign entrepreneur must bear a much higher cost of maintaining a Polish employee compared to the situation that took place in 2021.

Reducing the Employee’s remuneration as a method of optimizing employment costs? Is it legal?

In practice, entrepreneurs try to use the right to amend an employment contract to unilaterally reduce the employee’s remuneration. This new change in law may result in the fact that from January 2022, employers will propose new, lower remuneration to their employees. The salary is reduced by the amount that is needed to bring the cost of maintaining the employee to the level before the tax reform introduced by the Polish Deal was in force. On the other hand, Polish authorities deny that changing the employment contract with regard to the reduction of remuneration is a legal method of circumventing the provisions of the Polish Deal.

To sum up, entrepreneurs employing Polish employees reduce employee costs so as to optimize the cost of employing a Polish employee in Poland in the face of the new tax law in Poland, which implements a more restrictive fiscal policy of the Polish state budget by introducing new tax regulations for entrepreneurs. The new regulations change the rules of settlement of employee costs, thus significantly increasing the cost of employment of Polish employees.

Since January 2022, there has been a discussion among lawyers as to whether the legal method of circumventing the new tax and social regulations increasing the cost of employing employees can consist in reducing employees’ salaries. The formal reduction of employees’ salaries in the employment contract allows a foreign employer operating in Poland to save on tax changes which seem to be beneficial for Polish employees under the “Polish Deal”.

In January 2022, entrepreneurs operating in Poland reduce employees’ salaries in order to adjust their salaries to the changed tax regulations. Implementing the reduction of salary will result in the fact that the employee will gain nothing from the Polish Deal, but the employer saves on the reduced costs of his employment.

In the debate about this controversial issue the following example is given – assuming even the reduction of about PLN 200 in salary for each such employee (including a reduction in social insurance contributions paid from the employer’s pocket), it may turn out that the more such employees will be covered by such optimization, the greater will be the savings of the entrepreneur. With one hundred employees, the savings of the entrepreneurs will amount to almost a quarter of a million zlotys. When there are a thousand such employees, the annual savings will amount to two and a half million zlotys. This is a very tempting prospect for many companies which, due to the entry into force of the Polish Deal, expect an increase in the costs of their operations.

However, even at the beginning of the year 2022 some Polish authorities like the Polish National Social Insurance Institution and the National Labour Inspectorate questioned such practices calling them unfair practices of employers.

The notification of the official website of the Polish National Social Insurance Institution reads as follows: “An employee who, after the introduction of the Polish Deal has doubts as to the settlement of remuneration and contributions by the employer, may report this fact to the Social Insurance Institution and the National Labour Inspectorate. Due to the incoming signals from employees, we react immediately together with the Social Insurance Institution and the National Labour Inspectorate.”

However, it may turn out that both the Polish Social Insurance Institution and the National Labour Inspectorate will have few possibilities to counteract such practices. Pursuant to the labour law, each employer may reduce the salaries of employees at any time.

In this case, the entrepreneur, when changing employee contracts, must provide the employee with an amending notice and justify the reduction in gross remuneration.

In the case law of Polish labour courts it is recognized that the optimization of the costs of business activity, including a reduction in salaries, may be a legitimate reason for the termination of an employment contract in Poland, and the Polish labour court may not review the employer’s economic decision in this regard. It therefore seems that if employees appeal such amendment of employment contract to a court, they have little chance of challenging the reductions.

In general the above described procedure can turn out beneficial for employers when they implement it in respect of a greater number of employees. However, if all groups of employees are covered by the reduction of remuneration, than in the light of Polish law there may come into place the procedure of group dismissals and in such case the employers would have to apply the relevant procedures set forth by the Polish Labour Code.