Government proposes increased powers for labour inspectors 

In autumn 2005, the Hungarian parliament is considering a government bill that would increase the powers of labour inspectors and increase the fines on employers that breach employment law. The aim of the proposed changes is to crack down on undeclared work. Employers' organisations have objected to many aspects of the amendments.

The state authority in charge of supervising employment conditions as well as health and safety issues at the workplace is the Hungarian Labour Inspectorate (Országos Munkabiztonsági és Munkaügyi Felügyelet, OMMF), which was established in the mid-1980s. With democratisation and the transition to market economy, the inspectors’ entitlements and the related procedures have changed many times, and are currently regulated by Act LXXV of 1996. Presently, the law on labour inspection is undergoing a significant modification once again. A bill is before parliament and the amendment is expected to come into effect on 1 January 2006.

Political background

Trade unions have long demanded stronger powers for labour inspectors, including a substantial increase in the fines payable by employers that breach the law. The main criticism voiced by trade unions has been that inspectors focus on health and safety issues instead of the violation of employment law regulations. They have called for more inspections, as currently only 3% of undertakings are examined annually. Recently, the unions’ calls have been backed by the government, especially since the Prime Minister’s announcement in April 2005 of a broad package of piecemeal reform measures affecting the world of work, welfare services and broad areas of economic regulation, under the heading of the '100 steps programme' (HU0506101N). The current modification of the inspectorate system is incorporated in this process, as one of the main lines of the reform measures is addressing undeclared work. In addition to strengthening the inspectorate, the government is also seeking alternative solutions; for instance, in the construction industry it has facilitated the conclusion of a sectoral collective agreement and re-regulated the compulsory documentation of costs incurred by real estate development projects, especially in the housing sector (HU0506105F). Other measures aim to facilitate the performance of casual work in a lawful manner; employers may pay lump-sum levies on wages by buying a pre-paid sticker (közteherjegy), which is then stuck in a special booklet held by casual employees (alkalmi munkavállalói könyv).

As a first step, the president of the Labour Inspectorate (OMMF) was dismissed in April 2005 and the minister of labour and employment appointed his successor, a chief officer of the Budapest inspectorate. While the previous OMMF president was an expert on health and safety issues, the new president is a well-known for having led several investigation campaigns together with tax authorities and police forces at major construction sites in order to combat undeclared work, especially by migrant workers. The choice of the new president is a clear sign of what kind of shift is envisaged in the focus of the inspectorate’s activities. In 2005, the number of inspectors has been increased twice, though only slightly, and the new president has started a reorganisation of the inspectorate’s structure in order to separate clearly labour inspection activities from health and safety functions and improve the effectiveness of supervision. At a press conference, the new president promised that inspectors would make inquiries at night during the summertime as well as at weekends to fight undeclared work in seasonal industries. In the case of a first offence, however, inspectors would give employers only warnings instead of the usual fines.

Main amendments

Several measures in the bill serve to widen the competence of OMMF. First, inspectors will be in a position to monitor whether wages and other allowances are paid lawfully in case of termination of employment. Second, the bill strengthens inspectors’ entitlement to investigate temporary agency work, especially to perform on-the-spot inspections at the user enterprises to ensure that the registration of the agency is appropriate and that the employment contracts and working conditions meet the legal requirements. This entitlement is extended to the control of agencies registered abroad, as a number of new Slovakian agencies, employing Hungarian workers in part, are causing decreasing tax revenues and unfair competition between agencies, especially in the border region with Slovakia (HU0412102F). Third, the inspectors will be in charge of controlling the employment of foreign workers.

The bill introduces a new registration system for foreign employees and their family members who are citizens of countries that became EU Member States at the same time as Hungary. Although citizens of the newly joined countries do not need a work permit in Hungary, they do have to be registered, which is controlled by OMMF. The underlying motivation is that, should these migrant workers cause significant problems and a critical situation in the Hungarian labour market, Hungary will be in the position to derogate from this regulation and reintroduce the requirement for these foreign workers to have a work permit. (At the same time, citizens of countries outside the EU or of a Member State that imposes a ban on the 'free movement' of Hungarian workers need to have a work permit to undertake a job in Hungary. Employers quite often violate this rule to evade paying taxes and social security contributions or to avoid the cumbersome authorisation process. Policing the employment of these foreign workers has already been a major task of the inspectors, before the current amendment.)

Furthermore, the bill overhauls the OMMF penalty system. On the one hand the punishment might be adjusted to the seriousness of the violation of the law, ranging from a simple warning to serious fines or imposing a ban on certain operations of the employer. In the event of infringement of lawful rights, the inspector will take into consideration all the circumstances, such as the number of employees employed by the employer, the number of employees affected by the infringement, the legal status of the employer (business or private person), or the number of repeated abuses in the last three years. In the case of a serious infringement, the penalty will be imposed even if only a single employee is concerned. On the other hand, the amount of fines will be substantially raised to as much as HUF 20 million (EUR 40,000), or HUF 10 million (EUR 20,000) if the employer has fewer than 20 employees.

The bill also includes a number of minor changes in the definition of the tasks of OMMF. A new task of the headquarters of the inspectorate will be to cooperate with its counterparts in other EU Member States: on request, it will provide information about investigations taking place in Hungary and about Hungarian labour law. For companies tendering in public procurement procedures or applying for active labour market policy subsidies, OMMF will issue a certification that the applicant has not been penalised for violations of labour law, which will become a formal criterion for participating in bids for public procurement/subsidy procedures. The procedural deadline for OMMF to act will, in a significant number of cases, be longer than usual (60 days instead 30 days) in the future. The fines will be collected in the same way as taxes and other public arrears.

The amendment has an impact on social dialogue too: a new consultative body, known as the Council Supporting Labour Inspection (Munkaügyi Ellenőrzést Támogató Tanács), will be established. The members of the Council will be delegated by trade unions and employers' organisations participating in the National Interest Reconciliation Council (Országos Érdekegyeztető Tanács, OÉT) (HU0502105F) and by the government, with three members from each side. The president of OMMF will also participate, though he or she will not take part in the decision making of the new Council.

Social partners’ views

Although the social partners agreed on the necessity of the revision of the labour inspection legislation, employers' associations expressed serious discontent about the bill during consultations. Several rounds of consultation were held at the OÉT, both at the plenary session and in its Labour Law Committee (Munkajogi Bizottság).

The original aim of the legislative modification was to reduce undeclared work. The representatives of both employers and employees supported the idea of criminalisation of undeclared work, which means that employers that violates the law could be held responsible for the undeclared work in a criminal court (a bill on criminalisation of undeclared work is already before parliament).

During the negotiations, however, the representatives of the employers objected to the amount of the fines as being too high and proposed a ceiling of HUF 10 million instead of HUF 20 million, but their view was rejected. Furthermore, employers found that the rules on differentiation of fines were not properly clarified. Another idea brought up by employers was that not only the employers but also the employees should be fined in cases of undeclared work. The government rejected this on the grounds that it would seriously hinder the production of evidence on undeclared work, because in a significant number of cases it is the employees who testify against their employers, and this is the authorities' main evidence to prove undeclared work. Eventually, employers could achieve only minor changes in the proposed penalty system.

Employers' representatives criticised the bill as a whole. Basically, they agreed that it was important to prevent violations of abuses of the law, but stressed that increasing the fines might be counter-productive as overly high penalties could reinforce unlawful practices, which then could endanger legal security. Essentially, they argued that the bill is against the interests of employers.

However, the idea of a new labour inspection consultative body was endorsed by both social partners.

Commentary

Undoubtedly, the government is committed to fighting undeclared work, and the minister of employment and labour made it clear at a plenary session of the OÉT that he is determined to pursue this direction of legislation even without the consent of the employers. The strict rules and stringent control against undeclared work seems to be one of the most important measures in the course of the implementation of the Prime Minister’s reform programme launched in April 2005.

The aim of the amendments to the law is to improve the effectiveness of labour inspection and to widen the competence of inspectors. Also, the government has introduced measures to increase significantly the number of inspectors, and envisages a reorganisation of OMMF, which certainly will be carried through. However, in the opinion of many experts, an increase in penalties is not necessarily the most effective instrument to cut undeclared work. First, this would need a more consistent public policy in the enforcement of labour law, but in recent cases OMMF itself, through its interpretation of the law, has given waivers to employers using 'sham' civil law contracts instead of standard employment contracts. (HU0310102F) Moreover, concerning this sort of violation of the law, the waiver was reinforced and extended by a parliamentary decision. Second, in the view of many economists and political scientists, the real solution would be not only a cut in levies on pay, which is a general demand of employers’ associations, but also a more transparent system of using public money in general, and a crack-down on corruption in particular, which could serve to mitigate the 'moral hazard' problems of paying taxes. (Lilla Bodnár and László Neumann, Institute of Political Science, Hungarian Academy of Sciences)

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