Hungary: Decline in turnover as grounds for dismissal

Under certain circumstances, companies may decide to restructure their internal organisation in order to:

• increase efficiency;
• reduce costs; or
• focus on other areas of operation.

If a company's turnover declines and its business is suffering, it may force decision makers to reorganise its operations, which often results in redundancies.

Hungarian law generally requires employers to justify the termination of an employment relationship, and economic grounds generally serve as valid grounds for dismissal. This update provides insight into the circumstances which may constitute 'economic grounds' on the basis of recent case law.

Grounds for dismissal

Under Hungarian law, reasons for ordinary dismissal may relate to:

• the employee's abilities;
• the employee's behaviour with regard to their employment; or
• the employer's operations.

The grounds listed in the Labour Code are rather generic. A distinction may be made between two wider categories:

• when a dismissal is connected to the employee's ability or behaviour; and
• when a dismissal is linked to reasons relating to the employer's operations.

This latter category is often referred to as 'economic grounds'.

Formal and substantive requirements of dismissal

As a formal requirement, the termination of an employment relationship always requires a written notice to be delivered to the other party. If an employer terminates the employment, it must – with certain exceptions – justify the dismissal (ie, indicate its grounds in the termination notice in accordance with the law). In practice, justification is a crucial part of a dismissal as, in the event of a legal dispute, the employer must be able to prove the validity of the grounds stated in the dismissal.

Substantial requirements have largely been developed by court practice and commentaries. In this regard, a reason for dismissal must be clear, genuine and reasonable.

The clarity criterion means that the reasoning must be comprehensible and clearly specify the grounds for termination. In other words, the justification must inform the employee why the employment relationship is being terminated. Court practice in this regard accepts both long and detailed and short and concise descriptions. The courts generally review the content of a justification and not its length.

The genuineness criterion means that that the reason for the dismissal must be true and valid (supported by facts) when the dismissal is communicated (eg, the cited reorganisation must take place or the dismissal must be supported by documents).

The reasonability criterion has a unique meaning in the context of dismissals: it does not require a decision to be reasonable from an economic, financial or other perspective, but rather creates a cause-effect relationship between the justification and the dismissal. This criterion is aimed at allowing employees to understand the rationale behind their dismissal (eg, the employer reduced the headcount of a department, so the employee's position ceased to exist).

Reorganisations as economic grounds

As noted above, the law does not specify which grounds could qualify as reasons linked to the employer's operations or economic grounds as valid grounds for dismissal.

The relevant court practice interprets this concept broadly and confirms that a reorganisation could be lawful grounds for dismissal. Employers enjoy great freedom when dismissing employees for economic grounds (eg, a reorganisation or lay-offs), which means that:

• they may freely decide on a reorganisation, whenever they deem it necessary, without offering other vacant jobs (with certain exceptions) to the employees being made redundant; and
• if the reorganisation affects several employees, the employer may freely select the ones to be made redundant.

When a reorganisation is the reason for a dismissal, in the event of a dispute – assuming that the reasoning is clear and understandable – the courts may examine only the validity (genuineness) of the reason (ie, whether the reorganisation took place) and not its economic substance.

Consequently, if an employee challenges the dismissal in court, the employer must prove only that:

• the reorganisation has taken place;
• the employee's position has been terminated; and
• the tasks have been allocated to other persons.

This is normally the point where the court's authority to examine the background of a dismissal stops, because if the employer successfully proves these circumstances, the courts have no authority to further examine whether the reorganisation was useful or economically viable.

Decline in turnover as grounds for dismissal

A recent case, which was heard by several courts up to the Supreme Court, questioned whether a dismissed employee can infer that a reorganisation took place if the employer terminated their employment relationship unilaterally based on the fact that the company's turnover had declined.

The case focused on an employer that had dismissed one of its sales representatives and justified the dismissal on the decline in its sales volumes and turnover in comparison with preceding years. After the sales representative had been dismissed, his tasks were allocated among two other sales representatives.

The dismissed employee challenged the dismissal in court, claiming that the reasoning for the dismissal had not clearly specified the grounds for termination. The reference to the decline in the employer's turnover had not allowed him to understand whether the reason was economic in substance or somehow linked to his behaviour or performance as a sales representative. It had also been unclear to the dismissed employee whether the employer's whole turnover had declined or just the turnover of the division in which he had worked.

The employer argued that the circumstances of the dismissal had also been explained orally and that it had (or should have been) clear that the decline in turnover constituted an economic ground. The employer also argued that such reasoning does not have to be detailed; it can be concise as long as the grounds for termination are valid.

After the first and second-instance courts delivered different decisions, the Supreme Court decided in the employee's favour and stated that the reference to the decline in turnover in itself had not clearly specified the ground for termination. In its reasoned opinion, the court declared that the employer's justification had not referred to the fact that this economic reason had led to reorganisation or redundancy. The Supreme Court concluded that the dismissal had been unlawful, as the justification had not been clear and reasonable.

Comment

The Supreme Court's decision arguably does not mean that a decline in an employer's turnover does not allow it to take measures to reduce its headcount. However, even in such cases, the justification of the dismissal must comply with the law and be sufficiently clear and understandable.

The dismissal in the abovementioned case would likely not have been declared unlawful if the employer had explained the genuine reason for it (ie, that the decline in the company's turnover had led it to undertake a restructuring, whereby the employee's function had ceased to exist).

This case clearly shows that even when an employer has a rightful interest in dismissing certain employees for economic grounds, the justification of the dismissal must be formulated correctly in accordance with the law and checked by legal counsel. Otherwise, employers may have difficulties protecting themselves in court.

This article was first published on www.internationallawoffice.com