Change in the wage cost calculation of postings

The new Act on Eligibility for Social Security Benefits, which will enter into force on 1 July 2020, will - among other amendments - significantly change the method of calculating the contribution base for expatriates, which may represent an additional cost for employers. It is worth to prepare for this in time and to consider the posting structures for the employers who are concerned.

EU Coordination Regulation 883/2004 on the coordination of social security systems states that if an employer who employs a worker in the territory of one Member State and assigns the employee to work in the territory of another Member State, the employee will remain under the social security system of the sending Member State (in this case under the Hungarian rules) provided that the posting does not exceed 24 months.

For the period when there is no taxable income in Hungary because the employee is posted abroad, the contribution base is according to the section (2) of the paragraph 4 (k) of the current Act on Eligibility for Social Security Benefits (LXXX 1997, hereinafter referred to as: Contribution Act) the following: 'the basic salary specified in the contract of employment, where the work is carried out under a contract of employment or a contract governed by foreign law, shall be the monthly amount of the contract fee'.

With regard to base salary, it is also important to further examine the related legal definition in order to determine what constitutes to the contribution base from the wage costs. According to the section (2) of the paragraph 4 (k) of Decree-Law No 195/1997 defines the salary according to which, in the year preceding the posting, directly dependent on the employee's performance and working hours, based on the employee's base salary and the average monthly wage actually paid according to statistical accounts. In the absence of this, the basic monthly salary is the contribution base.

Thus, in the case of posting abroad, Hungarian contributions had to be paid based on the the basic salary under the employment contract, which until now was based on the actual calculated basic salary.

However, according to the section ba) of paragraph 27 of the new Act on Eligibility for Social Security Benefits (Act CXXII of 2019, effective July 1, 2020) for the period when there is no taxable income in Hungary ‘ the contribution base is the base salary, but at least the national average gross earnings for full-time employees published by the Central Statistical Office for July of the previous year. For example, in July 2019, this amount was HUF 362.600, which is well above the Hungarian minimum wage.

(The contribution base may be less than this if the income earned in the current month as a consideration for the activity does not reach the above-mentioned average salary.) With this change, the rule that the basic monthly salary for the year preceding the posting is abolished should be considered.

Thus, this change affects Hungarian companies that send lower-income workers to work abroad. According to the practice so far, the contribution was paid on the basis of the base salary in Hungary in the previous year, whereas from 1 July 2020 the income earned in the given month shall be considered as the contribution base.

It can be seen from the above that, although the legislation has changed slightly and in many cases is not relevant for the calculation of the contribution base, it may nevertheless be more relevant for some companies posting workers with lower basic wages. Given that it is not easy to determine when gross national income needs to be taken into account, it is worth considering, in the case of postings, whether this change could have an impact on the wage costs of our business.