Wage subsidy in relation to reduced working hours and in relation to employment in research and development (“R&D”)

Tax & Legal Alert | PwC Hungary | April 10, 2020

The economic rescue package, announced by the Prime Minister on 6 April, consists of five pillars on which the Hungarian government is developing its economic protection measures. In this economic situation, the preservation of jobs is of vital importance. In order to make this immediately feasible, a state wage subsidy will be introduced for work performed in reduced hours, by which the government seeks to avoid mass redundancies. The government also wishes to pay special attention to preserving R&D jobs. For this reason, special wage subsidy rules have been formulated for those employed in research and development.

1.      Subsidy in relation to reduced working hours during the emergency period

105/2020. (IV.10.) Government Decree (“Decree”), promulgated on 10 April 2020, contains detailed rules for subsidy that can be claimed for reduced working hours during the emergency. The Decree came into effect on 16 April 2020.

Conditions for using the subsidy, eligibility criteria

The Decree gives a specific definition for each concept within it. Thus, when applying the new rules, e.g. with regard to employer, employee and absence pay, it is not sufficient to take into account the relevant provisions of Act I of 2012 on the Labor Code.

Based on the Decree, for economic reasons related to the emergency, wage subsidies may be provided to the employee by the capital and county government office acting as a public employment body (“Government Office”) at the joint request of the employee and the employer, provided the following joint conditions are met:

the employee:

• does not receive any other part-time subsidy in respect of the same employment
• has been employed by the employer at least from the date of the declaration of the emergency (11 March) and is not spending his period of notice

the employer:

• employs every worker who submits a joint application with him on a part-time basis, in order to prevent a reduction in headcount
• describes in his application for aid the economic circumstances justifying the employment of part-time work, those conditions’ direct and close connection with the emergency, and the measures taken and expected to be taken in order to overcome the economic difficulties,
• exhausts -regarding the previous point - the possibilities for rescheduling working time, until the application is submitted
• has been in operation for at least six months
• is not employing the employee with whom it is submitting a joint application on the basis that it is receiving job creation, or job preservation support or support for those being employed in research and development, at the time of the application
• did not employ the employee for a fixed time which has already expired.

It is important to emphasize that investigating the existence of other potential subsidy must be examined not for the company as a whole, but regarding each individual employee requesting the wage subsidy.

Restrictions on providing the subsidy

The Decree states that no subsidy may be provided for employment in a job, at a workplace or with another employer other than the one indicated in an employment contract, nor in the case of temporary employment.

Further conditions of the subsidy are: 

• The employee has no payment obligation in connection with the subsidy, reclaimed by a final decision by the public employment body.
• The employer meets the conditions as per the law on regular industrial relations, which can be certified.
• The employer is not in liquidation based on a final order, there is no bankruptcy or other statutory winding-up proceedings against it or proceedings aiming to terminate its operation.
• The employer did not qualify as an undertaking in difficulty on 31 December 2019, in the sense of the European Union competition law.
• The employer demonstrates that the economic justification for reduced working hours is directly and closely linked to the emergency and credibly demonstrates that the retention of employees is for the benefit of the national economy.

Therefore, an important condition of the wage subsidy is that during the application procedure, the employer proves the economic circumstances justifying the use of the subsidy and their connection with the emergency.

Duration and amount of the subsidy

The support is available for a period of months, following the submission of the application, but for a maximum of three months. The Government Office will pay this public support –which is tax free and not subject to public charges – directly to the employee, on a monthly basis, retroactively. The support cannot be paid during unpaid leave.

The amount of the subsidy is 70% of the proportional part of the monthly absence fee, determined on the date of the declaration of the emergency, with the personal income tax advance and contributions determined in accordance with the general rules, for working time lost by 30%, 40% or 50%.

Regarding the upper limit, the Decree stipulates that the maximum amount of the absence fee, including taxes and contributions, which may be taken into account in determining the monthly amount of the support, may not exceed twice the mandatory minimum wage reduced by taxes and contributions in force at the time of the application. Given that the net monthly minimum wage is HUF 107,065, the maximum amount of the subsidy in the case of working hours reduced by 50% may not exceed approximately HUF 75,000 per employee ((107,065*2)*0.5*0.7= 74,945.5).

Employer and employee commitments required to receive subsidy

In addition to meeting the above conditions, both the employer and the employee have obligations in relation to the subsidy requested. Therefore, they must undertake to agree on reduced working hours, and individual development time beyond reduced working hours, at least for the duration of the subsidy. Individual development time is an advancement related to the employee’s job or the activity of the employer, for which the employee is exempted from the obligation to work to the extent of thirty percent of the time lost due to reduced working hours.

In addition to this joint commitment, the employee and the employer are also subject to the following individual commitments, thus:

the employee must undertake

• to work part-time with a loss of income when receiving the subsidy;
• that the creation of a new employment relationship in addition to the one applied for after the duration of the subsidy will not prevent the return to working time prior to the reduced working time, and;
• to be available to the employer during the individual development period.

the employer must undertake

• to maintain its statistical headcount at the date of submission of the application for the duration of the subsidy and for one not to that -together with the subsidy - the wage of the employee will reach the employee's payment for absence period during the period of the subsidy and will pay wages during the individual development period.
• to notify the Government Department of any change in the conditions of the subsidy or the duration of the reduced working hours within two working days.

Application and assessment of the subsidy

The application for the subsidy must be submitted jointly by the employer and the employee in electronic form to the Government Department responsible for the place of employment on a form published on the website of the National Employment Service (Nemzeti Foglalkoztatási Szolgálat), accompanied by the agreement between the employee and employer regarding the reduced working hours and the individual development period.

The application can be submitted from the Decree’s date of entry into force (16 April), during the emergency and within one month of its cessation.

In a case where the application is rejected, the employer may re-submit the application no more than once in connection with the same employee. There is no right of appeal against the rejection of the application, therefore special attention should be paid to the proper preparation of the application, including sufficient detail about the presentation of the economic circumstances.

However, one month after the subsidy period expires, a new application can only be submitted for previously non-subsidized employees. Consequently, applying for the all subsidy is only possible once per a given employee. Another important provision about the submission of the application, if the employer submits a joint application with several employees from the same establishment, they must be submitted at the same time.

Termination and repayment of the subsidy

Failure to comply with employee and employer obligations on the part of either the employer or the employee may result in a reimbursement or an equal amount being paid to the National Employment Fund (Nemzeti Foglalkoztatási Alap). The employer is exempted from the obligation to pay due to non-performance of the staff headcount requirement if the employer proves that the employment relationship was terminated as a result of the cessation of the employer without a legal successor or the termination of the employee.

The Decree contains the conditions for the termination of the subsidy. For example, the subsidy is terminated, if the employer receives job-creation or job-retention subsidy in respect of the employee receiving the subsidy, or if the employer receives subsidy for employing workers engaged in Research and Development. This means that the subsidy cannot be combined with subsidy regarding job creation or retention or subsidy given for employees engaged in R&D.

2. Wage subsidy for employees engaged in research and development

103/2020 (IV.10.) Decree (“R&D Decree”) published on April 10 contains the detailed rules of the subsidy that can be applied for in connection with the employment of employees performing research and development activity during the time of the emergency. The R&D Decree entered into force on 15 April 2020.

Conditions and eligibility criteria of the subsidy

According to the Innovation Act, at the request of the employer, the capital and the county government office (Kormányhivatal)  acting as a state employment body may provide wage subsidy for economical reason related to the emergency situation to an employer employing a worker performing R&D activity, if the following conditions are met:

The employee

• does not receive any other employment-related subsidy in respect of the same employment relationship,
• has been employed by the employer for R&D activity at least from the date of the declaration of the emergency, (i.e. 11 March), and
• is not in his period of notice (after resigning or being dismissed).

The employer

• shall, in the application for the support, set out the economic circumstances justifying the application, their direct and close link with the emergency, and the measures taken and expected to take to overcome the economic difficulties,
• has to ensure, that the employee named in the application will not receive reduced working time employment subsidy or job-creation or job-preservation subsidy in connection with the same employment
• has been operating for at least 6 months at the time of the application.

As seen from the above, the subsidy can only be used for employees engaged in R&D and not for employees employed in general engineering. Consequently, similar to the reduced working time subsidy, an important condition here is that, when applying the employer must prove the economic circumstances justifying the use of the subsidy and their connection with the emergency situation.

Duration and amount of the subsidy

The subsidy can be paid for up to three months after the application has been submitted and will be paid to the employer in arrears on a monthly basis.

The monthly amount of the aid may not exceed HUF 318,920 per employee. The employer will be eligible for the maximum amount of the subsidy for those employees whose gross salary reaches or exceeds HUF 670,000 on the day of the declaration of the emergency. In the case of lower gross wages, the amount of support must be proportional.

Commitments

The employer - during the provision of the subsidy - must undertake to

• maintain the average statistical headcount in the month preceding the submission of the application,
• employ the employee for the duration of the aid and not reduce the wage equivalent to the wage the employee earned on the date on which the emergency was declared.

As seen from above commitments, in our opinion it is questionable whether – in the case of a possible wage reduction ordered in the period between the emergency situation and the publication of the R&D Decree – this possibility is available and, if so, under what additional conditions. The employer is obliged to notify the Government Office of any change in the conditions of the subsidy within two working days.

Restrictions on providing the subsidy

The subsidy can only be provided if the employer

• has proven to meet the conditions of the legislation on regulated industrial relations,
• is not under liquidation or liquidation by a final order or bankruptcy proceedings or other pending proceedings for its termination prescribed by law.
• did not qualify as “company in difficulty” within the meaning of European Union competition law on 31 December 2019.

In addition to the above, the R&D Decree determines the forms of employment that are not eligible for the subsidy. Thus, according to the Hungarian Labor Code, employment in a job other than the employment contract, at a workplace or with another employer, downtime according to the Hungarian Labor Code, cases of dismissal from work, and employment in the case of temporary employment does not authorize the state subsidy.

The procedure for applying for the subsidy and authority’s process

The employer must submit the application form to the government office which is competent according to the registered office or site/business plant of the employer during the emergency or within one month after its cessation. The deadline for the assessment is eight working days. However, a decision on the provision of the subsidy can be made by 31 December 2020 at the latest.

Pursuant to the R&D Decree, an application may be submitted only once for the same site and employees, furthermore if the application is rejected, it can be submitted again, but no more than once. Applications for employees of the same site can only be submitted at one time.

If the application meets the legal conditions, the government office provides subsidy to the employer and at the same time concludes an official contract with it, so it is also necessary to take into account the provisions of Act CL of 2016 on General Public Administration Procedures.

Termination of the subsidy

The subsidy must be terminated based on the R&D Decree if the employer requests it or the eligibility criteria set out above are not met, i.e.

• if the employee's employment is terminated or he/she receives a reduced working time subsidy for the same employment, or if he/she does not qualify as a researcher-developer,
• if the employer fails to fulfill an obligation under the R&D Decree or reduces the concerned employee’s wages effective at the date of the declaration of the emergency, or receives job creating or job maintenance subsidy in respect of the concerned employees, or
• if the subsidy could not have been allocated in the absence of the conditions set out in the R&D Decree.

Audit and repayment of the subsidy

It is important to note that the audit for the fulfillment of maintaining the employment obligation is carried out after its duration. If the employer breaches his obligation to continue employment, he/she is obliged to repay a proportionate part of the subsidy.

Moreover, the full amount of the subsidy must be repaid if the subsidy could not have been established in the absence of the conditions specified in the R&D Decree.

The employer is released from the obligation of repayment if he/she proves that the employment was terminated with immediate effect during the probationary period, due to immediate termination of the employer, termination of the employer without legal successor, or resignation of the employee, i.e. the repayment of the subsidy due to termination of employment should be only fulfilled in the case of ordinary dismissal by the employer.