a. Factors that Determine Who is an Employee and Who is an Independent Contractor
Primary and secondary factors are utilised by Hungarian courts to help determine whether the relationship is one of employment or one of an independent contractor. The primary and secondary factors therefore provide a good starting point for determining the true nature of the relationship between the parties.
If only one of the following primary factors is identified by the labour authority, or the court, in the practice of the parties, then their relationship will most probably qualify as one of employment. Severe sanctions may be applied if the employment has been disguised under a sham civil law contract.
• specifics of the activity, tasks defined as a job description;
• personal working obligation;
• regular availability of the employee; and
• hierarchy between the parties.
Specifics of the activity, tasks defined as a job description
It is a mandatory component for an employment contract to contain a job description outlining the continuous and regular nature of the work. The job description will be defined broadly, allowing the employer to instruct the employee to perform different tasks falling within the scope of the job description. In comparison, an independent contractor works on a specific task or creates a certain product and, unlike an employee is not committed to a wide range of activities that need performing regularly.
Hungarian labour law makes it possible, by the rules of the temporary assignment of the employee, for employers to direct employees to work temporarily on tasks not defined in his/her job description. This is not considered to be an amendment to the employment contract. An independent contractor may not be unilaterally instructed to vary its contract and perform tasks not defined therein. An independent contractor’s tasks can be changed only by mutual consent.
The specifics of the job description and the regularity of the tasks may induce the court to classify the relationship as one of employment. Regular work is fundamental to the employment relationship and so if the task to be done is a one-off task, or is required to be done irregularly, then it may qualify as a civil law contract, even if the contracting parties met each other through recruitment agencies.
If a person does the same task for the principal under a civil law contract and under a part-time employment contract at the same time (i.e. there are two different, parallel agreements between the parties), the court may hold the civil law contract to be a sham agreement between the parties.
Personal working obligation
An employee is not entitled to engage a subcontractor or another employee to fulfil his/her working obligations. The employee must work personally and is not authorised to choose a substitute if they are absent. It is the employer’s right to engage more employees for the same task.
By law, an independent contractor may have the right to engage subcontractors to fulfil their obligations (although this right can be restricted in contract).
It must be emphasised that even when the contract entitles the independent contractor to engage a subcontractor, such provision will not exclude the possibility that the court may re-characterise the contract as an employment contract if, in practice, the subcontractor was not engaged or was appointed by the principal (i.e. the employer).
Further, the personal obligation to perform the task may be fundamental to an independent contractor, if the type of task requires it (e.g. an actor in a movie, an artist or other type of task which is strongly connected to personal performance).
Regularly availability of the employee
Employers have an obligation to provide work to their employees, and the employees are obliged to perform the work in return for their salary.
One of the most important obligations for an employee is to be regularly available at their working place no matter whether they are supplied with work by the employer or not. Breach of the availability obligation (i.e. not being at the working place at working time) entitles the employer to terminate the employment regardless of whether the employee is supplied with work or not.
• appear at the place and time specified by the employer, in a condition fit for work;
• be at the employer’s disposal in a condition fit for work during their working time for the purpose of performing work;
• perform work in person, with the level of professional expertise and workmanship that can be reasonably expected, in accordance with the relevant regulations, requirements, instructions and customs;
• perform work in such a way that demonstrates the trust vested in him/her for the job in question; and
• cooperate with their co-workers.
Employees may not accept and may not lay claim to any remuneration from third parties in connection with their activities performed during work, without the employer’s prior consent.
Hierarchy between the parties
The employee works under the control of the employer and the employee belongs to the organisation of the employer. The structure of the organisation is usually detailed in the employer’s organisational and operational rules, which define the employee’s direct superior and (depending on the employee’s position in the hierarchy) may authorise an employee to exercise some employer rights (e.g. to instruct and supervise other employees subordinated to him/her). If an individual has such employer rights, it usually indicates an employment relationship, unless such individual holds the managing director (or is a member of the board of directors) position at the company.
Therefore, the employment relationship can be identified by the hierarchy between the employer and the employee and the right to instruct and supervise. In contrast, there is no hierarchy in the contractual relationship with an independent contractor because the parties are equal and not subordinated.
The independent contractor may receive instructions, but in such case the instructions are generic. The independent contractor is entitled to decide how to perform the task.
There is also a distinction between an employee and an independent contractor regarding the right of supervision and inspection. In case of employment, the employer is entitled to supervise and inspect all stages of the employee’s work in detail. The independent contractor may also be supervised and inspected, but only once the task has concluded; not while the work is in process.
The Hungarian courts have declared, on numerous occasions, that strict hierarchy is, in practice, evidence that an employment relationship exists. In contrast, if hierarchy, the right to instruct in detail and the right to supervise do not dominate the relationship, then such relationship cannot be qualified as employment.
Identification of the secondary factors outlined below in a contractual relationship will not automatically classify the relationship as one of employment. The secondary factors can however, be used to support the notion that the nature of the relationship is in fact one of employment where one of the primary factors outlined above is present. The secondary factors are as follows:
• defined daily working hours;
• place of work;
• salary or fee;
• use of the employer’s equipment, resources and raw materials;
• workplace safety; and
• agreement in writing.
Defined daily working hours
The daily working time of employees is determined, in detail, by the employer. In the case of an independent contractor, they and the principal agree only on deadlines as to when the product or services is to be delivered. The independent contractor is entitled to unilaterally define his/her working hours, timeline, and daily workload. The independent contractor must meet the final deadline but workflow management is at his/her sole discretion.
However, there are some types of employment whereby the employee is partly or totally free to regulate his/her working hours, e.g. “telework” or “home office” work, and so this factor is not decisive. “Telework” means activities performed on a regular basis at a place other than the employer’s facilities, using computers and other means of information technology, where the end product is delivered by way of electronic means. Other employees who are free to regulate their working hours are employees with flexible working hours, e.g. employees in leading positions who cannot claim compensation for their overtime.
Place of work
Although the place of work is usually specified in the employment contract, and is an essential part of the agreement between the employer and the employee, it is not a definite component of employment. In some cases, the civil law contract may also define the place of work (e.g. a construction site). Further, “telework” or “home office” employees may be permitted to choose their own place of work.
Salary or fee
The parties must specify in the employment contract the employee’s basic wage. The basic wage is the employee’s regular income and it should be paid in monthly arrears, except where the results of the work can only be established after a longer period. In such cases, the employer is obliged to make an advanced payment.
For the independent contractor, the fee for the provided services is usually a one time payment. However, the contractor may ask for an advanced payment and, where there is a continuing relationship, the payment of the service fee may also be a regular one.
Hungarian law regulates the minimum salary of employees. There are two types of minimum salaries, one for unskilled employees and one for skilled employees. The employer must pay employees, at least, the minimum salary. The minimum salary amount is increased by the government every year.
In contrast, the minimum salary is not provided by law for independent contractors.
Instead, the fee has to be agreed by the parties.
Use of the employer’s equipment, resources and raw materials
As a general rule, the employer provides the equipment, raw materials and resources necessary for the employees to do their work properly. In certain cases, the employee may also use his/her own devices (i.e. notebook, car) so this is not a decisive factor to establish whether the contract is a civil law contract or an employment contract.
In most cases, the independent contractor is obliged to provide the necessary equipment for the task and includes the costs incurred with the performance of the task with his/her fee for the provided services. However, any variation from this rule will not be a decisive factor when establishing whether the contract is, in fact, one of employment.
The responsibility for the implementation of occupational safety and health requirements lies with the employer. In the case of an independent contractor, the principal is not obliged to comply with the safety and occupational requirements.
Agreement in writing
In contrast to civil law contracts, employment contracts may only be concluded in writing. Invalidity on the grounds of failure to provide a written contract may only be alleged by the employee within 30 days from the first day on which he/she commences work. If the relationship continues, the lack of written agreement will not preclude the court from declaring the relationship as one of employment if primary factors can be identified.
b. General Differences in Tax Treatment
Social security law
The social security contribution to be paid by employees consists of the following items:
• pension contribution;
• health insurance contribution; and
• labour market contribution.
For independent contractors, the social security contribution depends on the type of civil law contract entered into. The independent contractor will usually be required to pay pension contributions, health insurance contributions and labour market contributions.
The employer and the independent contractor are responsible for paying social security tax. Social security tax is a newly introduced concept (adopted at the end of 2011). It does not grant social rights of allowances or subsidies (social rights are covered by individual social contributions). The tax base is identical to the tax base of personal income. Irrespective of social security tax, the employee and the contractor must pay personal income tax.
c. Differences in Benefit Entitlement
Paid holiday leave
Employees are entitled to annual vacation time (paid holiday leave). Annual vacation time in Hungary is divided into basic and extra vacation time and is due to an employee in each calendar year (subject to the time spent in work by the employee in the given year). The basic vacation time is currently 20 working days in Hungary. Eligibility to extra vacation is subject to an employee’s age and the number of his/her children under 16 years of age. While vacation time (inclusive of extra vacation) shall be allocated in the year in which it is due, the parties do have the ability to agree that extra vacation time can be rolled over to the next working year.
Independent contractors are not entitled to any paid holiday leave.
Paid sick leave
Employees shall be entitled to 15 working days of sick leave per calendar year. During a period of sick leave the employee is entitled to 70 percent of his/her absence fee (which is calculated based on the employee’s base wage plus the last six months average of performance wage and overtime payment).
Independent contractors are not entitled to any paid sick leave or other compensation.
The employer may give special allowances to the employees (e.g. Christmas presents, other benefits).
Independent contractors do not receive any special allowances.
d. Differences in Protection from Termination
The employment relationship can be terminated (i) by notice, (ii) with immediate effect, and (iii) by mutual agreement.
The employer may not terminate the employment relationship during:
• maternity leave;
• unpaid child-care leave;
• voluntary military service; or
• the first six months of IVF treatment.
In addition to the above; disabled persons, mothers and single fathers of children up to the age of three years and employees five years before their pension age are also protected (although termination is allowed in special cases as regulated by labour law).
The employee is entitled to a severance payment if the employment is terminated by the employer and the employee has three years continuous service. The minimum amount of severance payment is a one-month absence fee; the maximum amount (in case of 25 years of employment) is six months’ absence fee.
The employee is not entitled to a severance payment if the reason for termination is the employee’s behaviour or ability to work (except for health issues).
In contrast, the independent contractor can generally be terminated without any statutory restriction. It can be terminated by mutual agreement or by either party, with or without any reason. The contract can also be terminated with immediate effect where there has been serious breach of contractual obligations. If the termination of the contract causes damage for the other party, he/she is entitled to claim for compensation.
e. Local Limitations on Use of Independent Contractors
In Hungary, there are no limitations on the use of independent contractors.
f. Other Ramifications of Classification
If the employment contract is terminated by the employer without a proper (clear, real and in line with the real cause of the termination) reason, the employee can ask for damages from the court. The amount of such damages claimed under the title of lost income is limited to 12 months of absence fee.
Upon the application of the employee, the court shall reinstate the employment if the termination breached the equal treatment obligation, if the termination took place during a prohibited period (pregnancy, child care absence etc.), if the employee was a trade union officer or an employee representative and in some other limited cases.
An independent contractor may claim damages without legal limitation on the amount thereof, but no reinstatement of the relationship is possible.
g. Leased or Seconded Employees
The employer is entitled to lease an employee to another employer. There needs to be a temporary work (placement) agency, a user enterprise, and an employee who is explicitly engaged for temporary work.
The agreement between the placement agency and the user enterprise shall specify the material conditions of the placement and how the employer rights are to be shared. Employment may only be terminated by the placement agency. The agreement must be made in writing.
The employment contract between the employee and the temporary work agency shall contain a clause indicating that it was engaged for the purpose of temporary work, and shall contain a description of the work and the base wage. The contract shall also be made in writing.
The basic work and employment conditions of temporary agency workers shall be, for the duration of their assignment, the same as those available to the workers employed by the user enterprise under an ordinary employment relationship.
Employers are entitled to temporarily reassign their employees to jobs and workplaces other than what is contained in the employment contract or to another employer.
The duration of such secondment may not exceed a total of 44 working days or 352 scheduled hours during a calendar year. This shall be pro-rated if the employment relationship commenced during the year, if it was entered into for a fixed term, and in cases of irregular daily working time or part-time work. The affected employee shall be informed on the expected duration of the secondment.
An employee may not be transferred to work at another location without their consent:
• from the time she learns she is pregnant until her child reaches three years of age;
• until the child reaches sixteen years of age, in case of a single parent;
• if providing long-term care personally for a close relative; or
• if having suffered a degree of health impairment of at least 50 per cent as diagnosed by the body of rehabilitation experts.
The employee shall be entitled to the wage prescribed for the job in question, or at least to the base wage fixed in the employment contract.
h. Regulations of the Different Categories of Contracts
One of the main differences between employment contracts and civil law contracts is that an employment contract must be in writing. However, it is also advisable to provide a written contract for independent contractors.
Beside the difference in formalities, the Hungarian labour law prescribes several mandatory terms and conditions in relation to the employment contract (e.g. the base wage and the job position). For independent contractors, there is usually no specific legal requirement regarding the terms and conditions of the contract.
In addition to the above, the employer must meet several requirements in relation to the employment relationship. For example, the employer must comply with occupational safety and health requirements. The employee’s fitness for the job for which he is being considered shall be examined, free of charge, before taking up work and on a regular basis during the life of the employment relationship. Where there are disabled employees, appropriate steps shall be taken to ensure that reasonable allowances are made to accommodate the disability.
All the mandatory provisions are for the protection of employees.