Employment Update, Hungary – February 2009

19 February 2009

Andrea Simándi

Reclassification of employment relationships still a hot topic in Hungary

With the recession hitting, alternative and more cost-effective employment solutions may soon become a hot topic again in Hungary.  The Hungarian government has been reluctant to decrease the tax and social security burden of employment as a potential response to the economic climate.  As a result, in order to minimise potential redundancies, agency and entrepreneurial relationships are being considered by employers in various sectors as substitutes to employment relationships.

However, these considerations may raise significant legal concerns, as Hungarian authorities retain broad powers to reclassify agency, entrepreneurial or other civil type of agreements into employment relationships.

The Labour Inspectorate may investigate these relationships on the basis of: (1) primary classifying factors; and (2) secondary classifying factors.  Should the Inspectorate establish any of the primary classifying factors, this is sufficient evidence to reclassify a civil contract (e.g. agency, entrepreneurial) into an employment agreement.  The finding of a secondary classifying factor, without the establishment of further differentiating factors, is not, in itself, sufficient reason to reclassify an agreement.

Primary classifying factors are: (a) the nature of the activity and the specification of the tasks to be carried out under the scope of work; (b) the obligation to act personally, i.e. the individual is not free to subcontract the duties; (c) employer’s obligations to the individual and the requirement for the individual to remain at the disposal of the employer; and (d) a hierarchical relationship between the two parties.

Secondary classifying factors are: (i) control and supervision rights; (ii) the right to determine working hours and schedule; (iii) a specified place of work; (iv) regular payment for work; (v) the use of tools, resources and raw materials of the employer; (vi) the provision of a safe and healthy work environment by the employer; and (vii) a written statement of employment (which is mandatory in the case of employment relationships).

It should be emphasised that the Inspectorate evaluates all the above factors on a case-by-case basis. Should the Inspectorate determine that the civil law contract in fact constitutes an employment agreement (i.e. it is a sham contract), it is considered void by operation of law and has to be read as an employment agreement (reclassification). This means in practice that upon such reclassification all the tax and social security obligations become payable, retroactively, burdening both the employer and employee with significant payment obligations.

The strongest counter-argument against such reclassifications remains contractual freedom.  It is currently more favourable, from a financial perspective, for both parties to opt-out of an employment relationship, given the huge tax and social security consequences.