Recent Hungary Decision Makes Restrictive Covenants Null and Void Unless Supported by Consideration

As with other countries, in Hungary the Hungarian Labour Code allows employers to use restrictive covenants to limit an employee’s ability to compete following a discharge where that may harm the employer’s legitimate economic interests, in return for adequate compensation. The Labour Code contains specific regulations concerning executive employees, which apparently allow covenants that do not include consideration (so-called “gratuitous restrictions”). However, in a recent decision, the Curia has declared restrictions without consideration to be null and void.

In a relevant case, an executive agreed to refrain from having any business or employment relationships with clients or competitors of his employer for three years after the end of the employment relationship. When the employer fired the executive employee, he filed a lawsuit stating that the noncompetition agreement must be reconsidered, as the Labour Code explicitly requires a pecuniary interest (i.e., a payment, or “consideration” as it is known legally).

The case centred on the second part of the Labour Code, which regulates individual employment relationships (General Rules). Parties may deviate from the General Rules, but only when doing so favors the employee. Agreements with executives, on the other hand, may deviate from these rules even when doing so does not favor the executive.

The Curia stated that consideration is an essential term of a noncompetition agreement, which compensates the employee’s commitment for his or her undertaking. Failing to provide any consideration violates the Labour Code; thus, the noncompetition clause was considered null and void. This applies to executives and all other employees.

Comment

Although the Curia required consideration (by stating the agreement could not be gratuitous), it did not specify how much. For regular employees, the General Rules specify that the amount of compensation must not be less than one-third of the base wage for the same period. The Curia’s decision leaves open the possibility that a lower amount could be acceptable in the case of executives.

Written by Barnabás Buzási of Wolf Theiss and Roger James of Ogletree Deakins

© 2019 Wolf Theiss and Ogletree, Deakins, Nash, Smoak & Stewart, P.C.