Common labour law issues and misconceptions in the state of emergency

If the company’s sales have fallen due to the crisis caused by the coronavirus, can employees’ salaries be reduced or even employed in other jobs?

The employer may not unilaterally reduce the wages of employees or change their jobs. According to the Labour Code, the parties to the employment contract must agree on the employee’s basic salary and position. That is why wages and positions can only be changed by mutual agreement of the parties. Thus, a salary reduction or a change of job can be made by amending the employment contract, which requires the consent of the parties.

If the salary cannot be reduced and the job cannot be changed unilaterally, then how can the employer get rid of the overstaffing situation?

The employment may be terminated by the employer by notice, which is a unilateral act, i.e. it does not require the agreement of the parties. If the parties can agree on the termination of the employment, they may settle the matter of parting ways by mutual agreement. Thus, the rules for termination of employment have not been changed with regard to the coronavirus, employment can still be terminated by mutual agreement or termination if the employee cannot be provided with work.

Could the coronavirus be the reason for the termination?

The employer is required to give the reasons for the termination and the Labour Code requires the reasons for the termination be clearly stated. This requirement is not met if the justification for the termination is merely that “the termination is due to the coronavirus”.

The reason for the termination in this case will be a reason related to the operation of the employer, i.e. the loss of income due to the coronavirus and the resulting redundancies and/or reorganisations. However, these must be apparent from the statement of reasons, which must be clear, real and reasonable.

Of course, in an eventual labour lawsuit, the employer has to prove the fact that the income has decreased and as a result the number of employees has actually been reduced and the work processes have been reorganized. Thus, termination will be unlawful if, after the termination, another employee is hired for the same job instead of the employee who was terminated with reference to redundancies.

If the rules for terminating employment have not changed, what has changed because of the coronavirus? Although the Labour Code has not changed since January 1, 2020, the government has allowed deviations from certain rules of the law for a period lasting until thirtieth day following the end of the state of emergency. Thus, for example, the employer may unilaterally order the employee to work from home and telework, but the government decree also gives the opportunity for the parties of the employment to deviate from the rules of the Labour Code in a separate agreement.

The Most Important Rules Of Lease Agreements For Office And Business Premises, During The State Of Emergency

In order to prevent the spread of the coronavirus pandemic (COVID 19), a number of restrictive measures have been imposed, which also have a significant impact on tenancies. As a result of the restrictions, the home office has become commonplace, office buildings have become depopulated, a significant number of stores have been open for a limited time, their turnover has decreased significantly, however, leases still exist. The question rightly arises as to what rights and obligations the landlord and the tenant have in the current situation, whether the rent can be reduced and what rules apply to the termination of the tenancy.

Until 30 June 2020, a prohibition on termination will apply to some lease agreements

According to the newly released government decree, from the declaration of a state of emergency there is a prohibition on termination of the lease agreements until 30 June 2020, for the most endangered sectors, such as tourism, catering, entertainment, gambling, film, performing arts, event management and sports services. The prohibition on termination may be extended by the government until the end of the state of emergency.

Does this mean that non of the tenancy can be terminated at all?

No. This means that the leases of business premises belonging to the indicated sectors cannot be terminated by unilateral termination during the prohibited period, which in our opinion applies to all types of termination, thus both the so-called ‘ordinary’ and ‘extraordinary’ (immediate) termination. Of course, it is still possible for the parties to terminate the contract by mutual consent.

What about the lease agreements on office spaces? Does the prohibition on termination apply?

If the office spaces in question do not belong to any of the economic sectors listed in the government decree, so it is typically not a commercial business, the prohibition on termination does not apply to these leases. However, termination of these leases may not be the most economically viable option in the long run, so a temporary amendment to the lease should be considered, in which favourable conditions can be laid down for both landlords and tenants.

Can the tenant demand a reduction or waiver of the rent?

The Civil Code stipulates that no rent is payable for the period during which the tenant may not use the thing for reasons beyond his or her own interest. In view of the restrictive measures introduced due to the coronavirus pandemic, the remission of rent can only occur in a very narrow scope. It can only take place if the restriction imposed directly affects the operation of the rental property and makes it impossible to use it. If the restrictions only indirectly affect the use of the rental property, but do not make it impossible, the tenants are not released from their obligation to pay the rent.

Furthermore, the parties may deviate from the cited provision in the lease agreements with the same will, so it is worth examining the concluded agreements, because if the lease agreement excludes the applicability of this provision, the tenant cannot rely on the cited provision and refuse to pay the rent.

However, a reduction in the rent requires an amendment of the contract based on the mutual agreement of the parties. Under the contract amendment, the parties can agree on a number of provisions that will alleviate their situation (e.g. rent reduction, subsequent rent settlement, extension of the lease term, etc.). Mutually agreed amendments to the contract are in the interests of both the tenant and the landlord. Although it currently appears that a contract amendment will bring more favourable changes to the legal relationship for tenants, a contract amendment by mutual agreement may also be more economical for landlords. If the obligations of the tenant are left unchanged, there is a high risk that the tenants will become economically paralysed and will be liquidated. In such case, the landlord’s claims against the tenant might be enforced up to the amount of the contractual guarantees only.

Possibilities of holding general meetings and members’ meetings during the state of emergency II.

As from April 11, 2020, a lately issued Hungarian government decree regulates how members’ meetings and general meetings should be held during the state of emergency. The new government decree also overrides the relevant provisions of the Civil Code and the articles of association of companies and other legal entities.

What additional rights does the government decree give to the management?

In the first part of our summary of this newest government decree, we have already explained the increased „freedom” of the management regarding corporate decisions.

In many company’s case, the adoption of the annual financial report under the Hungarian Accounting Act is due in the near future. Pursuant to the interim regulation introduced by the government decree, the management is entitled to decide on the approval of the company’s financial report and the use of the after-tax profit. Moreover, the management can take emergency measures during the state of emergency, which would normally fall within the competence of the decision-making body.

These are very far-reaching decisions. Aren’t the hands of the management tied?

Yes: the decisions mentioned before can only be taken if a meeting of the decision-making body cannot be held, either by the participation of the members by electronic means or by voting in writing.

In addition, the legislature intends to set limits on the “emergency measures” of the management as a guarantee: accordingly, the management (i) may not, as a general rule, amend the articles of association, (ii) decide on the dissolution of the legal entity without a successor, (iii) nor may it decide on the transformation, merger or division of the company.

An additional restriction is that (iv) additional payments or other capital injections may be ordered by the operational management of the legal entity only with the prior written consent of the members/founders. In the case of company forms where company law imposes a minimum capital requirement (i.e. in the case of limited liability companies and public limited companies), (v) the management may not decide to reduce the subscribed capital.

Can members hinder management decisions?

Yes, this is possible before the measure in question is taken; the management may not take a decision if in their written opinion, the majority (at least 51%) of members holding more than 25% of the votes object to the proposed decision of the management. (If the legal person has a member having majority influence or a qualified majority, such member can block the measures of the management on its own.)

What happens if the tasks of the management are not performed by one person but by a body?

Like in the case of decision-making bodies, the government decree intends to enable the widest possible use of electronic means in decision-making processes in the case of management acting as a body. If there is no agreed procedure for the use of modern means of communication (or deviates from the government decree), the chairman of the board (deputy in case of impediment) and ultimately the member requested by the management are entitled to determine the rules of meeting and decision-making. It is important that written consultation and decision-making can also take place by electronic message exchange (i.e. by e-mail).

These facilitations should apply not only to the decision-making of the board of executive officers, but also to the decision-making of the supervisory board (or, if one exists, the audit committee).

What happens to mandates that expire during the state of emergency?

If the mandate of the executive officer of the company expires during the time of the state of emergency, his/her position shall last until the 90th day after the end of the state of emergency. The executive officer shall perform duties during this period. The cited rule applies ex lege, i.e. without a decision of the decision-making body.

If the executive officer resigns, he/she shall still perform his/her duties during the emergency or for 90 days after its termination. The same is true if the mandate is for a fixed term and the fixed term would expire during the state of emergency.

On the other hand, the mandate of the executive officer shall terminate if he/she is removed from office by the supreme body or if a reason for exclusion or conflict of interest arises. It goes without saying that in the event of the death of executive officer, the mandate cannot be maintained either, the just implemented interim rules do not bring change in this, of course.

It is important to emphasize that in the above time interval – similarly to the rules described for the executive officer – the mandate of the permanent auditor does not expire, and the permanent auditor is also obliged to perform duties during this time.

Possibilities of holding general meetings and members’ meetings during the state of emergency I.

How can corporate decisions be made during the pandemic?

Government decree about holding members’ meetings during the state of emergency

Restrictive measures imposed due to the coronavirus pandemic pose companies to many difficulties. The current situation requires not only financial considerations, but the need for seamless legal operation of the companies also calls for the use of solutions that are not often used otherwise. In our article we briefly overview what decision-making alternatives does the current Hungarian legal system offer to avoid personal contact.

Holding events and gatherings has been prohibited in Hungary since mid-March in general, and the convening of the main bodies of companies has not been named as an exception in the relevant government decree.

As from April 11, a new government decree is in force regulating how to hold members’ meetings and general meetings during the state of emergency. The new government decree overrides the relevant provisions of the Civil Code and founding documents of companies and other legal entities in certain aspects. The decree deals with how decision-making bodies, such as general meetings, members’ meetings and boards of trustees can make decisions during the limited curfew implemented in the course of the state of emergency.

Who is affected by the regulation?

The decree applies to both legal and non-legal entities. So, the scope of the ones affected includes, among others, general partnerships and limited liability companies, and public limited companies, cooperatives, associations and foundations. However, the government decree does not apply if the decision-making body is not prevented from taking a decision in compliance with the rules on meeting restrictions. Nevertheless, the provisions of the decree may be applied even in such cases on a voluntary basis.

Is there a case where the decision-making rules under the government decree apply even if the meeting could otherwise be held under the movement restriction rules?

Yes, if the number of members of the decision-making body is not more than five and decision-making can be made in the manner specified in the government decree. In the case of a decision-making body with more than five but not more than ten members, the majority of members with a majority of votes may request the management to initiate decision-making under the rules of the government decree, while in case of a decision-making body of more than ten members, the management can initiate it on its own.

How should the meeting be held under the regulation?

There are two ways. Either the meeting may be held with the participation of the members by electronic devices, or a decision may be taken in writing without holding a meeting on the initiative of the management, even if the articles of association does not provide for these possibilities and conditions.

Decision making without holding a meeting

Hungarian company law provides an opportunity for companies – excluding public limited companies – to make decisions without holding a meeting. Decision-making without holding a meeting serves as a possible alternative for the members to vote from home, as it does not require personal appearance. It is important to emphasize, however, that this is a written decision-making process in practice (for example voting by letter or email), so it is not the same as holding a meeting by electronic communication devices.

The decision-making may be initiated by the management by sending a draft of the resolution to the members. Members shall be given a period of at least fifteen days to send their votes to the management unless it is otherwise provided in the articles of association. In decision-making without a meeting, the decision-making process is effective if at least as many votes are sent to the management as would be necessary for a quorum if the members would hold the meeting.

Holding meetings by electronic communication devices

Company decisions can also be made online. In this case, participation shall be provided by means of an electronic communication device which allow the identification of members and mutual, uninterrupted communication between members. If the articles of association do not provide the rules for meeting held by electronic devices the management is entitled to establish these rules and communicate them to the members. The management must determine the electronic devices and IT applications that can be used and, if the management does not know the members (representatives) personally, the method of proving their identity.

Before the meeting, it is recommended to make a “test call” with the members of the company so that everything can be done smoothly during the decision-making process and the meeting can be held validly. Meetings can also be held on the nowadays popular applications like Skype, Zoom, Microsoft Team or Jitsi. It is important that the decisions taken and everything which was said at the meetings should be recorded so that they can be recalled later. All this means that there is no need to make a written record, it is only important that what is said on the meetings should be recallable in the future.

In conclusion, the current Hungarian legal system, in particular the new government decrees offer companies a number of choices how members should avoid personal contact in their decision-making. The new government decree also defines the cases when the management may decide on certain matters within the competence of the general meeting, the members’ meeting, regulates the operation of the executive bodies separately, and also contains additional rules concerning public limited companies. We will analyze these issues in our next publication.

Some important questions nowadays in Hungary: Conversion of business methods, employee’s leave, suspension of business activity for small and mid-sized enterprises

Conversion of regular business methods into ordering and contracting by telephone

The spread of the coronavirus poses new challenges for businesses that have so far been using primarily personal contact or paper-based methods during their activities. Many would introduce processing orders and making contracts by telephone in their administration to replace personal contact. In our newsletter, we represent the most important legal aspects should companies consider such conversion of their business methods.

The first question is how detailed the tenderer must describe the content and elements of the contract in the telephone contracting process in order for it to be validly concluded. In order for the contract to be valid, the essential elements of the contract must be agreed by the parties. Such material elements are typically the amount of the product or service, the payment deadline, the main features of the product or service, or the method of payment, but it varies from contract to contract as to what may qualify as a material item. Many companies already enter these essential elements into their contracts in accordance with their general terms and conditions (GTC) and regulate their details therein.

We would also recommend this method as a starting point for regulating telephone and online contracts, as it is the simplest form of detailed and prudent contracting. When concluding a telephone contract, it is always necessary to inform and draw the customer’s attention to the detailed knowledge of the GTC and the terms of purchase.

Recording telephone conversations

Another important aspect of telephone order is the matter of voice recording. Most customer services record calls and a machine voice automatically notify customers thereof. This can later be important to a business, if we think about what happens if the customer claims to have been invoiced for a different amount than the amount of the order, or if he/she received a different product. Recording the telephone conversations serve as a perfect solution in the event of a dispute, as the voice recording has probative value if it is lawfully recorded.

According to the information provided by the Hungarian National Authority for Data Protection and Freedom of Information, telephone conversations can only be recorded and stored pursuant to the mandatory requirements of law or upon the prior consent of the person concerned as data subject.

However, in addition to the consent of the data subject, it is a further condition that the data subjects are to give their consent after being duly informed of the purpose, duration and conditions under which the conversation will be recorded, stored and used. For this purpose, a statutory privacy statement published on the company’s website and accessible to all may be appropriate. However, data management must always remain within the necessary framework and be capable of achieving the desired purpose.

From the above summary, it is pointed out that there are relatively many legal obligations associated with lawfully recording telephone orders, but its introduction in accordance with the law can be a long-term solution for businesses. Of course, our summary does not cover all aspects of regulatory design, we have only highlighted some important issues.

Independent 14 days of the employee’s leave

This time, we draw attention to a lesser-known provision of Hungarian labor law that may be useful for companies where it is not feasible to work from home, or which are forced to shut down temporarily as a result of preventive government measures.

Granting leave by the employer

Employers generally seek to treat the current situation fairly, within the limits of economic reasonableness, and to avoid, as far as possible, dismissing workers. If the employer is unable to meet its employment obligation, it seems an obvious solution to grant leave to the workers concerned.

The „14 days rule”

Leave is generally granted by the employer, but the parties must pay attention to certain restrictions. Such a restriction is that, unless otherwise agreed, the leave must be granted in such a way that the employee is released from his/her obligation to work and to be available for at least fourteen consecutive days once per calendar year.

Unless otherwise agreed, if the employer is forced to grant leave to its employees anyway, they can use the current situation to fulfill their obligation described above.

Idle time/Downtime

If the employer is unable to meet its employment obligations, i.e. to give work to its employees during the working hours, we are talking about downtime/idle time. In this case, the employee is still entitled to the base salary or, if he or she was entitled to a wage supplement according to his or her position, the employer is also obliged to pay it to him or her. An employer may be released from its payment obligation only if it can prove that it was unable to fulfill its employment obligation for an unavoidable external reason.

By external reason we mean all the reasons that fall outside of the scope of interests and powers of the employer, and the employer could not prevent or eliminate, and this was not to be expected from the employer. However, we would like to draw your attention to the fact that we cannot automatically talk about the occurrence of force majeure at the same time as the introduction of the state of emergency. At present, no „general quarantine” has been ordered, so in theory the employer would still be able to employ the employee if the employer can provide the employee with safe and healthy working conditions.

Suspension of the business activity

Entrepreneurs subject to KATA taxation (a special form of simplified taxation applicable to certain small and mid-sized enterprises, entrepreneurs in Hungary) who have not been exempted from paying their KATA tax  , but who cannot generate income in the present situation, should consider suspending their business activities. , The suspension of the business activity must be communicated towards the tax authority, the local government responsible for the local business tax and to the competent professional chamber. During the break, these small and mid-sized enterprises still have to pay a small amount of monthly contribution to social security.

Main changes in Hungary due to the announced state of emergency

Since the World Health Organization (WHO) declared the rapidly spreading coronavirus a pandemic, people are increasingly affected by government, employers and many other decisions.

Due to the COVID-19 disease, the government declared a state of emergency in the territory of the Hungary on March 14, 2020. In the state of emergency, the Hungarian government has ordered extraordinary measures to prevent the health and life of the Hungarian people from the now pandemic coronavirus.

Exceptional measures led to create the 47/2020 (III.18.) and 61/2020 (III.23.) Government Decrees, which aim to ensure economic performance and survival of the small and medium-sized enterprises in Hungary.

  • Loan moratorium

Government Decree 47/2020 (III.18.), on the measures to protect the national economy, has been published in the Hungarian National Gazette. The decree contains the details of the loan moratorium announced by the Prime Minister previously. Furthermore, it declares provisions to reduce the burden on the sectors most affected by the effects of the COVID 19 epidemic.

Under the decree, all the debtors – whether businesses or individuals – will be deferred until December 31, 2020 in respect of payment obligations arising from loan, loan or financial lease contract entered. During the moratorium, the debtor is not obliged to pay any capital, interest, or other charges arising from such contracts, as the deadline extended.

The payment extension period modifies the period of completion and the maturity, meaning that the terms of these contracts are extended from March 18, 2020 to December 31, 2020. Thus, it is not to be expected that the banks will eventually seek a lump sum repayment during the moratorium, but the contracts (and all repayment installments) will be extended by approximately 9 months. Of course, the debts will continue to yield interest, but this additional cost is expected to be included by the banks in the future installments.

  • Temporarily the Government exempts low-income enterprises and individuals from paying their taxes

In addition to the credit moratorium, another major change came into force by the 47/2020 (III. 18.) decree. The Government exempted the „low-income” entrepreneurs such as taxi drivers, passenger transport companies, from taxation. (In Hungary this tax type is named ’KATA’, hereinafter: „KATA”).

The 61/2020 (III.23.) Government Decree clarified the scope of the activities which „benefit” from the tax and contribution concessions granted by the decree. This recent decree has significantly extended the scope of activities which do not have to pay KATA until the state of emergency. It means that, at the moment hairdressers, personal trainers, painters, dentists, hospitality practitioners, waiters/waitresses etc., whose income is mostly affected by the epidemic, do not have to pay their taxes in this period.

  • Suspension of executions

One of the other changes which came into force by the 60/2020 (III.23.) Government Decree is the suspension of the executions and tax executions from March 24, 2020, until the 15th day after the state of emergency has ceased. In fact, if the end of the state of emergency occurred during the fall or winter, then the evictions could only continue next April, in 2021.

Until the end of the state of emergency, an on-the spot procedure, and an auction may not be held and no on-site procedural action may be taken. These procedures and actions can only be done once the state of emergency has ceased, with the time limit for taking the procedural action restarting on the 15th day after the cessation of the emergency.