Employment 2020

Last Updated September 08, 2020

Hungary

Law and Practice

Authors



Nagy és Trócsányi was founded in 1991, and turned into a limited professional partnership ("ügyvédi iroda") in 1992, with the aim of offering sophisticated legal services. The firm is one of the largest home-grown independent law firms in Hungary. Currently, Nagy és Trócsányi has 27 lawyers, with eight active partners; all partners are equity partners. All lawyers at the Budapest office are either members of, or registered as clerks with, the Budapest Bar Association. Several of the firm’s lawyers are admitted attorneys or registered as legal consultants in New York. The firm's activity focuses on the following practice areas: M&A, company law, litigation and dispute resolution, real estate law, banking and finance, project financing, insolvency and restructuring, venture capital investment, taxation, competition, utilities, energy, media and telecommunication. Nagy és Trócsányi is the exclusive member firm in Hungary for Lex Mundi – the world’s leading network of independent law firms with in-depth experience in more than 100 countries worldwide.

In the last 12 months, several notable modifications of Act I of 2012 on the Labour Code (henceforth, the "Labour Code") have been implemented. Most of these changes were temporary to address the challenges imposed by the COVID-19 pandemic; nevertheless, numerous long-term modifications have also been implemented.

A new subchapter was introduced in the Labour Code, defining the rights of the employee with respect to the processing of personal data and special personal data, in line with Article 88 of the General Data Protection Regulation (GDPR). For example, in certain cases, the Labour Code allows the employer to handle the biometric data of the employee.

As a general rule, an employee must be at least 16 years of age in order to enter an employment relationship. Prior to the amendment of the Labour Code, the formal permission of the guardianship authority was necessary for the employment of a person under the age of 16 within the framework of cultural, artistic, sport-related or advertising activities specified in law; after the modification effective from 1 January 2020, a notification made at least 15 days prior to the start of the employment is sufficient.

Significant modifications have been introduced to the Labour Code with the aim to provide more protection to families, two examples of which are detailed below.

Pursuant to Section 61 (3) of the Labour Code, the employer must amend the employment contract based on the employee’s proposition to part-time work covering half of the regular daily working time until the employee’s child reaches the age of four, or the age of six in the case of employees with three or more children. In relation to this provision of the Labour Code, in order to facilitate more flexible employment conditions for mothers with young children, the modification of the Labour Code raised the previous age limit of three or five to the current age limit of four or six.

Prior to the amendment of the Labour Code, maternity leave was only available for women (mothers); as a result of the modification effective from 1 January 2020, maternity leave is also provided to a parent (male or female) who provides care for a child – based on a court decision or resolution of the guardian authority – due to the death or health condition of the mother.

The government of Hungary declared a "state of emergency" in Governmental Decree No 40/2020. (III 11) on 11 March 2020, in order to implement the appropriate measures to address the challenges imposed by the COVID-19 pandemic. Subsequently, the Hungarian government introduced new, temporary extraordinary measures with Government Decree No 47/2020 (III 18) concerning labour matters, derogating from the effective provisions of the Labour Code for the duration of the state of emergency and for 30 days thereafter.

Under the general rules of Hungarian labour law, the employer must provide the working time schedule to the employee in writing for at least a period of a week, and at least 168 hours prior to the commencement of the working hours. In the absence of such notification, the last working time schedule provided will apply. Pursuant to Section 97 (5) of the Labour Code, the employer may modify the announced working time schedule 96 hours prior to the commencement of the working hours, in the event of unforeseeable circumstances in its operation or business. The employer might also modify the announced working time schedule at the written request of the employee. As a result of the extraordinary measures, the employer could derogate from the announced working time schedule 96 hours prior to the commencement of the working hours.

As a general rule, distance working (ie, home office) must be agreed upon by the employer and the employee in the employment contract. As a result of the extraordinary measures, the employer could order distance working (home office) unilaterally – therefore, the employer had the option to unilaterally change the employment relationship to distance working.

The extraordinary measures also made it possible for the employer to take the necessary and justified measures to monitor the employee’s state of health, thus providing the employer with an appropriate legal basis for handling the employee’s related personal data. It is important to note, however, that as a general rule – pursuant to Section 10 (5) of the Labour Code – the employer must inform the employee concerned in writing about the processing of his or her personal data and must comply with the rules on the protection of such personal data.

The above-mentioned amendments introduced by the extraordinary measures prevailed over any contradicting rules set out in collective agreements. 

The extraordinary measures also allowed the employer and the employee to derogate from the provisions of the Labour Code in a separate agreement. This was a significant change in the structure of the Labour Code:

  • derogation from certain provisions of the Labour Code is granted only to the benefit of the employee;
  • in other cases, the Labour Code allows derogation to the detriment of the employee, but only to a certain extent;
  • there are also certain provisions in the Labour Code which allow no derogation, with no exceptions.

As a result of the changes introduced by the extraordinary measures, the employee and the employer could, by mutual agreement, derogate from any provision of the Labour Code. On the one hand, this allowed the employer and the employee to find a more flexible solution to the harsh employment situation imposed by the COVID-19 pandemic in order to maintain the employment relationship; on the other hand, the rules set out in the Labour Code which limit or prohibit derogation in order to protect the employee did not apply during the period of the state of emergency and for 30 days thereafter.

The above measures were temporary. Nevertheless, since major changes took place in the workforce as a result of the COVID-19 pandemic, future amendments to the effective provisions of the Labour Code and related laws are expected – for example, the Ministry of Innovation and Technology has already announced the revision of home office-related legislation.

Under Hungarian labour law, only a natural person can enter into an employment relationship as an employee; legal persons, such as corporations, cannot be subject to an employment relationship as employees, only as employers. The Labour Code provides special provisions with respect to some employees, based on their special personal characteristics (eg, age, mental health) or status within the company (eg, executives).

As a general rule, employees must be at least 16 years of age in order to be eligible to enter into an employment relationship; nevertheless, any person of at least 15 years of age receiving full-time school education may enter into an employment relationship during school holidays. Furthermore, subject to prior notification to the guardian authority at least 15 days before the employment, persons under 16 years of age can be employed for cultural, artistic, sport-related or advertising activities provided for by law.

Employees under the age of 18 and incapacitated employees are subject to enhanced protection under the Labour Code. For example, for the conclusion, amendment or termination of an employment contract, or to undertake commitments, the consent of a legal representative is required for the validity of such legal statements of young workers or persons whose legal capacity has been partially limited with respect to employment-related matters.

Also, special rules apply to employees of executive position. Pursuant to Section 208 (1) of the Labour Code, such employees are the managers of the employer, or other employees under his or her direct control who are – in part or in full – entitled to exercise rights in the name of the manager.

For example, unless the parties agree otherwise, the executive employee’s working schedule is unfixed, and is not subject to a collective agreement concluded between the employer and a union.

Under Hungarian labour law, the employment contract must be put into writing. However, if the parties fail to put their contract into writing, a special rule of invalidity applies: invalidity of such contracts can only be relied on by the employee for a limited duration of 30 days after the commencement of employment. The amendment and the termination of an employment relationship must also be executed in writing.

Hungarian labour law requires two elements to be agreed upon by the parties in order to deem a given employment contract valid: base wage and job position of the employee.

The employer and the employee are nevertheless advised to agree on other terms of their employment relationship; the Labour Code provides default options with respect to certain terms of employment that will apply in case there is no agreement between the parties that provides otherwise.

Employment contracts can be concluded for a fixed term or for an indefinite period of time. If the parties to an employment contract do not specify the term of the employment contract, then by default the employment relationship will be concluded for an indefinite duration.

If an employment contract is concluded for an indefinite period of time, the employment relationship will terminate at the end of the given time period. Otherwise, the termination of an employment contract concluded for a definite period of time is subject to additional requirements in comparison to an employment relationship concluded indefinitely – for example, the employee can terminate the employment contract by notice only in the following cases: the employer is undergoing liquidation or bankruptcy proceedings, for reasons related to the employee’s skills, or if maintaining the employment relationship is no longer possible due to unavoidable external reasons.

In case of fixed-term employment contracts, the employees must give reasons for terminating their employment relationship: the reason given for termination must demonstrate that maintaining the employment relationship would be impossible or it would cause unreasonable hardship in light of the employee’s circumstances.

If the workplace of the employee is not specified in the employment contract, pursuant to Section 45 (3) of the Labour Code, the place where work is normally carried out will be considered as the workplace under the employment relationship.

With respect to working hours, in the absence of an agreement to the contrary, all employment relationships are deemed to have been concluded for full-time daily employment (ie, eight hours a day).

If the employee and the employer do not agree otherwise in the employment contract, the daily working time will be eight hours (the regular daily working time). The parties may increase the daily working time in full-time jobs to a maximum of 12 hours daily for employees either (i) working in stand-by jobs or (ii) who are relatives of the employer or the owner (extended daily working time).

The parties may agree to part-time employment, in which case the base wage is proportionate to the amount of time spent working. However, the parties may also agree to reduce the daily working time even in full-time jobs, in which case the base wage will remain the same, although the daily working time will be less compared to regular daily working time.

As a general rule, the daily working time of employees cannot exceed 12 hours, and the weekly working time cannot exceed 48 hours.

Pursuant to Section 97 (4) of the Labour Code, the employer must communicate the working schedule to the employee in writing for at least the subsequent week, a minimum of 168 hours prior to the start of the scheduled daily working time. In the absence of such communication, the last work schedule remains in effect

The working schedule communicated by the employer can be altered in special cases (ie, the occurrence of unforeseen circumstances in the operation or business of the company); also – in line with the second sentence of Section 97 (5) of the Labour Code – the employer may alter the communicated working schedule upon the employee’s request made in writing. If the employer needs the employee concerned to work extra hours above the already communicated working schedule, then compensation for overtime work must be paid to the employee.

Generally, in a given calendar year, 250 hours of overtime work can be ordered. In case of a written agreement between the parties, this amount of overtime work can be increased by 150 hours – however, this agreement can be withdrawn by the employee at the end of the given calendar year.

Pursuant to Section 96 (2) of the Labour Code, the employer may permit the employee in writing to manage his or her own work schedule (ie, a flexible work schedule), in which case the rules of the Labour Code on working time – including overtime work – will not apply. Nevertheless, pursuant to the Hungarian judicial case law, the application of flexible working schedule presupposes that the employee carries out an activity that can be performed independently of the work of other employees, and that the work of the employee can be scheduled by the employee, regardless of the employer’s demands or the restrictive rules of the Labour Code.

It is also worth mentioning that the employer may introduce "uneven" working hours – meaning that the employee will not work the same amount of time on each and every working day – in which case the employer must introduce either a time banking scheme (munkaidőkeret, most commonly used) or a payroll period arrangement (elszámolási időszak, very rarely used). The introduction of such schedules allows the employer to allocate the working hours of the employee in a more flexible manner – however, they require precise recording of the employee’s working hours, which normally imposes a significant administrative burden on companies.

The amount of compensation for work is subject to the agreement between the employer and the employee. Nevertheless, under Hungarian law, there are two types of minimum wages: (i) guaranteed wage minimum, and (ii) mandatory minimum wage.

Guaranteed wage minimum applies to employees employed in a position requiring at least secondary education or a secondary vocational qualification. The monthly amount of guaranteed wage minimum is currently gross HUF210,600 in case of full-time employment (eight hours a day).

Mandatory minimum wage applies to all the other employees. The monthly amount of mandatory minimum wage is currently gross HUF161,000 in case of full-time employment (eight hours a day).

The amount of mandatory minimum wage and guaranteed wage minimum is revised every calendar year, and is set by the Hungarian government in a government decree following a consultation with the National Economic and Social Council. In recent years, the average increase in mandatory minimum wage was 8%, and around 10% in the case of guaranteed wage minimum.

The Labour Code, as opposed to many European jurisdictions, contains provisions with respect to wage supplements. The amount of a wage supplement, unless otherwise agreed by the parties, is calculated on the basis of the employee’s base wage for an hour of work.

The employee is entitled to a wage supplement based on the work carried out during certain time periods (eg, on Sunday, during the night, etc), and is entitled thereto in addition to his or her base wage for regular working time. The parties may set rules in their employment contract that are different from the relevant provisions of the Labour Code, but may deviate from these provisions only in favour of the employee.

Paid Leave

Employees are entitled to paid vacation leave, the amount of which generally corresponds to the age, health and number of children of the employee. The base amount of paid vacation leave for any employee is 20 days per calendar year, which increases after time with extra vacation days (one extra day from the age of 25, two extra days from the age of 28, etc). During paid vacation leave, the employee is entitled to receive the full amount of his or her base wage.

Employees are entitled to unpaid leave under various legal titles. Please see a few important examples below.

The employer must pay for 15 days of the employee’s sick leave in a calendar year; for the duration thereof, the employee is entitled to receive 70% of absentee payment (the latter of which generally corresponds to the employee’s base wage).

A mother is entitled to 24 consecutive weeks of maternity leave, of which two weeks are required to be used. Unless otherwise agreed by the parties, a maximum of four weeks of maternity leave must be allocated before the expected time of birth.

Employees – both the father and the mother – are entitled to unpaid leave for the purpose of taking care of their child, until the child reaches the age of three, and such unpaid leave must be allocated as requested by the employee. Employees are also entitled to unpaid leave for the purpose of taking care of their adopted child for the period of three years, or for six months if the adopted child is over the age of six.

Employees are also entitled to unpaid leave for providing in-person care for a relative, if the duration of such care is foreseeably more than 30 days, for the duration of the care, but in any case for a maximum of two years.

Confidentiality Obligations

It is also worth mentioning that employees are obliged by force of law to keep the business secrets of the employers: pursuant to Section 8 (4) of the Labour Code, the employees must maintain confidentiality in relation to business secrets obtained in the course of their work, and cannot disclose to unauthorised persons any data leaned in connection with their activities that, if revealed, would result in detrimental consequences for the employer or other persons.

Employee Liability

As a general rule, the concept of the Labour Code is based on a fault-based liability system with respect to the employee’s liability for damages: the employee is subject to liability for damages caused by breach of any obligation arising from the employment relationship, if the employee did not act as normally "expected in the given circumstances". The amount of compensation cannot exceed four months’ absentee payment payable to the employee; nevertheless, the employee is liable for the full extent of damage caused intentionally or by grave negligence. The employee is not liable for any damage that was unforeseeable or that resulted from the employer’s wrongful conduct, or that was incurred due to the employer’s failure to perform its obligations to mitigate the damage.

The employee’s liability for damages may arise due to a breach of any obligation originating from the employment relationship; breach of obligation can take the form of active conduct, or it may be the result of not exercising activity when required (omission).

The employer (as plaintiff) must prove that:

  • it has suffered damage as a result of the employee’s breach of obligation;
  • the intentional or gravely negligent act of the employee; and
  • the causal link between the employee’s conduct (or omission) and the employer’s damage.

The employee is also be liable for non-pecuniary damage caused to the employer (eg, causing harm to the employer’s reputation).

The employer and the employee may agree in writing that the employee shall not engage in any conduct – for up to two years following the termination of the employment relationship – that would infringe or jeopardise the rightful economic interests of the employer.

In return, the employer must pay adequate compensation, the amount of which is to be determined based on the degree of impediment the agreement imposes on the employee’s ability to find employment elsewhere, in light of the employee’s education and experience. Nevertheless, there is a minimum amount the employer is obliged to pay: the amount of compensation cannot be less than one-third of the base wage due for the same period covered by a non-competition agreement.

If there is no agreement between the parties regarding the amount of compensation, the non-competition agreement will be null and void. The parties must also define the activities of the employee covered by the non-competition obligation. Nevertheless, under the Hungarian judicial case law, the mere fact that the former employee finds a job at another company whose main business activities according to the information contained in the company registry are the same as the activities of the former employer, does not necessarily mean that the employee concerned will be in breach of his or her non-competition obligations: the specific content of the employee’s new position must also be assessed.

The parties may attach a contractual penalty pursuant to the Civil Code to the non-competition agreement to strengthen their legal obligation; this can help to unambiguously monetise the consequences of infringing the agreement.

In case of succession in the employer’s legal status (transfer of undertakings), the rights and obligations arising from a non-competition agreement are transferred to the receiving employer.

The employer and the employee may agree upon the application of a non-solicitation clause, under which the employee will be prohibited from soliciting the customers of the former employer. Pursuant to the Labour Code, the same conditions are to be applied to a non-solicitation clause as to a regular non-competition clause.

The employer may also apply a non-solicitation clause in its contracts concluded with customers. However, special attention should be paid to such contractual clauses from a competition law aspect since a non-solicitation clause may result in a competition infringement. On the other hand, competitors must also adapt their workforce-recruiting activities to the requirements of fair dealing in business relationships.

The processing of the employee’s personal data is subject to the general requirements of data protection legislation.

Pursuant to Section 11/A (1) of the Labour Code, the employer is allowed to monitor the employee’s worktime activity. It should be highlighted, however, that no information is allowed to be gathered by the employer which does not concern the employment relationship of the employee.

Considering the right of data subjects to prior notice on data processing under Article 13 of the GDPR, the employer (as a data controller) is obliged to provide adequate information to the employees (as data subjects) on the circumstances pursuant to which their personal data are processed.

Section 16 (1) of Act CXII of 2011 on the Right of Informational Self-Determination and on Freedom of Information expressly states that in order to give effect to the right to prior information – before the commencement of data processing operations or, at the latest, immediately after the start of the first data processing operation – the data controller and/or the data processor acting on the controller’s behalf or following the controller’s instructions shall forthwith make the required information available to the data subject.

The processing of the employee’s personal data must have sufficient legal basis. In line with the EU case law, the Hungarian data protection authority (Nemzeti Adatvédelmi és Információszabadság Hatóság, NAIH) considers the consent of the employee as insufficient legal basis for the handling and processing of personal data under the GDPR, since the hierarchical nature of an employment relationship can adversely affect the voluntary character of the consent given by the employee. Consequently, the employer should establish its data processing practices on a different and more appropriate legal basis provided by the GDPR (eg, the legitimate interests of the employer, Article 6 (1) (f) of the GDPR, etc).

Since Hungary is a member state of the EU, citizens of any European member state are free to work in Hungary, as under Article 45 of the Treaty on the Functioning of the European Union, freedom of movement for workers shall be secured within the Union. Citizens of EU countries do not normally have to obtain a work permit in order to take up employment in Hungary, and self-employed workers are not obliged to obtain a work permit in any case.

A work permit is required for the employment of persons who do not possess Hungarian citizenship, and do not have the right to free movement and residence in Hungary pursuant to Act I of 2007 on the Admission and Residence of Persons with the Right of Free Movement and Residence.

Nevertheless, Government Decree No 445/2013 (XI 28) enumerates 27 cases where a work permit is not required for the employment of persons from non-EEA countries (eg, for the chief executives and supervisory board members of business associations with foreign participation, etc). The employer must notify the government agency of competence about the employment of non-EEA state employees, by reference to the place of employment. The requirements for exemption must be evidenced by the employer (applicant).

A work permit is not required for the employment of persons who are entitled to free movement and residence in Hungary. Pursuant to Act I of 2007 on the Admission and Residence of Persons with the Right of Free Movement and Residence, the following persons have the right to free movement and residence:

  • EU and EEA (European Economic Area) nationals;
  • family members of EEA nationals;
  • any person accompanying or joining an EEA national, who were dependant or members of the household of an EEA national in the country from which they are arriving, or who require the personal care of an EEA national due to serious health reasons, and whose entry and residence has been validated by the authority as a family member.

As described in 5.1 Limitations on the Use of Foreign Workers, in general, employees who do not possess Hungarian citizenship and do not have the right to free movement and residence in Hungary are obliged to obtain a work permit in order to work in Hungary.

Under Section 6 (1) of Government Decree No 355/2007 (XII 23), the employer must notify the competent Hungarian authorities about the employment of a person who has the right to free movement and residence. Special rules apply to employees employed by an employer established in an EEA state, posted to an EU member state or employed under temporary agency work.

An employee from within the EU must also notify the competent Hungarian authorities if the duration of his or her residence exceeds three months. Under Section 21 (1) of Act I of 2007 on the Admission and Residence of Persons with the Right of Free Movement and Residence, EEA nationals are required to register within 93 days from the time of entry by communicating their personal data, if they intend to exercise their right of residence for an intended stay of more than 90 days within any 180-day period.

Unions are legal entities, for which the general rules of associations of the Civil Code apply. The establishment of associations, and so unions, requires the adoption of its statutes, which requires the unanimous declaration of intent of at least ten persons. New members can enter the association in accordance with the provisions of the statute.

Unions are organisations of employees whose primary function is the enhancement and protection of employees’ interests related to their employment relationship.

In order to protect employee rights and needs, it is necessary for unions to have the means to act effectively. The following rights have been conferred upon them over the past decades.

Right of Representation

This means the right to represent all the members of the given union at the employer or at the employer’s representative bodies, with respect to their material, social, living and working conditions. This right does not pertain to representation in court proceedings, which requires an explicit authorisation by the employee concerned.

Right of Information

Unions may request information from employers on all issues related to the economic interests and social welfare of employees in connection with their employment. This also includes the right to express their position and opinion to the employer, concerning any actions planned or taken by the employer.

Ensuring Operating Conditions

This group contains: 

  • the right of propaganda;
  • the right of use of private space (that is to say the obligation of the employer to provide room for the union and its members, officials);
  • the right to join;
  • the right to deduct the membership fee from the member employees’ salary, at the request of the employee.

These entitlements assist day-to-day operations of the unions, allowing them to operate more effectively and cost-efficiently. It is a mandatory obligation for the employer to ensure the exercise of these rights.

Working Time Reduction

This entitlement ensures that the employees directly involved in the work and activities of the union can perform their related tasks. The amount of the reduction is one hour after two union member employees, on a monthly basis.

Right to Initiate Court Proceedings

This right enables unions to enforce claims before courts arising from the Labour Code or a collective agreement.

The main reason for the existence of the employee representative bodies is that they provide checks and balances within the confines of labour law. As employment relationships are fundamentally subordinate in the relation of the employer and the employee, the employee representative bodies have to balance the interest of the parties.

Within the framework of the Hungarian labour law, we can basically distinguish four employee representative bodies, which are the following:

  • unions;
  • work councils;
  • employee delegates in the company’s supervisory board;
  • occupational safety and health representation.

See 6.1 Status/Role of Unions for the rules pertaining to unions.

Works Councils

The duty of works councils is to participate in the decision-making process of the employer, which means the basis of its operation is the co-operation of employers and employees. The election of a works council is mandatory if more than 50 employees are employed by the same employer. As works councils are not legal entities, they are not entitled to acquire their own funds. Therefore, the employer is obliged to provide for their expenses.

The members of the works council are elected. An election committee has to be set up eight weeks before the elections take place. All employees of the employer are eligible to elect (passive suffrage), but only those who work at the same employer for at least six months prior to the election are entitled to be elected (active suffrage). Candidates may be nominated by the 10% of the employees, but by at least 50 persons. The election is secret and direct, which means that those entitled to vote cast their vote directly for the candidates without the intervention of any nominating body. The candidate to receive the most valid votes, or at least 30% of them, is thereby elected to the works council. The employer, the employees or the union having representation by the given employer may commence proceedings with regard to the invalidity of the election before court.

The main difference between unions and works councils lies in their relation to the employer. The role of the unions is fundamentally adversarial, their aim being to reduce the subordinate status of the employees. Works councils are more co-operative, since they take part in the employer’s decision-making procedure by consulting on the planned actions related to employees.

Based on Section 3:124 (1) of the Civil Code, if the annual average number of full-time employees employed by the company exceeds 200, then it is mandatory that one-third of the supervisory board consist of employee representatives. Employee representatives are delegated by the works council from among the employees following consultation with the unions operating at the company. In the event of the termination of employment of an employee representative, their membership of the supervisory board also terminates.

Occupational Health and Safety Representation

The function of the occupational health and safety representation is to ensure a safe work environment, reducing the hazards emerging in connection to the occupation. Employees may elect a safety representative – if the employer employs more than 50 persons, then the election is obligatory – from among themselves to represent their rights and interests in relation to their right to a safe, non-hazardous work environment.

Collective agreements are concluded between the employer and the union, regulating the relations of the parties and the employment relationship of the employees falling within the scope of the agreement.

The main function of collective agreements is to facilitate and ensure the enforcement of the needs and interest of the employees. In this way, unions are able to ensure more favourable working conditions for the employees; in return, the unions undertake to refrain from strikes and other actions with regard to the questions settled within the framework of the collective agreement.

Collective agreements consist of two parts. Firstly, the part of obligation, which regulates the relations between the contracting parties. Secondly, the normative part, which regulates the obligations and rights arising from the employment relationship and so it directly affects the employment itself.

The contracting parties are obliged to send the collective agreement to the ministry responsible for employment policies (ie, the Ministry for Innovation and Technology) by electronic means for registration within 30 days of its conclusion.

Within the framework of the Labour Code there are two types of termination (dismissal) procedures – general termination (termination by notice) and immediate effect termination (dismissal without notice).

In the case of termination by notice, the employer is required to justify the dismissal. The reasons for the dismissal may only be in connection with the behaviour of the employee in relation to the employment relationship, with its abilities or in connection with the employer’s operations. In this case, the employment will terminate after a notice period; in general, the notice period is 30 days, but can be higher depending on the years of employment at the same employer. Further, the employee is entitled to receive a severance payment, the amount of which depends on the years of employment at the same employer.

A termination without notice (ie, termination with immediate effect) is based on Section 78 of the Labour Code, and is applicable only if the following reasons occur:

  • if either of the parties wilfully or by gross negligence commit a grave violation of any substantive obligations arising from the employment relationship; or
  • if either of the parties otherwise engage in a conduct that would render the employment relationship impossible.

In this case the employer is also required to justify the dismissal of an employee but there is no notice period before the termination of the employment (“immediate effect termination”) and the employee is not entitled to severance payment (if the employee is dismissed for reasons in connection with his or her behaviour with regard to the employment relationship or on grounds other than health reasons). The right of termination without notice may only be exercised, without justifying by the employer, if it is in connection with a fixed-term employment relationship.

Collective redundancy is when an employer, based on the average statistical workforce for the preceding six-month period, intends to terminate the employment relationship:

  • of at least ten employees, when employing more than 20 and less than 100 employees;
  • of 10% of the employees, when employing 100 or more, but less than 300 employees;
  • of at least 30 employees, when employing 300 or more employees.

Further, if the employer plans to conduct a collective redundancy, it must consult the works council beforehand. The employer’s obligation of consultation shall apply until the conclusion of an agreement or in the absence of it for a period of 15 days after the beginning of negotiations.

In addition, the employer has the obligation to inform the works council at least seven days before the consultation, in writing, of the following:

  • the reasons for conducting a collective redundancy;
  • the number of employees affected by the planned redundancy and the number of employees employed, broken down by employment groups (eg, long-term employees, single parent employees);
  • the period over which the projected redundancy is to be executed;
  • the criteria proposed for the selection of the employees to be involved in the redundancy; and
  • the conditions and the extent of benefits provided in connection.

In order to reach an agreement, the negotiations shall, at least, cover the possible ways and means of avoiding collective redundancies, the principles of redundancies, the means of mitigating the consequences and the reduction of the number of employees affected.

The employer shall notify in writing the employees affected of its decision regarding collective redundancies at least 30 days prior to delivering the notice of dismissal or the dismissal without notice regarding the fixed-term employment relationships. The notice of dismissal or the dismissal without notice may be delivered after 30 days following the time of notification. The above notification shall be sent to the works council and the competent government employment agency as well. Any notice of dismissal delivered in violation of the above shall be considered unlawful.

A notice period applies in the case of termination by notice. In general, the notice period under the Labour Code is 30 days, which shall begin at the earliest on the day following the date the termination was delivered. The general notice period can be extended by the will of the parties (as well as within the framework of collective agreements) and also by law, but cannot exceed six months. In the case of a collective agreement the six months' limit does not apply, and the parties, the union and employer may agree on a longer period.

If the employer terminates the employment by notice, the 30-day notice period can be extended by a further five to 60 days, depending on the years of employment at the same employer. In the case of a notice period, the employer must excuse the employee from the duty to work for at least half of the notice period. For the period of being excused the employee shall receive an absentee payment, except if it would not be eligible for any wages.

Please note: where the employment is terminated by the employer, the notice period commences at the earliest on the day after the expiry of the following periods:

  • duration of incapacity to work due to illness, not to exceed one year following expiration of the leave period;
  • absence from work for the purpose of caring for a sick child;
  • leave of absence without pay for providing home care for a close relative.

The notice period, with regard to the termination of a fixed-term employment relationship by notice, may not go beyond the period of the fixed term.

The employee is entitled to a severance payment if the employment is terminated by the employer, upon the dissolution of the employer without succession or in the case the employer taking over the economic unit of another employer falls outside the scope of the Labour Code.

The amount of the severance payment depends on the years of employment by the same employer and varies between one and six months of absentee payment. In addition, the aforementioned amount can be extended with a further one to three months of absentee payment, if the employment relationship is terminated within a five-year period before the date the employee reaches the age limit for old-age pension (ie, protected age).

The employee is not entitled to receive severance payment if:

  • he or she is recognised as a pensioner at the time when the notice of dismissal is delivered or when the employer is terminated without legal succession;
  • he or she is dismissed for reasons in connection with their behaviour in relation to the employment relationship or grounds other than health reasons.

A termination without notice (termination with immediate effect) is applicable only if:

  • either of the parties wilfully or by gross negligence commit a grave violation of any substantive obligations arising from the employment relationship; or
  • either of the parties otherwise engage in a conduct that would render the employment relationship impossible.

The right of termination without notice may be exercised within a period of 15 days of gaining knowledge of the grounds thereof, but not later than one year from the occurrence of such grounds or, with regard to a criminal offence, up to the statute of limitation for criminal liability. If the right of termination without notice is exercised by a body, the date of gaining knowledge shall be the date when the body, acting as the body exercising employer’s rights, is informed regarding the grounds for termination without notice.

Termination agreements are accepted as a mean of termination within the framework of the Labour Code, although the Code does not cover any detailed rules pertaining to it. Based on the freedom of contract, fixed-term and open-ended employment agreements can be freely terminated by a termination agreement.

The termination agreement of the parties must indicate their clear will, the real intention of the parties and the date of termination. Further, as with entering into an employment agreement, the termination of it is required to be in writing. However, judicial practice has taken the position that if the termination was carried out by both parties on the basis of a verbal mutual agreement, the invalidity of the termination cannot be established due to the lack of a written record in itself. The parties may agree on other issues by mutual agreement.

The protection against dismissals can be divided into two categories. Absolute prohibitions on dismissal are circumstances (or the duration of their existence) in which the employment relationship cannot be terminated nor any dismissal can be announced by the employer. Relative prohibitions on dismissal are the cases in which the employment relationship cannot be terminated, but the employer has the right to announce the termination.

Regarding the absolute prohibitions, the employer may not terminate the employment relationship by notice:

  • during pregnancy;
  • during maternity leave;
  • during a leave of absence taken without pay for caring for a child;
  • during any period of actual voluntary reserve military service; and
  • in the case of women, while receiving treatment related to a human reproduction procedure, for up to six months from the beginning of such treatment.

Relative prohibitions pertain to the rules which determine when the notice period can commence. If the employment is terminated by the employer, the notice period shall begin at the earliest on the day after the expiry of the following periods:

  • duration of incapacity to work due to illness, not to exceed one year following expiration of the leave period;
  • absence from work for the purpose of caring for a sick child;
  • leave of absence without pay for providing home care for a close relative.

In addition to the above, based on Section 66 of the Labour Code, the obligations imposed on the employer are stricter than usual in connection to employees of protected age. The employer is not entitled to terminate employment relationships concluded for an indefinite period, if the employee reaches the age limit for pension within five years. In this case, the employment may only be terminated by the employer in connection to reasons for termination without notice, which is to say:

  • the employee wilfully or by gross negligence commits a grave violation of any substantive obligations arising from the employment relationship; or
  • if either of the parties otherwise engage in a conduct that would render the employment relationship impossible.

The employer may initiate proceedings at the competent court against the (former) employer in case the act of dismissal by the employer does not meet the legal requirements set out in the Labour Code. The proceedings must be initiated within 30 days after the date of the wrongful dismissal at issue.

The deadline for bringing an action before the court is considered to be met if the statement of claim is dispatched on or before the last day of the deadline. An employee missing the deadline has the option to file an application for excuse, however, the claim cannot be enforced later than six months after the employer’s act of dismissal.

Even if an employment relationship was wrongfully terminated by either the employer or the employee, the dismissal will terminate the employment relationship as in the case of lawful termination, regardless of whether and when the judgment of the court finding the dismissal wrongful after carrying out an employment litigation becomes final and legally binding.

Under Section 82 (1) of the Labour Code, the employer is liable to provide compensation for damages resulting from the wrongful termination of an employment relationship. The Labour Code limits the amount of compensation due for loss of income at 12 months’ absentee payment of the employee concerned.

At the request of the employee, the court may restore the former employment relationship, if:

  • the dismissal was in breach of the obligation of equal treatment;
  • protected employees were subject to wrongful dismissal (eg, a pregnant employee was dismissed);
  • the dismissal was in breach of the Labour Code’s provisions relating to the protection of union representatives;
  • the employee concerned was an employee representative at the time of dismissal;
  • the employee successfully annulled the agreement or his or her legal statement aimed at the termination of the employment relationship.

In such case, the former employment relationship is restored with retroactive effect, and the employer must compensate the employee for his or her unpaid wages, together with other benefits and potential damage suffered by the employee, for the period between the date of wrongful dismissal and the judgment rendered by the court.

If an employee is subject to unlawful discrimination, he or she may initiate proceedings at the Equal Treatment Authority (Egyenlő Bánásmód Hatóság) or may bring an action before the competent court. A major difference between the two options is that in case the Equal Treatment Authority finds that discriminatory practices were exercised by the employer in question, it may only impose a fine (among other potential sanctions). However, unlike the courts, it has no competence to order compensation for the employee concerned. It is possible, nonetheless, to have proceedings initiated both at the competent court and at the Equal Treatment Authority.

Hungarian anti-discrimination law – based on an EU-level harmonisation – favours the person who claims to have been a victim of discrimination based on a personal characteristic (eg, age, gender, political views, etc).

Under Hungarian law, the burden of proof is reversed if the plaintiff is able to present a case that in all probability he or she was a victim of discriminatory practices exercised by the employer. In other words, the employee is not required to prove that he or she was a victim of discriminatory practices, but only to present the facts such that the act of discrimination seems probable. Once the plaintiff is successful in presenting the facts and circumstances as described above, the employer (defendant) must prove that the circumstances indicated by the plaintiff did not exist, or that it acted in accordance with the legal obligation of equal treatment.

Generally, the employee concerned may claim non-pecuniary damages for the unlawful discrimination exercised by the employer. Furthermore, if the court finds that the termination of the employment contract constitutes wrongful dismissal – at the request of the employee concerned – it might order the restoration of the employment relationship, reinstating the former employee (plaintiff) into his or her former position at the company.

As of 1 April 2020, a court reform entered into force, which had a huge impact on the court system of Hungary, as special courts for labour law-related cases were integrated into Hungarian tribunals. However, as labour law and employment-related questions are of a very specific and complex nature, separate tribunal councils have overtaken the duties of the above-mentioned special courts, which consists of specialised judges.

Guidance and representation of the party in a court proceeding – ie, legal representation – is not mandatory in connection to labour law-related litigation. The parties are free to choose whether they represent themselves or ask for representation before court from a licensed lawyer. Besides, Act CXXX of 2016 on the Civil Procedure Code (“CPC”) enumerates the parties which can take the position of a legal representative in court proceedings, which are the following:

  • attorneys and law firms;
  • bar association legal counsels in cases defined by the Act on Legal Practice;
  • a judge and court secretary authorised to represent the court vested with legal personality;
  • a public prosecutor empowered to represent the Prosecutor General (Legfőbb Ügyészség); and
  • other persons defined by an act.

Junior lawyers (ügyvédjelölt) are not entitled to represent cases which are not under the jurisdiction of the district courts – as the former special courts for labour and administrative litigation – however, due to the reforms enacted in 2020, junior lawyers are now able to provide legal representation in labour law-connected litigation by the tribunals.

The CPC provides the possibility for the parties to file a class action. Firstly, if persons are required to enter a litigation by law, or the subject of the action or if the object of litigation is a common right or a common liability that can only be resolved uniformly, the persons affected are required to join the action as parties. Where this obligation involves one or more plaintiffs and/or defendants, this shall constitute an involuntary class action of the parties. Secondly, two or more plaintiffs may unite in an action and two or more defendants may be jointly sued if:

  • the substantive force of the verdict brought in the action would affect all of the litigants, even those not participating in the action;
  • the claims under litigation originate from the same legal relationship; or
  • the claims under litigation originate from similar cause of action and legal basis, and the same court is recognised to have jurisdiction under the provisions of CPC notwithstanding with respect to all defendants.

According to the wording of Act LX of 2017 on Arbitration, no arbitration proceeding can be conducted with regard to labour law disputes.

Unless otherwise provided for by an act, the costs of the court proceedings of the prevailing party shall be covered by the losing party. The costs of court proceedings shall include all expenses the party has necessarily incurred during or prior to the proceedings in a causal relationship with the enforcement of a right in the action, including the loss of income stemming necessarily from having to appear before the court. Based on the above-mentioned, the cost related to legal representation are generally included in the cost of the court proceedings, and, therefore, the prevailing party is entitled to receive attorney’s fees.

Nagy és Trócsányi

Ugocsa utca 4/B
Budapest
Hungary
H-1126

+361 487 8700

+361 487 8701

budapest_office@nt.hu www.nt.hu
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Trends and Developments


Authors



Vámosi-Nagy Ernst & Young Law Office was established in 2010 and the team is growing rapidly, now engaging 29 lawyers. As part of a global network of 2,000 law professionals across 76 countries (including the UK, France, Germany and China), the firm provides practical, workable proposals, whether in one or many jurisdictions. It focuses on areas where a fully integrated multidisciplinary approach pays tangible dividends, working with its people advisory services colleagues on employment law projects, with its transaction advisory team on M&A projects, and with its tax and advisory practice on the legal aspects of the regulatory issues faced by clients. The firm's recent employment law experience includes advising Accorinvest Group SA on a large-scale multinational transaction, MASTER GOOD Termelő és Kereskedelmi Korlátolt Felelősségű Társaság in the acquisition of Sága Foods Zrt., and providing full (legal, tax and project management) support in confidential reorganisations and collective redundancies.

COVID-19 and the Hungarian Labour Market

The COVID-19 pandemic has had significant effects on the Hungarian labour market. Despite government subsidies, loans and payroll tax reliefs, the public has seen a number of employers engaging in cutting labour costs, collective redundancies or exiting markets, initiating insolvency or winding-up procedures. These continue to go hand-in-hand with enhanced M&A activity as stronger competitors buy suffering enterprises. While the unemployment rate rises to a level not seen for a long time, the Hungarian labour market is still suffering from a lack of skilled workforce in many sectors.

However, the experience gained by employers during the COVID-19-related emergency situation, in connection with the results and efficiency of their departments and personnel when working remotely, may prove to be of considerable significance in the longer run. Many companies carried out (or are now considering) reorganisations – not just to re-calibrate supply chains, cut costs with respect to recession and operate in the post-COVID-19 era, but to keep and better incentivise the personnel providing real value to business, whether they be talented in digitalisation or simply better at adapting to changes. The signs of this shift towards a digital-ready and adaptable workforce are already visible in the corporate world.

Naturally, the COVID-19 outbreak affected the legal regulation of labour. During the "state of emergency" (henceforth, "SoE") proclaimed by the Hungarian government on 11 March 2020 and ending on 18 June 2020, Act I of 2012 on the Labour Code (hereinafter, “the Labour Code”) was modified temporarily. The wide application of the temporary new regulations has resulted in a great deal of new information and experience, which will foreseeably trigger further changes in legal regulations.

During the SoE, the relevant government decree allowed employers and employees to deviate from the rules of the Labour Code. This made it possible for many employers to decrease wages, and to agree to the employees being on unpaid leave instead of terminating their employment. However, employers now face the issue that such agreements cannot be maintained any longer, as the SoE is over.

Increased Demand for Working from Home

Another difficulty for the employers' HR departments is how they manage the fact that employees have an increased demand for working at their homes after the SoE. According to surveys, approximately 150,000 employees worked from their homes on certain days of the week before the pandemic. The number of such employees has obviously risen during the SoE, when the Government Decree No 47/2020 (on the prompt actions to be taken in order to mitigate the impacts of the COVID-19 pandemic) allowed employers to unilaterally order employees to perform work from their homes during the SoE and a 30-day period thereafter. According to a non-representative survey of EY Workforce Advisory in Hungary, 76% of office employees were ordered to perform work from their homes during this period.

However, since this legislation is no longer effective, employers once again face the issue of how they may order employees to perform work from their homes. The Labour Code regulates "remote work" in an independent chapter; remote work is an atypical form of employment, agreed in an employment contract, according to which the employee must work on a regular basis at a place other than the employer’s facilities, using computing equipment and delivering the results of work by electronic means. On the other hand, the Labour Code does not expressly regulate the matter of when the employee shall work at the premises of the employer but may often (or during certain periods) work at home (either at the employer’s initiative or based on the employer’s unilateral instruction). 

It is obvious that the employee may be obliged to perform work from his or her home if such is agreed in the employment agreement, or if the employer does this unilaterally using the legal concept of "employment deviating from employment contract" (which is maximised at 44 working days per calendar year). However, it is less clear what rules apply to working at home: for example, whether (i) all or some of the rules of "remote work" (such as the specific obligations of the employer to establish a safe work environment in the employee’s home, set forth in Act No 93 of 1993 on the Work Safety Act) shall apply to home office work, or (ii) the employer may regulate home office work in internal policies, at its own discretion (limited practically by the rules concerning employer’s policies of the Labour Code).

On 20 July, the government issued an announcement as a conclusion of recognising the pros of home office work during the SoE, stating that their aim is to support the spread of atypical forms of employment, especially home office work. It was declared that working from home was beneficial for both the employers and employees and that it may be a tool to increase employment in the country and simultaneously help to keep existing jobs.

As a next step, the government announced its plan to comprehensively amend the regulation of remote work and home office work, for which purpose they began discussions with key economic operators. The announcement also contains the main subjects of the proposed amendment, such as the extension of the characterisation of remote work, a redefinition of the agreement between the employer and the employee regarding remote work, an aim to assert the interests of both parties, an intention to provide the employee with the right to choose the place of work (if health and safety requirements are met), and making it possible to choose remote work for only part of the usual working days, based on the agreement of the parties.

It is predicted that the amendments will be debated and voted on by the Hungarian Parliament in the autumn of 2020. Considering that the government is preparing for a second wave of COVID-19 in Hungary in autumn 2020, we can assume that the adaptation period of the new legislation will be short. This may mean that employers will need to adjust their home office policies to the new regulation very quickly.

Shifting Workforce Strategies: the Rise of Soft HR

While eagerly awaiting government decisions on home office legislation, many companies are already working on their new workforce strategies in light of the knowledge obtained during the SoE. They are looking for measures that will not only help them bridge the next wave of the pandemic, but also lead to long-term organisational transformation and increased competitiveness. These efforts will certainly reshape the business landscape going forward.

One such measure broadly discussed in C-suites and local professional communities is that of creating a "hybrid office" arrangement, which essentially means finding the optimal composition of on-site and remote work. This requires careful assessment of health and safety regulations (based on the employer’s general obligation to provide for a safe workplace) that dictate infrastructural design, as well as a detailed evaluation of what jobs can be performed fully or partially remotely in all circumstances. Fortunately, experiences collected hitherto are promising: far more positions may be sustained or formed remotely than originally imagined by HR professionals. In addition, companies must gauge the personal preferences and circumstances of employees to make new arrangements feasible and sustainable for everyone, which is a crucial but legally sensitive factor.

Another challenge is to adjust the organisation to the hybrid set-up, by way of tailoring performance management, compensation and incentive systems to delivered results, changing organisational culture and developing leadership skills in managing people remotely. While it might be said that the common experience of being under lockdown created a positive impact on team coherence, even under remote settings, more must be done to continuously sustain a collaborative culture and good people-management practices. Employees who do not trust their leaders to be able to maintain a positive work environment are planning their exit, even under a pandemic, potentially spreading their sense of disengagement to colleagues. Companies are, therefore, looking at fast-track options for upskilling their managers to avoid losing top talents and to remain an attractive employer on the job market.

The shifting of workforce strategies will likely widen the path for engaging untapped resources on the job market, such as parents with small children, people who engage in caring for elderly relatives, or those with health challenges or disabilities of their own. All these groups could potentially be available to perform work part-time and in remote arrangements, but have not been available for full-time on-site jobs and thus have been sidelined so far.

Another benefit for organisations will be an easing of pressure on administration of recruitment or lay-offs, especially for certain highly skilled jobs that do not require a physical presence in the office. As the pandemic triggered a surge in virtual collaboration, with companies reporting that their employees’ performance remained mostly intact, leadership now has the grounds to assume they can include these solutions more broadly in their long-term strategies. In fact, some organisations have already announced that they are widening their recruitment angle and will source talent from across the country, no longer being limited to recruiting within a certain parameter of their physical location. Obviously, if an employer has the right technology and training in place, it can source skills and capabilities from any labour market around the world. Such measures will also play into re-thinking site functionalities, such as utilising office spaces as collaboration platforms rather than as permanent places for individual work.

It is a food for thought as to how this will affect labour law and its regulations. How will employers succeed in dealing with the different performance of their employees within the law? For example, how will they manage the laying off of those employees who cannot adapt to changes such as effectively working from a remote location and/or quickly learning to use new technologies? Will the requirement of written form loosen further? How will employers stay empathetic – considering that this is a highly emotional and stressful situation for everyone – while remaining in line with their own policies and corporate culture? Should remuneration be higher for those who provide work on-site? 

We are confident that most of the labour law issues triggered by managing these changes can still be tackled. However, the quantity of changes may lead to new regulations – first, potentially, in corporate policies and practices, then in statutory legislation.

Working Time Cycle

Pursuant to the effective provisions of the Labour Code, the maximum period of a working time cycle (cumulative working hours) is four months or 16 weeks; in case of specific circumstances, it can be six months or 24 weeks. If it is justified by objective or technical reasons or reasons related to work organisation, the employer may agree in a collective bargaining agreement to increase the frame period to 36 months.

During the SoE, several companies suffered from a decrease in their orders, which in turn resulted in a setback in their productivity, with less work to perform. To save as many jobs as possible, the government issued a decree increasing the possible maximum length of the frame period to 24 months, without any additional conditions to be met. The end of the SoE does not affect the working time cycles launched during this particular period, so those employers who decided to set the frame period to be 24 months can continue allocating working time in this frame.

Governmental Support to Protect Employees (Kurzarbeit)

During the SoE, the government accepted an action plan to protect employment and the economy. From a labour law point of view, the key measure of this plan was to subsidise the reduction of working hours for a temporary period instead of carrying out redundancies.

Under the short-time work wage subsidy, the state undertook to pay a subsidy to the employee if the employer, instead of dismissal, continued to employ the employee by reducing working time in a range of 25% to 85% of the original working hours for a period during which the subsidy is paid plus one month. The amount of subsidy could be 70% of the net base salary due for the missing working hours, but in no case more than the amount of double the net mandatory minimum wage.

Although this legislation is not yet in force, many expect that if a second (or third) wave of the COVID-19 pandemic reaches Hungary, the government will operate with the same or a similar action plan. This assumption is not ungrounded, as the government announced at the time of introducing its action plan that it wishes to keep fiscal budgetary funds for the protection of the economy and employees in such a scenario.

Implementation of the Reform Directive of the Posted Workers

Member states of the EU had the obligation to implement the content of the Posted Workers Reform Directive (Directive 2018/957) until 30 July 2020, and therefore the Labour Code was amended, thereby taking a further step to achieving equal treatment of all employees. Accordingly, from 30 July 2020, posted workers will be entitled (instead of a "mandatory minimum wage")to the amount of remuneration "considered standard for the place of employment", including all salary elements and supplements required by Hungarian law, any benefit provided by the relevant collective bargaining agreements or any employer’s policy. This is applicable irrespective of the country of origin of the employee. In addition, the Labour Code shall apply to the performance of work in case of postings exceeding 12 months.

As a significant number of foreign employees work in the Hungarian labour market, due to the lack of a skilled workforce in many industries and sectors, complying with this obligation will be more and more of a challenge for many employers providing work to a foreign workforce in the framework of posting (eg, Ukrainian and Serbian employees) in the current era when cost optimisation is the top priority.

Increasing Rate of Small Taxpayers’ Lump-sum Tax (KATA)

As of 2021, new rules will be come into effect regarding small taxpayers’ lump-sum tax (abbreviated in Hungarian as KATA). If, during the year in question, a disburser – as defined in the Act on Tax Procedures – transfers funds as generating revenue for the same KATA taxpayer business amounting to more than HUF3 million in total from the beginning of the year, then it must pay 40% surtax on the payments over the HUF3 million threshold. This new (but not yet effective) regulation has generated a lot of debate and concern.

The government announced that one of the primary goals of the new regulation is to further reduce disguised employment relationships. This goal is likely to be achieved, however, not because the gap between the costs of a small taxpayer enterprise and those of an employee is reduced but rather because, from 1 January 2021, all invoices issued will be forwarded online to the Hungarian National Tax and Customs Administration, which has already announced enhanced inspections of small taxpayers.

The goal of not allowing the enterprises disguising employment relationships to use KATA could have also been achieved with a better regulation on differentiating employment relationships from civil law contracts – the criteria of which have been well-developed in the practice of the Hungarian courts – if coupled with a well-designed inspection plan of the labour and tax authorities.

It is also clear that the government expects companies providing work to individuals as small taxpaying entrepreneurs to put them on payroll, thereby raising the national employment rate and obtaining more revenues for the state budget and social security system via taxation. However, it remains to be seen whether the aims of this new piece of legislation will be achieved, with many warning against potential negative effects.

For example, it is argued that the threshold is too low, so the new tax scheme may affect far more enterprises than intended by the government. The monthly average income may not be more than HUF250,000 per client (without reaching the threshold), which is only HUF39,400 more than the guaranteed minimum wage (and almost equals the total employer cost of the guaranteed minimum wage). Accordingly, in practice, it is probable that the amount of annual revenue received from one client exceeds the threshold of HUF3 million.

We presume that many small taxpayer enterprises which currently use KATA as a taxation form will transform their operations and leave KATA, which will then cause a turbulence in the employment market. Some of these enterprises will choose to operate from abroad, opt for another form of taxation, attempt to be engaged by more companies (and not just one or a few), whereas potentially only a minority of this population will establish employment, either because of headcount or cost restrictions; note that the amount of an employer’s total cost in employment is higher than the total public levies to be paid in compliance with KATA tax obligations. It is also questionable whether the individuals who wish to choose to be in employment (instead of continuing to run a small enterprise) can do so.

As many of the companies (privately or state-owned) are contracted to small taxpayers, the change will surely lead companies (even those which would not be required to leverage every opportunity to cut labour type costs) to re-assess and re-design the structure of their workforce and their costs, carry out HR restructurings and further rationalise operations.

An Employer-Friendly Environment in Challenging Times

The unemployment rate in the country rose to almost 5% in the first half of 2020 – a percentage not seen since the financial crisis in 2008 – and collective redundancies are still on the agenda of some companies. As the Hungarian Labour Code is one of the most employer-friendly pieces of legislation in Europe and the penetration of trade unions to private sector companies (including the number of collective bargaining agreements concluded) is relatively low, employers do not have serious obstacles if they wish to execute their redundancy plans, provided they planned the restructuring wisely considering their operations.

On the other hand, considering that the annual Hungarian GDP is expected to fall by 5-10%, it is also expected that the government will continue to provide some support (as much as fiscally allowable) to companies employing significant staff if they wish to either carry out massive lay-offs or leave the country.

Therefore, although companies will foreseeably be busy with restructurings and operating in the new circumstances – either in the event of further waves of the pandemic or after the COVID-19 crisis has finally passed – at this moment it seems that they do not have to worry greatly about the changes in Hungarian labour law. While the Labour Code has been materially unchanged (with a few amendments) since 2012, it seems to provide acceptable regulation (and opportunities) to the new issues raised, even if it needs some tailoring to adapt to changes, both currently and in the future.

Vámosi-Nagy Ernst & Young Law Office

Budapest 1132
Váci út 20
Hungary

+36 1 451 8225

+36 1 451 8199

law@hu.ey.com www.eylaw.hu
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Law and Practice

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Nagy és Trócsányi was founded in 1991, and turned into a limited professional partnership ("ügyvédi iroda") in 1992, with the aim of offering sophisticated legal services. The firm is one of the largest home-grown independent law firms in Hungary. Currently, Nagy és Trócsányi has 27 lawyers, with eight active partners; all partners are equity partners. All lawyers at the Budapest office are either members of, or registered as clerks with, the Budapest Bar Association. Several of the firm’s lawyers are admitted attorneys or registered as legal consultants in New York. The firm's activity focuses on the following practice areas: M&A, company law, litigation and dispute resolution, real estate law, banking and finance, project financing, insolvency and restructuring, venture capital investment, taxation, competition, utilities, energy, media and telecommunication. Nagy és Trócsányi is the exclusive member firm in Hungary for Lex Mundi – the world’s leading network of independent law firms with in-depth experience in more than 100 countries worldwide.

Trends and Development

Authors



Vámosi-Nagy Ernst & Young Law Office was established in 2010 and the team is growing rapidly, now engaging 29 lawyers. As part of a global network of 2,000 law professionals across 76 countries (including the UK, France, Germany and China), the firm provides practical, workable proposals, whether in one or many jurisdictions. It focuses on areas where a fully integrated multidisciplinary approach pays tangible dividends, working with its people advisory services colleagues on employment law projects, with its transaction advisory team on M&A projects, and with its tax and advisory practice on the legal aspects of the regulatory issues faced by clients. The firm's recent employment law experience includes advising Accorinvest Group SA on a large-scale multinational transaction, MASTER GOOD Termelő és Kereskedelmi Korlátolt Felelősségű Társaság in the acquisition of Sága Foods Zrt., and providing full (legal, tax and project management) support in confidential reorganisations and collective redundancies.

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