Employment of executives – endless possibilities?

Kinga Hetényi, Managing Partner, (left) and Dániel Gera, Attorney at Law

SCHOENHERR HETÉNYI ATTORNEYS AT LAW

An important element of keeping executives on board is to create a working environment which allows them to strive and focus completely on their tasks. Applying tailor-made conditions in their employment contracts and offering competitive compensation packages are important tools to achieve that. 

On the other hand, the high level of executives’ responsibility and the gravity of their decisions require solutions to protect employers’ interests by applying stricter liability rules, etc. Since the characteristics of regular employment relationships cannot appropriately reflect several aspects of executives’ employment, the need for more flexible rules has been addressed by the relevant regulations for a long time now.

Still, a significant change introduced by the new Labor Code went somewhat unnoticed. Namely, the “old” Labor Code of 1992 regulated the employment of executives in a way that it listed certain areas where different rules applied (e.g. collective agreement does not apply to executives, they work in a flexible work schedule, and are not entitled to extra compensation for overtime work, etc.). The current Labor Code kept the same rules in force but introduced a clause that allows parties of an executive employment contract to deviate from practically any regular (statutory) employment terms.

This means that – with certain exceptions – the statutory rules governing individual employment (creation, termination, working time, etc.) only apply to the employment of executives if the parties do not apply different contractual conditions. Below, we will take a look at two examples that demonstrate possible deviations from general rules.

Non-compete clause without extra compensation?

The employment contract of executive employees usually includes a post-termination non-compete clause. Both the former and the current Labor Code included that such a clause is only valid and enforceable if appropriate compensation is provided by the employer. Now the question is whether the parties can stipulate such a clause without providing appropriate compensation with reference to the general rule allowing deviation.

Executive employment contracts sometimes stipulate that the salary received during the employment includes the extra compensation for the non-compete undertaking. The validity of such a clause may raise questions, as in such case the compensation is paid in advance and it does not appear as a separate payment from the normal salary.

From a strict legal perspective both solutions seem feasible upon the parties’ agreement, as a deviation from the relevant rule of the Labor Code (i.e. the rule stating that the employer must pay proportionate compensation) is allowed under said rule. There are good arguments to support both positions, i.e. (i) one can argue that it is unfair to restrict someone’s fundamental right to exercise his or her profession without compensation; (ii) on the other the clause allowing deviation from the standards may extend to agreeing on unusual contractual terms.

To decide which argument prevails, it seems that we will have to wait for a case in which a court could decide about the validity of such deviations.

Gardening leave

For certain executives, employers (especially with foreign background) prefer applying a so-called gardening leave upon termination of employment. A gardening leave is a practice where an employee leaving the job is requested to stay away from work (stay at home to do gardening) during a definite period, while still remaining on payroll.

Such a measure aims to prevent employees from using up-to-date knowledge or information gained at the employer. Though it is somewhat unusual, a gardening leave can be applied under Hungarian law through existing legal concepts (exemption from work for a notice period). The rule allowing deviation from the rules of the Labor Code could help parties set out the exact rules of such leave in their employment contracts.

As shown by the above examples, parties have yet to fully explore and exploit the possibility of deviating from the general rules and legal counsel could take advantage of that freedom and fully tailor executive contracts to their clients’ needs.