Although performance-based compensation has long been an integral part of Hungarian employment law, neither the Labour Code nor the relevant commentaries provide a clear-cut definition of a 'bonus'. As a result, the definition and key legal principles governing bonuses have been developed by court practice. This update examines some notable decisions that illustrate the development of this practice. To better understand the developments, it will first consider the definition of a 'bonus' in court practice.
Definition of 'bonus'
The Labour Code's definition of 'wages' is broad. It includes any remuneration – provided directly or indirectly, in cash or otherwise – based on an employment relationship. This definition draws on international treaties, such as International Labour Organisation Convention 95 concerning the Protection of Wages and Section 157 of the Treaty on the Functioning of the European Union. These treaties define wages in the context of the equal pay principle. Thus, the definition can be unhelpful when courts try to define the exact legal nature of bonuses.
In a strict legal sense, a bonus falls within the above definition of wages, but courts tend to interpret it as a special type of remuneration outside the general wage concept. For example, Hungarian law does not recognise bonuses as being part of an employee's regular wages when it comes to absence pay (ie, a payment due in lieu of wages when someone is exempted from work or during sick leave).
The key characteristics of a bonus, according to court practice, are as follows:
- A bonus is based on performance, but is not the counter value of the performance of standard duties under an employment contract.
- A bonus is payable based on the employer's undertaking and the employee's exceptional performance.
- A bonus compensates exceptional performance. However, it does not compensate additional performance in general, as this is usually compensated by allowances. Rather, it compensates exceptional performance that was expected and that the employer undertook to compensate.
Courts use the above characteristics to define whether the remuneration in question can be regarded as a bonus. The decisive factor in such a decision is not the remuneration's title, but its legal nature and the concept behind it. Thus, to establish the legal nature of the remuneration in a particular case, the underlying documentation and the practice that was followed must be considered.
In addition to bonuses, Hungarian law also recognises the concept of a 'reward', with which an employer can compensate exceptional performance. A reward differs to a bonus as it is paid solely at the employer's discretion with no criteria set in advance, whereas a bonus is legally payable and enforceable if its preconditions are met.
Eligibility: evolving court practice
Unsurprisingly, most legal disputes regarding bonuses concern eligibility. As there are no regulations governing the payment of bonuses, courts usually base their decisions on:
- the parties' agreements (written or verbal);
- the employer's internal regulations (ie, bonus scheme);
- the parties' practice; and
- general legal principles (excluding the equal pay principle).
The most notable cases usually arise from disputes in which these elements are contradictory or which involve questions that fall outside their scope. Below are examples of some important decisions over the past decade that have shaped court practice.
The most important precondition for eligibility is that the employer undertook to pay the bonus. This can be done in an employment agreement or unilaterally. In accordance with court practice, a verbal promise cannot be considered a concrete commitment or undertaking and, therefore, no bonus claim can be enforced on this basis. Instead, an employee's bonus claim must be based on the employer's concrete written commitment.
If an employer undertook to pay a bonus, and the tasks or preconditions detailed in the undertaking have been completed, the bonus is automatically payable. In accordance with court practice, additional action (eg, an approval or request) that is not prescribed by the underlying documents is not required.
Partial performance of tasks
Another important question that the courts have to address is what happens if the tasks are determined correctly in advance by the employer and the employee completes them only partially. Court practice is not fully consistent regarding this question, but Supreme Court decisions from 1997, 1999 and 2002 adopted a rather employee-friendly approach, as they established that – in the absence of appropriate exclusion covenants in the employer's original undertaking – the employee may be entitled to a relevant part of the bonus.
Failure to set tasks
In a memorable 2004 judgment, the Supreme Court declared that a bonus could be payable even in the absence of the employee's performance if the employer:
- fails to determine the exact tasks to be completed by the employee; or
- determine the tasks so late (eg, in the penultimate month of the financial year, as in the case at hand) that the employee could not have been reasonably expected to complete them.
Most commentators interpreted this judgment to mean that if an employer undertakes to pay a bonus on the completion of certain tasks (eg, in the employment contract), it cannot escape its obligation to pay the bonus by failing to determine the tasks.
From an employer's perspective, this practice was further aggravated by the fact that courts considered an employer's general practice – for example, if an employer paid 80% of an annual bonus for the 50% completion of a task, employees may have based their claim on such practice. In response, employers tried to mitigate the risk of such court practice by applying more sophisticated bonus schemes and making less concrete undertakings.
After the economic crisis and the adoption of the new Labour Code in 2012, court practice in Hungary shifted; it seems that courts now try to strike a better balance between employee welfare and employers' economic interests. A sign of this change may be that recent court decisions addressing employee eligibility for bonuses (the most important of which is from 2014) seem to follow a more employer-friendly approach. Courts now seem to accept that an employer's undertaking to pay a bonus can be less concrete and that a bonus payment can be determined optionally.
In a recent decision, the Curia (Supreme Court) declared that an employee's bonus claim is not well founded if it is linked to the performance of certain tasks which were not determined conclusively. The Curia accepted that it is within an employer's liberty not to set out any bonus tasks and that, in such cases, the employee is not entitled to a bonus.
The courts' new approach is not guaranteed and it is always better to prevent disputes than pursue them. Therefore, it is always worth seeking legal advice before determining bonus schemes, especially if they are more sophisticated. This article was edited and first appeared on www.internationallawoffice.com
Originally published as Schoenherr legal insights on 19 October 2016.