Introduction
Declarations and legally binding statements made by employers and employees in the course of the employment relationship have key importance. They may have several aims and take several legal forms. They are relevant to the establishment and termination of the employment relationship, and may include instructions as to the performance of duties and terms and conditions of eligibility for certain benefits, among other things.
In practice, declarations made by employees rarely cause problems, as they are usually made personally. Declarations made by employers, however, must comply with certain formal rules – in particular, they must be signed or issued by designated persons in order to be effective.
General rules on employer representation
Considering the importance of unilateral declarations and commitments in the employment relationship, Hungarian labour law sets out detailed rules regarding the representation of the employer (in Hungarian terminology, 'exercising the employer's rights').
In principle, only the person or organ exercising the employer's rights is entitled to take legal action and make legal declarations on the employer's behalf. With certain exceptions, legal actions and declarations made on the employer's behalf towards employees are invalid if they are not made by a person entitled to exercise the employer's rights.
Exercising the employer's rights includes not only the conclusion and termination of employment contracts, but also the communication of instructions, approval of holidays and ordering overtime work or secondment, among other things.
According to the general rule, the employer is entitled to set out the way in which its rights are exercised, which includes appointing the relevant persons. This may be done through internal regulations, bylaws or other specific documents. The person entitled to exercise the employer's rights may also grant power of attorney to third parties to perform certain tasks on a case-by-case basis.
Specific methods applied in practice
Employers may set up a system in which a part of the employer's rights are exercised by employees' direct supervisors (eg, the delegation of tasks, annual evaluations, holiday approval), while more fundamental rights (eg, hiring and dismissal) are exercised by higher-level executives. Similar solutions are usually applied where employers operate through several braches, in which case the branch leader exercises the employer's rights related to day-to-day operations and staff management, but is not necessarily entitled to hire or dismiss workers.
This shared exercise of the employer's rights is also typical in the case of agency workers, where day-to-day supervision, work safety management and other employer rights relating to the performance of the work are exercised by the user enterprise, but the establishment and termination of employment can be exercised only by the agency.
It is crucial to duly inform employees of the person exercising the employer's rights. The employer must provide this information in writing within 15 days of concluding the employment contract; in the case of any change of the person exercising the employer's rights, notification must be made within 15 days of such change. This is an important obligation, not only because failure to comply with the duty to inform is penalised by the labour supervision authorities, but also because in certain cases it is critical who may sign or issue declarations towards employees on the employer's behalf.
Practical problems under previous legislation
The previous Companies Act provided that unless the employer's founding document (articles of association, deed of foundation) set out different rules, the managing directors or members of the management board were entitled to exercise the employer's rights towards the company's employees. In the absence of such alternative provisions, the managing directors or board members – as the legal representatives of the entity – were considered to exercise the employer's rights jointly.
Although employers were allowed to set out the system of exercising their rights through bylaws, and the management board or managing directors were entitled to further delegate this authority, in practice only larger organisations typically made use of these options. This often led to legal issues, particularly among multinational companies, whose board members may have been located in different countries. In such cases, signing a dismissal notice often caused problems, especially as a dismissal could have been declared unlawful for formal reasons if it was not signed by the person exercising the employer's rights.
The situation was further aggravated by the fact that court practice strictly interpreted the rules governing delegation of the employer's rights – that is, employers could delegate such rights only to other employees or persons within their own organisation. In the case of multinational companies – where human resources (HR) functions are often organised at group level and HR managers are sometimes not employees of the subsidiary in question – it was difficult to find a lawful solution.
Existing regulations – greater flexibility
Due to the problems caused by the somewhat incoherent rules of the Companies Act and the previous Labour Code, as well as the practical issued outlined above, the new Labour Code introduced more flexible rules that provide greater freedom for employers in establishing the system for exercising their rights.
One of the most significant novelties of the new Labour Code that a declaration made by a different person on behalf of the employer cannot be considered invalid if the person or organ entitled to exercise the employer's rights has subsequently approved the declaration. Since the regulations set out no specific format or deadline for such subsequent approval, an erroneous declaration (made by a person or organ other than the one formally exercising the employer's rights) can be remedied quickly.
Moreover, an erroneous declaration cannot be considered invalid (and therefore no subsequent approval is necessary) if the employee could have reasonably presumed the authority of the acting person from the circumstances.
Special rules apply to executive employees in charge of leading the organisation, as in their corporate function as directors – with certain exceptions – they may not be instructed by the company's shareholders. In their case, usually the supreme body of the company (ie, the shareholders' meeting), the supervisory board or persons appointed by such organs are entitled to exercise the employer's rights.
Since the entry into force of the new Labour Code in 2012, the number of cases relating to legal issues arising from the representation of the employer has effectively decreased. Nevertheless, it remains important to establish a coherent, legally sound system for exercising the employers' rights, as doing so could help to prevent future disputes.
For further information on this topic please contact Dániel Gera at Schoenherr Hungary by telephone (+36 1 8700 700) or email ([email protected]). The Schoenherr website can be accessed at www.schoenherr.eu.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
