Economically dependent workers in Hungary

The issue of economically dependent work is not yet officially recognised in Hungary, apart from special legal regulation for commercial agents. Nevertheless, the use of ‘bogus’ or false civil law contracts instead of standard employment contracts is common for various reasons, not least as employers try to evade high taxes. It may be assumed that a large proportion of workers in such situations fall into the category of economically dependent workers.

The boundaries between dependent employment and self-employment have become increasingly blurred in some sectors in recent years, in a context of changing labour markets and the spread of practices such as outsourcing and contracting-out. This process has led to a growing interest in ‘economically dependent workers’ – workers who are formally self-employed but depend on a single employer for their income. Against this background, a significant proportion of Hungary’s labour force may fall into the category of economically dependent workers, due to the prevalence of non-standard employment contracts in the country.

Non-standard employment arrangements

The use of ‘bogus’ or false civil law contracts is quite common in Hungary; in other words, employers often do not employ their workforce (or part of it) on the basis of standard employment contracts regulated by the Labour Code, but on the basis of bogus contracts under civil law. This situation has its origins in the socialist era, when state-owned companies – and even organisations directly funded by the state budget and the state administration itself – often used bogus civil law contracts instead of employment contracts. The reasons were, at that time, probably at least partly the same as today: the need to overcome a conflict between legal or fiscal limitations on the workforce and growth in the volume of work to be done, as well as the more favourable – for the employer – redundancy regulations characteristic of civil law contracts.

Since the economic transition period, two further reasons have encouraged the use of bogus contracts for employment purposes. Firstly, tax and social security contributions for a civil law contract have always been lower – sometimes much lower – than those imposed on regular wages. Secondly, employers are subject to a more severe liability in the event of work-related accidents compared with a civil law liability (HU0310102F). Clearly, working under a bogus civil law contract and being an economically dependent worker are not the same, but it may be assumed that the majority of bogus contracts disguise hierarchical relationships and long-term dependence on one employer. Other types of economically dependent workers, such as subcontractors, may be an issue in public discourse; however, they are not treated as dependent workers.

In the 1990s, employment on the basis of bogus contracts became widespread. Such forms of employment were frequently used in the areas of private security, transport and information technology. In the insurance industry, agents officially work on the basis of civil law contracts but, given their rights and obligations, should be categorised as employees. Other types of economically dependent workers are also evident in Hungary. In the construction sector, most subcontracting companies, especially in the second and third tier of the subcontracting chain, are very small and are in a weaker position than the main contractor; the latter may therefore in the course of contract negotiations impose conditions favourable for itself, such as cut prices.

A legal category of ‘economically dependent worker’ has not yet been introduced in Hungary. Most of the workers taking up jobs through bogus civil law contracts are officially self-employed, or members/employees of small business companies, operating typically in a form of partnership without legal entity. However, since 2000, Hungary has had a separate law on economically dependent workers in one specific sector. The Commercial Agents’ Contract Act 2000 (Act CXVII) is most commonly used in the insurance sector and, for example, grants commercial agents the right to a special kind of severance pay.

Criteria distinguishing employees

Since 2003, several pieces of legislation have addressed the issue of bogus civil law contracts, as a consequence of the government’s efforts to crack down on undeclared work and to increase tax revenue (HU0510102F). The guidelines issued in 2006 by the then Minister of Social and Labour Affairs, Gábor Csizmár, and the Minister of Finance, János Veres, specify certain criteria that may help in the review of contracts, in order to decide whether an apparent civil law contract is in fact an employment contract (HU0601103N). Such criteria are the: regularity of the tasks performed by the worker, possibility of obliging the worker to temporarily perform other work than that included in the contract, worker’s obligation to perform tasks in person, obligation of availability to perform work, existence of a hierarchical relationship between the employer and worker, employer’s right to command and control the worker, power to decide on work schedules and place of work, regularity of remuneration and use of the employer’s tools.

Definition of ‘employee’

The definition of ‘employee’ is currently the subject of discussion in Hungary, as part of a wide-ranging revision of current labour law, which was initiated by an agreement between the Hungarian government and social partners in 2003. In mid 2004, a group of leading labour law professionals presented a Conceptual paper on the creation of the new Labour Code proposing fundamental changes to the framework of labour law, which would also affect the definition of the employment relationship (HU0411102F).

According to the authors of this paper, contrary to the uniform employment pattern of the traditional industrial model, the new legislation should take into consideration the widespread use of ‘atypical work’, that is, various forms of employment situations – which also need differentiated regulations. Although the authors recognise that the main cause of the problem of evading labour law is the heavy financial burden on employment, in particular high taxation and social security contributions, atypical work should be kept within the boundaries of labour law insofar as possible. New types of contracts – in addition to the usual employment contract and civil law contracts – might also have to be introduced.

Case law

Bogus civil contracts have resulted in a series of court cases, with conflicting rulings. The best-known court ruling was rendered in 1993, when a court decided that manual work performed by agricultural workers in a hierarchical relationship and at a fixed place of work qualifies as an employment relationship regardless of the type of actual contract. The 1996 Labour Inspection Act gave labour inspectors the power to re-designate bogus civil law relationships as regular employment relationships. Labour inspectors have often used this power to fine employers who employ workers on the basis of bogus contracts. According to the Labour Inspection Act, such decisions may be challenged before a court (HU0310102F).

Data on economically dependent workers

No specific statistical data are available on the number of economically dependent workers. In 2006, some 466,000 self-employed persons acted as sole traders or were members of work partnerships, amounting to 11.9% of the total working population. Of these 466,000 self-employed workers, the proportion of women stood at 30.9%. Moreover, the issue of economically dependent workers may affect another 1.12 million employees – constituting 29% of the working population – who are employed in businesses with fewer than four employees.

Estimates exist on the number of economically dependent workers in three specific fields: 19,000 agents work in the financial and insurance sector, 2,500 agents work in the commercial sector and 2,000 persons work as real estate agents.

Only sporadic information and anecdotal evidence is available regarding the specific working conditions of economically dependent workers compared with other workers. For instance, it is known that in the road transport sector, bogus work contracts represented a significant problem a couple of years ago: hundreds of allegedly ‘self-employed’ workers drove the trucks of other companies. This situation arose at least partly because the European Directive 2002/15/EC on the organisation of the working time of persons performing mobile road transport activities does not apply to self-employed drivers. However, such cases of false self-employment have now been minimised in Hungary due to more effective inspections by the public authorities.

Legal regulation

No legal regulation with regard to economically dependent work exists, apart from the case of commercial agents. The Commercial Agents’ Contract Act 2000 (Act CXVII) noted above is in line with the European Council Directive 86/653/EEC on the coordination of the laws of the Member States relating to self-employed commercial agents. Nonetheless, the Hungarian act does not stipulate definitively on issues such as wages, working time, duration and termination of contract, sick leave, holidays, training, collective representation, information and consultation, or health and safety. For example, payment for the agent’s work is covered in the regulation but, although the law does define a wage level, only procedural rules and possible wage or bonus systems are applied.

The Conceptual paper on the creation of the new Labour Code argues that economically dependent workers should also be protected to a certain extent, but not by the strict Labour Code regulations (HU0601103N). The government has embarked on further legislative preparations, albeit so far with little result. A number of draft bills have been drawn up, but even government representatives recognise serious defects in them and a need for improvement (HU0506101N).

Position of social partners

As the legal category of ‘economically dependent workers’ has not been introduced in Hungary, practically no debate has taken place on this issue; consequently, the social partners have not developed their position either. As far as bogus civil contracts are concerned, trade unions have strongly condemned this manner of evading employment contracts under the labour law and the unions urge the government to crack down on such employer practices. Conversely, employer organisations have tried to divert the government measures and, as far as possible in the recent period, to postpone their implementation (HU0401107F).

Case of construction sector

Industrial relations coverage has not extended to economically dependent workers, as this category is not yet recognised. Nevertheless, in the construction sector, trade unions have formulated demands to ensure equal treatment of workers, particularly in subcontracting companies and in general in small and medium-sized enterprises (SMEs). For this purpose, the unions want to set up a liability (and accident) insurance fund based on compulsory contributions, covering employers with fewer than 50 employees. The sectoral employer organisation may accept the proposals if the funds are managed jointly by the social partners.

Despite this potential cooperation, the sectoral trade unions need to give advance notice to the main contractor when accessing construction sites where subcontractors are in operation should they wish to monitor health and safety conditions. Overall, given the fact that trade union density is very low in the sector, it seems unlikely that the trade union calls for state intervention in setting up an insurance fund will be answered any time soon.

Interestingly, in the construction sector, the employer organisation had also prepared a model contract to help SMEs in concluding subcontracts; however, this was finally taken off the agenda because the large member companies were opposed to giving such assistance to their potential subcontractors.

Responsibility for health and safety issues is in fact the only issue concerning the subcontractual relationship at construction sites which is widely discussed. The employers’ liability for various damages is an item in the contract between general contractors and subcontractors. Formerly, the subcontractor was, in principle, liable for any kind of damages caused. That situation changed when Hungary joined the EU in May 2004, as a ministerial decree regulated the ‘minimal health and safety standards at construction sites and in the course of construction processes’. This decree prescribes the nomination of a coordinator – that is, a natural person responsible for health and safety issues for the overall construction project; prior to the actual work, this individual’s name must be reported to the Labour Inspectorate (Országos Munkavédelemi és Munkaügyi Főfelügyelőség, OMMF).

A further change in the regulations has given OMMF and the Hungarian Tax and Financial Control Administration (Adó- és Pénzügyi Ellenőrzési Hivatal, APEH) broader authority. Based on a proposal by the social partners, an amendment in the internal rules of OMMF and APEH authorises field inspectors to investigate the employment relationship at subcontractor companies on their own initiative.

Commentary

Undoubtedly, the issue of economically dependent workers exists in Hungary. Yet this situation has had limited influence on legislation and social dialogue and remains a rather neglected matter. Nonetheless, the employment conditions of self-employed workers and of employees in SMEs have been highlighted from a different point of view: as being the major source of illegal and unregistered employment as well as bogus civil contracts. Thus, public discussion and policy efforts tend to focus on how to control tax evasion and undeclared work, instead of providing economically dependent workers with appropriate employment protection.

Comparative overview

A comparative overview of the situation in 16 European countries (15 Member States and Norway) was published in 2003 and is available online: Economically dependent workers, employment law and industrial relations. This article, compiled from the same questionnaire, serves to highlight the situation in one of the new Member States.

László Neumann, Institute for Political Science, Hungarian Academy of Sciences