a. Laws and Guiding Principles
As described earlier, the Hungarian labour courts developed several factors which are applicable for classifying the type of contract between parties. As employees are entitled to a higher level of protection than an independent contractor, labelling a civil law contract as an employment contract may have material consequences.
In Hungary, the tax authority, the labour authority and the courts are also authorised to re-classify civil law contracts as employment contracts.
The tax authority starts to review the relationship based on the following:
• notification by the other contracting party about the alleged sham contract;
• official request from the labour authority;
• results of other investigations; and/or
• data received from the contractors (income, expenses, payments).
Both the tax authority and labour authority base the review on the factors described above.
b. The Legal Consequences of Re-Characterisation
It is a general rule that the contract should be categorised based on its content, instead of its name. Parties are free to engage in any agreements but they must meet the legal requirements regarding the content of their agreements.
A sham contract shall be null and void, and if such contract is intended to disguise another contract, the rights and obligations of the parties are determined on the basis of the disguised contract.
The labour authority is authorised to fine the employer.
Where a contract is found to be a sham, the employer must pay the following:
• social security contributions (health and pension);
• labour market contributions;
• personal income tax;
• reimbursement of amount unduly paid (e.g. VAT);
• default interest; and
• penalties for engaging in a sham contract.
c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status
Any agreement that infringes upon any employment regulation, or is entered into by way of circumvention of any employment regulation or is manifestly in contradiction with good morals shall be null and void. If annulled, an agreement shall be considered void, unless the relevant employment regulation stipulates other legal consequences. The party concerned may allege the invalidity of an annulled contract without a time limit, but the statutory time of limitation for any employment claim is three years. The court may determine the invalidity of the agreement on its own motion.
d. Legal or Administrative Penalties or Damages for the Employers in the Event of Re-Characterisation
Sham agreements shall be null and void, and if such agreement is intended to disguise another agreement, it shall be judged on the basis of the disguised agreement. If the authority or the court re-characterise the civil law contract as an employment contract, the independent contractor and the principal shall pay all contributions and taxes that should be paid, plus default interest and any penalty.