Government suspends subsidies for Hankook due to labour law abuses

Following a series of trade union complaints and company fines imposed by the labour inspectorate, in November 2007 the government suspended the transfer of a training subsidy of HUF 143 million (€558,166) to the Korean tyre manufacturer Hankook. This is the first serious government sanction imposed under the law on ‘orderly labour relations’, in force since January 2006. This law ties subsidies and participation in public procurement tenders to good labour practices among employers.

Background

At the recently opened Hungarian site of the Korean tyre manufacturer Hankook (see EMCC company factsheet), employees reported irregularities in payroll calculation, overtime hours and weekend work. According to the Federation of Trade Unions of the Chemical, Energy and Allied Workers (Magyar Vegyipari Energiaipari és Rokon Szakmákban Dolgozók Szakszervezeti Szövetsége, VDSZ), the company was ignoring international labour standards and intimidating local trade union representatives so that the union was forced to work in secret and employees were afraid to disclose their membership. The company failed to recognise the trade union and refused to engage in collective bargaining (HU0707049I).

Prior to this, huge state subsidies allocated to Hankook had spurred political debate and the case received significant media attention. Moreover, the Ministry of Economy and Transport (Gazdasági és Közlekedési Minisztérium, GKM) refused to disclose details of the contract signed with Hankook in 2005, claiming business confidentiality. As a result, an investigative journalist from Index, a popular internet-based news portal, sued the ministry and won. Following this, newspapers were able to publicise that, beyond job-creation and training subsidies, Hankook was also eligible for state support worth HUF 15.8 billion (about €61.6 million as at 25 March 2008) for its HUF 130 billion (€507 million) investment in the country. This includes HUF 500 million (€1.95 million) for job creation and adult training purposes. In addition to direct subsidies, the company is eligible for tax allowances of up to HUF 10 billion (€39 million) during the next 10-year period. The government also undertook to award compensation for future changes in taxation, should they be unfavourable for Hankook. The Ministry of Social Affairs and Labour (Szociális és Munkaügyi Minisztérium, SZMM) published the procedural basis of the job creation part of the subsidies on its website: major investors in disadvantaged regions are granted a subsidy of HUF 160 million (€624,521) by the government, which may be increased by another HUF 100 million (€390,326) if more than 300 jobs are created in a region with an extremely poor labour market situation.

Government actions

Reportedly, as early as mid July 2007, the Vice-President of VDSZ, Tamás Székely, met Prime Minister Ferenc Gyurcsány and the President of VDSZ, György Paszternák, and contacted the State Secretary in charge of social policy and labour, Gábor Csizmár, in order to secure the trade union’s right to block the state subsidy for Hankook until employee relations are improved. In September 2007, an investigation carried out by the Hungarian Labour Inspectorate (Országos Munkabiztonsági és Munkaügyi Felügyelet, OMMF) resulted in a fine of HUF 8 million (€31,226) for irregularities in the company’s labour practices. In addition, Hankook was forced to pay HUF 17 million (€66,355) because of employing 32 Korean undeclared workers.

On 27 November, a spokesperson for SZMM announced that the Minister of Social Affairs and Labour, Mónika Lamperth, had suspended the transfer of a training subsidy from the Labour Market Fund (Munkaerőpiaci Alap) worth HUF 143 million (€558,166) until Hankook complies with labour regulations. She justified the decision on the basis of Hankook’s non-compliance with the law brought to light earlier by OMMF.

Legal underpinning of decision

This is the first serious case where the government had to apply a sanction on a company under the provisions of the law on ‘orderly labour relations’, in force since January 2006. This law ties government subsidies and participation in public procurement tenders to favourable labour practices among employers. The trade unions have been calling for such a law for a long time, while employer organisations have tried to moderate its provisions during a series of consultations held at the National Interest Reconciliation Council (Országos Érdekegyeztető Tanács, OÉT) prior to the legislation coming into force. The government put the bill on the agenda in the framework of the ‘100 steps programme’ launched in May 2005, which, among other objectives, aimed to curb undeclared work. In an effort to meet this goal, the legislation increased the powers of labour inspectors and threatened companies using undeclared workers by excluding them from state subsidies and public procurement procedures (HU0510102F, HU0506101N).

Act CLXXVII of 2005 and the related decrees of the government and SZMM on implementation defined the criteria for ‘orderly labour relations’ and the procedure for implementation, respectively. The basic preconditions include adhering to the legal regulations regarding the employment contract, rights of trade unions and works councils, legal protection of employee representatives and the law on European Works Councils. If the decision-making on subsidies needs to rank the applicants, further labour relations criteria may be taken into consideration, such as equal treatment, adhering to the regulation on working time, pay and collective redundancies. Since January 2006, when the law came into force, a good labour practice record means that a given employer has not been fined by the authorities for irregularities regarding employment, or in the case of appeal that the claim has been rejected by a valid decision in force made by the supreme authority. In the case of bidding for public procurement tenders and applications for subsidies, the bidders have to attach certificates received from OMMF and the Equal Treatment Authority (Egyenlő Bánásmód Hatóság, EBH) confirming their ‘fine-free’ status.

Commentary

The government’s attitude towards multinational companies is a delicate issue. On the one hand, the socialist-led coalition aims to make companies comply with labour standards, not only because of its commitment to enforce international treaties – for example, on the transposition and implementation of EU directives – and International Labour Organization (ILO) conventions. It is also worth mentioning that for the Hungarian Socialist Party (Magyar Szocialista Párt, MSZP), trade unions are also important allies, ensuring organised support of the electorate (HU0504101N). It is no coincidence, therefore, that the old trade union dream of a law on ‘orderly labour relations’ came to fruition following the 2002 electoral victory of MSZP.

On the other hand, in more recent times in Hungary, foreign direct investment (FDI) has made up the largest proportion of restructuring industries, maintaining and creating jobs; in other words, inward FDI ensured economic recovery following the ‘transition recession’ period in the 1990s. Job creation, however, is still badly needed, as the country’s employment rate is persistently low (57% for the 15–64 year old population), despite the implementation of various government measures to increase labour market participation in line with the European Employment Strategy. Without offering new jobs in disadvantaged regions and without appropriate public transport to allow for increased commuting, it is hard to imagine mass-scale re-employment of the unemployed or inactive populations. So far, in many remote regions of Hungary, foreign-owned greenfield manufacturing plants have offered a solution with regard to transport by running company buses. Therefore, in the context of strong competition for foreign investment across neighbouring countries, understandably the government is keen to offer generous subsidies for incoming companies. Thus, finding a balanced way of attracting and ‘disciplining’ foreign companies is a key issue for both economic and employment policy.

Comparing the amounts of total subsidies promised to Hankook, the recent government measure can be evaluated as a delayed step or a cautious warning message. It affects temporarily the training support offered to Hankook, which corresponds to a small part of the overall subsidy. In turn, the subsequent application of the criteria for ‘orderly labour relations’ is a novelty and seems to be a sort of punishment for companies, which is enough to satisfy the trade unions. By no means did the measure deter foreign investors in the manufacturing industry. Ironically, following the Hankook suspension case, the government’s major success in promoting FDI occurred in the same industry, and again in relation to an Asian producer. In January 2008, during his four-day visit to India, Prime Minister Gyurcsány announced that Apollo Tyres, the 14th largest tyre manufacturer in the world, agreed to set up a plant in Hungary (see EMCC company factsheet). The greenfield facility is to open in Gyöngyös, which is located about 80 kilometres northeast of Budapest; the total investment will amount to €200 million and the fully-fledged production will need 1,500 workers. The government is providing Apollo Tyres with subsidies worth HUF 7 billion (€27.3 million). However, the size of the subsidy per employee is 30% smaller than the amount given to Hankook.

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

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