To be or not to be (an executive)?

HR

The following article was written by Kinga Hetényi, Managing partner at Schoenherr Hetényi Attorneys at Law.

Hungarian law differentiates between “ordinary” employees and executives. The biggest difference is that many provisions of the Hungarian Labour Code which protect “ordinary” employees and restrict what kind of agreement can be made with them do not apply to executives. This means that the law is less protective and more flexible towards executives.

Executives can be further subdivided in two different categories. The first category consists of employees who are actually on the top of the organization, i.e. the managing director and his direct reports who are also entitled to substitute for him or her if absent. When substituting, the direct report does not need to be authorized to exercise all rights of the director; it is sufficient if he or she may substitute for the managing director in certain limited functions. If the company has several managing directors or is lead by a board of directors, each of the directors will qualify as an executive. 

These persons qualify automatically as executives without expressing such categorization in a shareholders’ resolution or their employment contracts. It is usually easy to identify the very top management level. However, if there is no clear organizational chart or there are no detailed job descriptions, there can be some uncertainty as to who can be regarded as a direct report with the right to substitute for the top management. The substance over form rule applies here too: It does not count whether the position is called “vice director” but the actual scope of work and the rights and obligations of the person will decide whether he or she is a direct report with the right to substitute for the top management person.

The second category of executives consists of employees who are expressly declared to be executives. Only employees may be declared as executives who work in either a position which is of special importance for the operations of the employer, or in a position which involves working with highly confidential information. In addition to the special nature of the position, the employee’s agreed gross monthly salary must be at least seven times the statutory minimum wage (in 2015: HUF 735,000). Although there is still very little judicial practice on who can be classified as executive, this above could mean that even the secretary of the managing director may be classified as an executive if she watches the director’s emails, has access to all kinds of confidential information and a salary which exceeds the above threshold.

Interestingly, although the law recognizes two different categories of executives, there are no differences in the rules that apply to them. Both categories receive the same treatment. The most important deviation from the rules applicable to “ordinary” employees is that, the employment contract of an executive may stipulate also provisions that are less favourable to the employee than the statutory rules (with a few exceptions from this). Whereas, in the case of an “ordinary” employee, no contractual deviation from the statutory rules is permitted if it is less favourable for the employee than the statutory rule. Furthermore, the main rule for executives is that they are authorized to set their own work schedule which also means that they are not entitled to any additional payments for overtime. This increases the performance character of the employment of executives.

As long as all tasks are completed and the affairs within the scope of authority of the employee are taken care of satisfactorily, the executive may not be held accountable for coming to work only at 10 AM. It goes without saying that most probably this will mean for the executive that occasionally he or she may need to stay at work even for the evening without additional financial compensation for the late hours.

The last two important factors to be mentioned are that the employer does not need to indicate any reasons if it decides to terminate the employment of an executive and that the executive will have unlimited liability for any loss or damage that he or she may cause to the employer negligently. Whereas, the liability of an “ordinary” employee for damage caused negligently is limited to one and a half month’s salary.

Being an executive is, thus, a privilege as it usually entails a higher salary but it also has certain downsides and additional risks for the employee. Based on the statutory rules one would think that employers are keen on qualifying as many as possible employees as executives. However, I have not actually noticed such endeavours in the practice.

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