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Independent Contracting in Hungary

Mandate agreements are regulated by the Civil Code; employment contracts are subject to the Labour Code provisions, which do not apply to independent contractors.

One of the characteristics of an employment relationship is the employer’s right to direct, instruct, and control all phases of the employee’s job. In case of mandate agreements, the parties are not subordinate, and a contractor is an independent person.

Independent contractors conclude a mandate agreement to deliver a final result, to complete a task, or to render services, for which they receive remuneration. In employment relations, the scope is the continuous provision of workforce. In case of a mandate agreement, contractors usually carry out the services with their own equipment, are allowed to allocate their own working hours, are not regularly remunerated for the performed services, and the principal has a limited right to give instructions.

The personal involvement of a contractor is not a requirement; the contractor may use a substitute or a subcontractor but may require that a specific person carry out the assignment.

Independent contractor contract length allowed

Mandate agreements are concluded for a definite or an indefinite period. A definite period could be a specified time frame or a condition (e.g., completion of a project). However, entering into a framework agreement, under which a party may order contractor’s services repeatedly, is also possible.

For an employment agreement, a definite term may be determined for a maximum of only five years (including the duration of an extended relationship).

What makes someone an employee

An employee is a natural person performing work under an employment contract concluded with an employer (natural person or entity) by which the employee receives remuneration (usually monthly) for the performance of work. If a mandate agreement has typical and usual characteristics of an employment relationship, the agreement may be re-qualified as employment relationship.

Law specifies the conditions for employment eligibility. The main requirement is reaching the minimum age for working capacity, which is 16 years. Increasing the minimum age to 18 for heavy, dangerous, or harmful work is possible. Young persons under the age of 16 can be employed for the performance of cultural, artistic, sports, or advertising activities, provided the competent Guardianship Authority receives a notification 15 days before the starting date of employment.

Special requirements (e.g., a medical exam, a labour inspection permission, etc.) are defined for the scenarios mentioned above.

Employment eligibility for certain positions requires meeting additional criteria like educational status, work experience, Hungarian citizenship (for government positions), and, in some cases, a clean criminal record.

Based on the judicial practice, certain characteristics are considered as establishing an employment relationship.

Primary qualifiers:

  • the nature of the activity (e.g., internal activities more closely related to the employer’s day-to-day operations)
  • tasks being set out in a job description (always detailed in an employment contract or by reference to a job description)
  • obligation to perform work personally
  • obligation of employment on the part of the employer (In the case of a service/independent contractor’s agreement, the “employer” is not obliged to provide a new task (unlike in the case of an employment contract) if the tasks are exhausted.)
  • the obligation of availability of the employee (i.e., employees must be present at the place of work and in a fit state to work at all times during their working hours)
  • subordination

Secondary qualifying characteristics

  • right to direct, instruct, and control (which is broad in the employment relationship and narrow in the service/contractor relationship, since contractors decide how to carry out their duties)
  • determining the duration of work and the scheduling of working hours (which in the case of an employment relationship is determined by the employer)
  • the place of work (more precisely, the employer’s determination of the place of work)
  • the remuneration for the performed work (which carries elements of remuneration, such as something regular and in fixed amounts)
  • use of the employer’s work equipment, resources, and raw materials
  • the provision of safe working conditions that do not endanger health (in all cases, an obligation on the employer, as opposed to the employee
  • the contract being in written form

The primary qualifying characteristics may in themselves be decisive for the qualification of an employment relationship and thus indicate the existence of an employment relationship. In comparison, the secondary qualifying criteria are not necessarily decisive. Still, they can often lead to the qualification of a legal relationship as an employment relationship but only in combination with other qualifying criteria.

Employee vs contractor

Employees and independent contractors are treated and regulated differently. Employees have a specific work time, place of work and are hierarchically dependent on the employer. Employees use the materials and work environment of the employer. Employees bear disciplinary liability, which can result in penalties, including their dismissal from the position.

An independent contractor is liable under the general terms of the Civil Code, and special liability provisions are applicable in an employment relationship. A salary is a mandatory condition for concluding an employment agreement; however, independent contractors can perform their duties free of charge as long as this doesn’t result in tax evasion.

Employers are responsible for calculating, deducting, filing, and paying the personal income tax (PIT) on the employee’s behalf. They are also responsible for paying insurance contributions, along with the employee, which gives employees access to many benefits, such as retirement pension, disability pension, sick benefits, health insurance, unemployment benefits, etc. As for contractors, calculating, deducting, filing and paying taxes and insurance contributions may depend on what their legal status is (self-employed or not), on whether the payer is a company, etc.

Employees are due compensation in certain cases. For example, if an employment agreement is terminated, the employee is due compensation for proportionate part of unused holidays, severance pay, or absence for the exemption period. Such compensation is not due for an independent contractor unless otherwise explicitly agreed.

Penalties for misclassification

If a mandate agreement has typical characteristics of an employment relationship, a risk that such agreement may be reclassified as an employment contract (either by the tax authority or by an employment court) exists.

If the authority/court establishes that the parties have entered into a mandate agreement to circumvent certain employment-related rules, the agreement is deemed null and void, and the provisions of labour law shall apply to the parties’ relationship. From a taxation perspective, the employer could be obliged to pay (1) the taxes that should have been paid in case of an employment contract (e.g., social security contribution, vocational training contribution, and social security tax) and (2) tax penalty, late payment interest, and default penalty imposed by the tax authority.

The tax penalty is 50% of the unpaid tax amount, and the maximum default penalty is HUF 500,000 (around EUR 1,230).

This page was last updated on 
22 September, 2022,
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