The New Regulation Of Unlawful Termination In The New Labour Code

Before 1 July 2012 a termination judged to be unlawful could have had fatal financial consequences for a smaller company.  Why? Let us imagine that a court decides, in its final decision rendered 3 years after the beginning of the lawsuit, that a termination was unlawful and the company as employer has to pay an amount equal to 50 months' average salary to the winning employee as lost salaries and compensation.  Little imagination is required to see the impact of such a decision on the economic situation of an employer, even if the concerned employee was not in a leading position.
 
How is it possible? According to the previous Labour Code, terminated employees – in case of winning the lawsuit – were entitled to their lost salaries until the end of the employment lawsuit; and they were also entitled to flat rate compensation (i.e.  liquated damages) in the amount of 2 to 12 months' of average salaries if no reinstatement into the original position was requested.  Previously, employees were interested in longer lawsuits if they saw that they would be the winning party.  Summarising the previous regulations of unlawful termination, we can conclude that it was expressly pro-employee, since the employees received a full salary for the period of the lawsuit, they had no strict obligation to mitigate damage, reinstatement in to the former position could be requested in all cases, the burden of proof was on the employer, it was difficult to prove that damage was compensated from other sources and employees were entitled to get automatic liquated damages when the court found the termination unlawful.
 
The new rules of unlawful termination
As of 1 July 2012, the new Labour Code entered into force, which fundamentally changed the regulation of unlawful termination.  It can generally be concluded that the new act takes a pro-employer approach, and this is particularly true for the new provisions regulating unlawful termination.
 
Decreasing employer's burden
In the new legislation, the legislator's clear intention was to decrease the financial burden on employers.  On one hand, this is intended to be achieved by mitigating the amounts payable in case of an employment lawsuit lost by the employer, and on the other hand, by decreasing the number of employment lawsuits, since litigation that could occasionally last for several years may bring about significant costs.
 
Maximised compensation for the loss of salary
Accordingly, the new act has regulated the amount which the unlawfully terminated employee can claim as compensation for lost income.  In contrast to the previous regime described above, reinstatement of the employee may only take place in exceptionally serious cases, for example if the termination infringes the principle of equal treatment or violates a prohibition of termination; for example if the employer terminates the employment relationship during pregnancy or maternity leave.
 
As a result, the dominant legal consequences have changed: primarily, compensation is to be paid instead of reinstatement; more closely, lost income has to be paid, the amount of which has been maximised in the amount of 12 months of the employee's absence fee.  The new regime also departs from the rule that the employment of the employee is terminated by the final and binding judgment that determines the unlawfulness of termination; termination now terminates the employment at the date contained therein, hence the employee is not entitled to further compensation for this. 
 
The questions of proving damage to the employee
 
The new regulation also abolishes the formerly controversial flat-rate damages equivalent to 2-12 months' average salary of the terminated employee, the amount of which was determined in the judge's discretion, and apart from a maximised compensation with respect to lost income of the terminated employee, it does not impose any other compensation obligation on the employer.  Instead, it generally obliges the employer to compensate the damage caused by the unlawful termination of the employment to the employee.
 
Numerous questions emerge in relation to this.  Is the terminated employee required to prove, in accordance with general tort rules, the damage suffered in connection with the unlawful termination? What is the standard of the burden of proof on the employee in this respect?
 
Since the new law prescribes, as a basic principle, the employee's obligation to mitigate the damage for which the employer is liable, it emerges as a further question whether the employee has to prove in this case as well that he/she made all efforts to find new employment and to minimise the further damage suffered from the unlawful termination.  In our position, the answer is yes, which also places the employers in a more favourable position. 
 
Finally, the question that apart from lost income, what kind of compensation can be demanded by the terminated employee, also remains open.  Can one sue for compensation of stress related illnesses or other damage to health that occurred as a result of the termination, or – for instance – consequential damage?
 
Considering that the former flat-rate damages scheme and the salaries payable for the duration of the lawsuit covered (or even exceeded) the damage suffered by the terminated employee, itemised presentation or even enumeration of losses were not part of judicial practice, hence legal practice clearly faces a new situation.  Only future judicial practice will answer the above questions. 
 
Development of new litigation strategies
 
Considering the above, in certain cases it can even be worth for employers to unlawfully terminate the employment.  If the employment lawsuit ends quickly, the employee can only fight for a few months' worth of lost income until the final and binding judgment.  It can also occur that at the time of filing the claim, the employee cannot actually claim any lost income because the employee's termination period has not yet expired.  In these cases even if the judgement establishes unlawful termination, no damages based on lost income can be ruled.  In extreme situations the employer itself could admit the unlawfulness of the termination of the employment on the first hearing and acknowledge condemning judgment, in order to shorten the duration of the lawsuit and at the same time limit the terminated employee's damage claim for the lost income.  The employee could be better off with requesting the reinstatement of the employment – that is, if such a request can be made at all – since in this case there is no limitation on damages, it can exceed the limitation of 12 months' absence fee.
 
Judicial practice will have to determine whether after the final and binding judgment is rendered, an employee who is still unemployed – and hence indeed suffers damage due to the lost income – can, within the 12 months' salary limitation, initiate a subsequent lawsuit for the lost income not compensated for in the final judicial decision.
 
Conclusion
 
To summarise the above, we can conclude that the new Labour Code has changed the system of sanctions for unlawful termination in a way that in many cases, it is simply not worth for terminated employees to turn to the labour courts.  In the future, terminated employees will need to thoroughly consider whether it is worth to the costs associated with litigation for few months of absence payment. 
 
It is likely that with the decrease of the number of lawsuits, demand for alternative dispute resolution methods (e.g. mediation, conciliation) will increase.  These however, in the view of several practitioners, are still not emphasised enough in the new Labour Code, albeit Hungarian practitioners do not expect a decrease in the number of disputes.
 
The number of employment lawsuits is has been decreasing for years
 
Having examined the number of employment lawsuits, we can see a decreasing tendency.  After its peak in 2005 (number of employment lawsuits: 32,818), the number of employment lawsuits has been decreased and only changed as a result of the financial crisis (number of suits in 2010: 26,745).
 
After 2010 the number of newly initiated lawsuits shows a definitely decreasing tendency.  The Hungarian Central Statistical Office registered 22,844 lawsuits in 2011 and 18,299 lawsuits in 2012, and the number of lawsuits initiated during January 2013 is expressly low, which already shows the effect of the new Labour Code.
 
Wolf Theiss
 
Wolf Theiss is an Austrian based law firm one of the largest firms in Central and Eastern Europe and South-eastern Europe (CEE/SEE).  The Budapest office launched at the end of 2007.  The team has many years of experience in advising international clients in all aspects of commercial law, including corporate/M&A, tax optimisation, property & environmental law, banking & finance, employment, restructuring and dispute resolution – with a particular emphasis on the energy sector. 
 
László Kenyeresis the partner heading the Energy & Projects Practice Group and the Employment Practice Group in Budapest.  Beside his energy law and projects practice, László has almost 20 years experience in advising regarding contractual arrangements, conducting disciplinary investigations, management of mass redundancy projects and collective labour law matters as well as handling employment issues arising from mergers & acquisitions.
 
Lászlócan be contacted by phone on +361 4848 800or alternatively via email at laszlo.kenyeres@wolftheiss.com
 
Barnabás Buzásiis an associate in the Corporate and the Employment Practice Group in Budapest.  Barnabás was involved in several M&A transactions, company set-ups and various commercial matters.  As Barnabás has been working on employment matters for over 5 years, he has an in-depth knowledge of the constantly changing Hungarian labour regulations.  As well as handling everyday employment matters, he has experience in employment restructuring, preparation of executive and general employment contracts as well as advising in employment related litigation cases.  Barnabás has been lecturing corporate law at the University of Szeged. 
 
Barnabáscan be contacted by phone on +361 4848 800or alternatively via email at
barnabas.buzasi@wolftheiss.com