- New penalty system for unlawful dismissal
- Damages caused by unlawful dismissal
- Lost income – calculation, amount and enforcement
New penalty system for unlawful dismissal
The 2012 Labour Code introduced significant changes concerning
the compensation to be paid by employers in the event of unlawful
dismissal. Since the new rules apply to all unlawful dismissal
cases commenced after the entry into force of the new Labour Code
(ie, after July 1 2012), it has taken some time for these cases to
be processed, and thus also for the potential pitfalls of the new
regulations to be identified and conclusions to be drawn.
As part of this process, on March 31 2014 the Administrative and
Labour College of the Supreme Court issued an opinion addressing
the most important questions relating to the penalties for unlawful
dismissal.
Under the previous Labour Code, in case of unlawful dismissal and
upon the employee's request, the employer was obliged to
reinstate the employee to his or her original position. If this was
impossible due to various circumstances (which was the situation in
most cases), the employer was obliged to pay:
- lump-sum compensation amounting to between two and 12 months' average salary; and
- full compensation for the damages suffered by the employee (including lost wages) from the date of termination.
The previous Labour Code stipulated that if a legal dispute
arose, the date of termination correlated to the date on which the
court ruling declaring the dismissal unlawful became binding. As
such, employers were forced to bear the risk of lengthy and delayed
court procedures.
As the previous regime put an unreasonably high burden on
employers, the new Labour Code has introduced a new penalty regime
for unlawful dismissal.
According to the new Labour Code, in case of unlawful dismissal and
upon the employee's request, the employer must pay compensation
for the damages that the employee has incurred. Compensation for
lost wages or lost income may not exceed an amount equal to 12
months' absence rate1 . This new rule has two
significant consequences:
- Compensation now relates only to the actual damage caused by the dismissal; and
- Damages arising from lost income are capped at an amount equal to 12 months' absence rate.
Alternatively, employees may claim lump-sum compensation amounting to the absence rate due for their notice period instead of compensation for damages. In such case the employee need not prove damages suffered as a result of the dismissal. Such a claim could considerably simplify court procedures, although the amount of compensation that can be awarded to the employee is significantly lower.
Damages caused by unlawful dismissal
One consequence of the new penalty system is that – aside
from the unlawful nature of the dismissal (the employer must still
prove the lawfulness of the dismissal) – the employee must
prove the exact damages suffered and their extent. In other words,
the fact that the dismissal was unlawful does not automatically
trigger the employer's duty to pay full compensation for
damages. Thus, the court must decide on the individual damages
claims submitted by the employee and evaluate them separately, in
accordance with the general rules pertaining to damage
claims.
What type of damages typically arise in cases of dismissal? The
most important is lost income or potentially lost social security
and other benefits. Extra costs incurred as a result of unlawful
dismissal may also be considered as damages; moral damages may also
arise.
The law stipulates certain damages for which the employer may not
be held liable, including:
- damages that were reasonably unpredictable at the time of dismissal (eg, the employee was unable to find a new job for several years, leading to damage to his or her health); and
- damages that could have been prevented or avoided by the employee.
With respect to the prevention of damages, the court usually expects employees to search actively for a new job following dismissal. If the employee finds a new job, but the remuneration is lower, the difference may be claimed from the previous employer as damages (ie, lost income).
Lost income – calculation, amount and enforcement
The amount of lost income is capped at an amount equal to 12
months' absence rate. The law's indication of 12 months
often leads to confusion; this rule does not mean that the employee
is entitled to the absence rate for a period of 12 months following
dismissal. Rather, this amount serves as a cap up to which the
amount of actual damages incurred may be claimed from the previous
employer.
The opinion issued by the Administrative and Labour College of the
Supreme Court also suggests that if the employee wishes to make
damages claims for lost income, it is advisable first to establish
the amount of the cap (ie, the amount equal to 12 months'
absence rate) before examining and deciding on the individual
claims.
According to the Labour Code, for the purposes of determining lost
income, the cash value of other regular benefits to which the
employee was entitled (on the basis of the employment relationship)
shall be taken into account in addition to lost salary. This means
that under the correct interpretation of the legal provisions,
claims pertaining to all types of lost income (eg, bonuses and
fringe benefits) may be enforced within the aforementioned
cap.
Another consequence of this new system is that if the employee
finds a new job at a lower salary after the unlawful termination,
it is possible that the amount of damages suffered by the employee
(ie, lost income) may reach the aforementioned cap only after a
relatively long period, especially if the salary difference between
the two jobs is minimal.
In such case, the employee may have further damages claims after
the court verdict has been issued, as the amount of the cap will
not have been reached on the verdict's issuance date. The fact
that the courts may award compensation only for damages that have
already occurred – not for future damages – makes this
scenario even more probable.
Most practitioners consider that in such cases, employees may
enforce their additional damages claims in a subsequent court case
– even if, formally speaking, doing so could violate the
concept of res judicata, which does not allow the same party to
initiate legal proceedings to enforce claims arising from the same
legal relationship.
Until a comprehensive new regulation on such situations is
developed, employers that have dismissed employees unlawfully
within the past three years (the period of prescription) cannot be
certain that they will not face further claims made by their
employees, even if litigation between them has already
concluded.
This article was edited by and first appeared on www.internationallawoffice.com
1 A concept used in Hungarian payroll processing, referring to the amount payable to employees when they are absent from work.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.