In this article, we provide a brief overview of the ordinary termination of a non-executive employment agreement by the employer, from the perspective of both the currently applicable Labour Code and the new Labour Code entering into force on 1 July 2012.

Employer's ordinary termination notice under the current Labour Code

Under the currently applicable Labour Code, the employer may terminate an indefinite employment agreement by way of ordinary termination notice under certain conditions. Definite-term employment agreements may not be terminated by way of ordinary termination notice. Termination by the employer of an indefinite-term employment agreement of an ordinary employee (i.e. non-executive employee) is possible on the following grounds.

The employer must justify the ordinary termination notice and the justification/reasoning must clearly indicate the cause for the termination. The reason must be true and accurate. An employee may only be dismissed for reasons in connection with:

(i) his/her abilities;

(ii) his/her behaviour in relation to the employment relationship; or

(iii) the employer's operation (reorganization etc.).

The employment relationship may not be lawfully terminated by ordinary dismissal during the periods defined by the Labour Code, which are as follows:

a) during an employee's incapacity to work due to illness, not to exceed one year following expiration of the sick leave period; furthermore, for the entire duration of eligibility for sick pay on the grounds of incapacity as a result of an accident at work or occupational disease;

b) for the period of sick leave for the purpose of caring for a sick child;

c) during a leave of absence without pay for nursing or caring for a close relative;

d) during a treatment related to a human reproduction procedure as specified in specific other legislation, during pregnancy, for three months after giving birth, or during maternity leave;

e) during a leave of absence without pay for the purpose of nursing or caring for children, until the child reaches the age of three, during the period of eligibility for child-care allowance, irrespective of any leave of absence without pay;

f) during regular or reserve army service, from the date of receiving the enlistment orders or the notice for the performance of civil service; and

g) the entire duration of incapacity for persons receiving rehabilitation benefits.

As a rule, the basic termination period is 30 days. The termination period increases in accordance with the amount of time spent in the employer's employment. As a rule, severance is payable to an employee if he/she has been working for the employer for at least three years and the employment is terminated by e.g. the employer's ordinary termination notice.

Employer's ordinary termination notice under the new Labour Code

Under the new Labour Code, "ordinary termination" will be referred to as "termination". The employer may terminate an indefinite-term employment by way of referring to the employee's abilities or behaviour in relation to the employment relationship or the employer's operation (reorganization etc.). The employer must justify the ordinary termination notice. The justification/reasoning must clearly indicate the cause of the termination. The reason must be true and accurate. A significant change from 1 July 2012 will be that the employer's termination notice may be lawfully handed over to the employee during sick leave. However, the termination period may not commence as long as the employee is on sick leave.

Under the new Labour Code, as a rule, the basic termination period will remain at 30 days and the termination period will increase in accordance with the amount of time spent at the employer's employment. Furthermore, in general, severance is payable to an employee if he/she has been working for the employer for at least three years and the employment is terminated by e.g. the employer's termination notice.

It is worth noting that under the new regime, the employer may also terminate a definite-term employment agreement through termination notice:

(i) during liquidation and bankruptcy proceedings or

(ii) by way of referring to the employee's abilities or

(iii) if maintaining the employment becomes impossible due to an external and unavoidable reason.

Both under the current and the new regimes, the termination of the employment may be challenged by the employee before the competent labour court within 30 days after the hand-over of the termination document, by referring to its unlawfulness. The termination document must draw the employee's attention to their right to challenge the termination. In the absence of such information on the right to challenge, under the currently applicable Labour Code the employee may turn to the court within the general statute of limitations period of 3 years, instead of within 30 days. Under the new Labour Code, in the absence of such information, the employee's right to turn to court will elapse after six months.

Amounts Payable by the Employer in the event of Ordinary Termination

Under the current Labour Code, if the employer releases the employee from work for the entire duration of e.g. a 30-day notice period, the following sums are due to the employee:

(i) wages due until the date of hand-over of the ordinary termination notice;

(ii) average salary payable for the 30-day release period and

(iii) pecuniary compensation for holidays not taken by the employee.

Depending on the duration of the employment and the content of the employment agreement, severance and compensation for a non-compete undertaking may also be payable.

After 1 July 2012, if the employer releases the employee from work for the entire duration of e.g. a 30-day notice period, the following sums will be due to the employee:

(i) wages due until the date of hand-over of the termination notice;

(ii) absence fee payable for the 30-day release period and

(iii) pecuniary compensation for holidays not taken by the employee.

Depending on the duration of the employment and the content of the employment agreement, severance and compensation for a non-compete undertaking may also be payable.

Consequences of Unlawful Termination

If termination takes place (i.e. the ordinary termination notice is handed over to the employee) before 1 July 2012 and, during a labour dispute before the labour court, the judge establishes that the termination notice was unlawful, the following consequences apply:

a) the employee may request the court to place him back into his position as employee of the employer;

b) if the employee does not request the court to place him back into his position, the court may oblige the employer to pay to the employee an amount equal to between 2 and 12 months' of the employee's average salary;

c) if the employee does not request the court to place him back into his position, all wages must be paid to the employee until termination of the employment. The employment is terminated on the day when the judgement establishing unlawful termination becomes final and binding. It can easily be that 2 years or even more pass between the date of hand-over of the termination notice to the employee and the date when the judgement establishing unlawful termination becomes final and binding. This means that the wages due for this entire period is also payable by the employer;

d) any damages suffered by the employee as a consequence of unlawful termination must also be paid by the employer. The amount of damages must be proven by the employee.

As far as the new Labour Code is concerned, if the employer's termination handed over to the employee after 1 July 2012 is found to be unlawful, the amounts payable will be different. E.g. wages do not have to be paid until the judicial decision on the establishment of unlawful termination becomes final and binding, but rather only until the end of employment. The employment will terminate at the end of the termination period. This change certainly benefits the employer in comparison with the regime applicable until 1 July 2012.

From 1 July 2012, the employer must pay damages caused by unlawful termination to the employee. The amount of compensation claimed by the employee may not exceed the 12-months' absence fee. In addition, under certain circumstances, the employee is entitled to severance pay if the employment was terminated unlawfully in a way other than through termination or by way of referring to his/her behaviour, provided that the employee has been employed by the employer for at least three years. Under the act containing the transitional provisions in connection with the new Labour Code, when it comes to examining the conditions and consequences of termination, it is the date of hand-over of the termination notice that is of relevance.

It is also worth noting that in the event there is a legal dispute at court concerning the lawfulness of the termination notice, the burden of proof is vested on the employer, i.e. it is the employer that has to prove that termination was lawful. This rule will not change under the new Labour Code.

In summary, termination of an employment agreement will remain a sensitive issue in Hungarian labour law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.