When should employers pay the consideration for non-compete obligation in Hungary?

17 April 2024

The Hungarian Labour Code does not specify the due date of the consideration for non-compete obligation, which resulted in legal uncertainty. Based on the recent case law, the judiciary filled this gap with legal interpretation. In our article we summarize this recent development in Hungarian labour law practice.

1. The facts

In the case at hand, the claimant was the employer of the defendant. The parties have entered into a non-competition agreement, according to which, the employee may not enter into an employment contract with the employer's competitors within 1 year from the termination of the employment relationship.

Based on the agreement, the compensation for the non-competition obligation was to be paid after the end of the 1-year non-competition period, if the employee proves within 30 days that the obligation has been successfully fulfilled.

After the conclusion of the contract, the employee informed the employer that he could not start work due to urgent personal matters. Since the employee did not start work, the employer terminated the employment relationship with immediate effect.

A year later, the employer became aware that soon after his dismissal, the employee had entered into an employment contract with a competing company for the same position. For this reason, the employer demanded from the employee the payment of the penalty stipulated for breaching the non-competition agreement and started a lawsuit against the employee.

In the lawsuit, the defendant employee argued, among others, that the non-competition agreement was invalid, as it could not be lawfully stipulated that the non-competition compensation is to be paid by the employer after the end of the non-competition period, in case the employee has verified the fulfilment of the obligation within a 30 days’ deadline.

2. First and second instance decisions

The first-instance court found the employer's claim well-founded. According to the court, the Labour Code does not specify when the employer is obliged to pay the compensation for non-compete, nor the rules of the determination of the non-compete obligation. Therefore, the non-competition agreement did not conflict with the law.

In its appeal, the employee emphasized regarding the payment of the non-compete consideration, that the payment cannot be tied to a future condition. The agreement does not comply with the LC, because the consideration determined there cannot fulfill its purpose, which is to compensate for the restriction of job opportunities during the non-compete period and to partially cover the cost of living. Payment of the consideration after the end of the non-compete period makes it impossible for the consideration to fulfill its purpose, because it cannot contribute to the employee's living expenses during the duration of the agreement. Furthermore, it is not possible to tie the payment to a future condition and a time limit.

In the second instance procedure, the claimant did not dispute the above argument, however, it argued that the above circumstance did not cause the invalidity of the non-competition agreement, only a partial invalidity, in the scope of the payment of the consideration, which means that these rules could not be applied, which is irrelevant, since the employee was not entitled to any compensation since he breached the agreement soon after its conclusion.

The second-instance court did not uphold the decision of the first-instance court.

The appellate court shared the defendant’s view that payment of the consideration after the end of the non-compete period makes it impossible for the consideration to fulfill its purpose, which is to contribute to the employee's living expenses during the duration of the non-compete period.

The appellate court found that the above problem cannot be cured by the legal concept of partial invalidity, because the Hungarian Labour Code does not specify the due date of the consideration for non-compete obligation, therefore there are no rules which could have been applied instead of the unlawful provisions.

In view of this and for other reasons as well, the court found the entire agreement invalid.

3. Comment

In Hungarian labour law practice, there are several methods for paying the compensation for non-compete obligation:

1. some employers already start paying the compensation as part of the salary during the employment relationship;
2. while others start paying when the employment relationship ends, usually in monthly instalments.

However, payment of the consideration after the end of the non-compete period is uncommon, and in light of the recent decision, it may cause the invalidity of the entire non-competition agreement.

The examined case was made interesting by the fact that the Labor Code in fact does not formally regulate the due date of the consideration, however, the appellate court used purposive legal interpretation to fill the legal gap.

(in the article we analysed judicial decision published under No. ÍH 2024.37)