One of the most frequent issues arising in connection with the termination of employment relationships in Hungary is the amount of severance pay. Whether in the context of collective redundancies or individual dismissals, employers and the affected employees – and, where a works council or trade union is involved, the employee representatives – will sooner or later have to confront the question of what amount is necessary to reach an agreement.
In the current labour market environment, however, the question is increasingly being raised as to whether severance pay is truly an appropriate instrument for protecting employees, or whether there are alternative solutions that can provide more targeted support for those affected while also being more sustainable for employers.
The Purpose of Severance Pay under Hungarian Law
In Hungarian legal practice – in line with the provisions of the Labour Code – there is a common misconception that severance pay constitutes a “reward” for an employee’s past performance or long-standing loyalty. According to the consistent position of the courts, however, this is not the purpose of severance pay.
The function of severance pay is to compensate the employee for the existential disadvantages resulting from the termination of the employment relationship, in particular the loss of regular employment income and the time required for re-employment. This interpretation has long been consistently upheld by higher-court case law, including the decisions of the Kúria.
Despite this, in practice – especially in the case of collective redundancies – negotiations tend to focus quickly on severance pay “multipliers”, while factors such as employees’ labour market prospects, age, qualifications, or retraining potential are pushed into the background. Alternative solutions, if they are considered at all, typically appear only as supplements to monetary compensation.
Redundancies and Labour Shortages – at the Same Time?
Public discourse is often dominated by news of corporate crises, factory closures, and layoffs, creating the impression that job loss represents a serious and lasting risk. It is indeed true that digitalisation, automation, and artificial intelligence are transforming or eliminating numerous jobs, while entire sectors are being forced into structural transformation.
At the same time, however, Hungary is also experiencing a persistent labour shortage. Economic policy debates focus on issues such as increasing labour market participation, improving qualification levels, or involving foreign labour. This contradictory situation is also evident in labour law practice: many employees are reluctant to change jobs, while the market in certain areas is distinctly labour-hungry.
What Does This Mean in Practice?
This apparent paradox in fact creates significant room for manoeuvre for both employers and employees. Hungarian judicial practice does not preclude – and indeed explicitly supports – addressing the consequences of terminating employment relationships by means other than purely financial compensation.
Increasingly, solutions that support the labour market reintegration of employees may come to the fore, such as:
- financing retraining and further education programmes,
- targeted job search and placement support,
- career counselling or outplacement services,
- the involvement of state subsidies (for example, training programmes) with the active participation of the employer.
From the perspective of court practice, these instruments do not conflict with statutory requirements and may be lawfully applied in collective agreements as well as in individual settlements.
A New Approach to Managing Terminations
Especially in the context of agreements related to collective redundancies, it is worth reconsidering severance systems based on the principle of “the same amount for everyone”. Instruments previously known in Hungarian practice – such as organised retraining programmes or structured placement support – may once again offer effective alternatives.
Experience shows that these tools are only effective if they are introduced in a timely manner, preferably before notices of termination are issued, and if employees actually make use of them. Otherwise, they risk becoming mere monetary compensation, thereby losing their original purpose.
Conclusion
Severance pay remains an important instrument in labour law, but it is not necessarily the only or the best solution. The framework established by Hungarian judicial practice allows employers and employee representatives to develop solutions that go beyond purely financial compensation and are sustainable in the longer term.
This can not only improve employees’ labour market prospects, but also help companies ensure that their resources are not devoted exclusively to short-term payouts, but rather to strengthening their own future competitiveness.
Dr Géza Katona, LL.M., Attorney at Law (Rechtsanwalt)
Katona & Partner Attorneys’ Association
(Katona és Társai Ügyvédi Társulás)
H-1106 Budapest, Tündérfürt utca 4
Tel.: +36 1 225 25 30
Mobile: +36 70 344 0388
Fax: +36 1 700 27 57
g.katona@katonalaw.com
www.katonalaw.com