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New Employment Contracts Act

15.12.2008

After long debates, the new Employment Contracts Act was finally passed by the Estonian Parliament on 17 December 2008. The Act will enter into force on 1 July 2009.

The currently effective Republic of Estonia Employment Contracts Act was passed on 15 April 1992. Although the 1992 Act has been amended several times over the years, the Act has become outdated and a new one has been needed for a long time already. The long-awaited new Act introduces a number of major and fundamental changes to the current regulation of employment relations.

One of the major changes introduced by the new Act is shortening the mandatory notification period in the case of an employee's lay-off. While according to the current Act an employee must be notified of a lay-off 2 to 4 months in advance, depending on the employee's continuous length of employment with the employer, the new Act cuts this period down to 15 to 90 days. The 15-day period concerns only those employees who have worked for the employer for less than a year and the longest, i.e. 90-day period, applies to the employees who have worked for the same employer for more than 10 years. Besides cutting notification periods, compensation to be paid to an employee upon his or her lay-off will also be reduced and the principles for payment of compensation will change. At the moment the employer has to pay compensation to an employee upon a lay-off in the sum of the employee's 2 to 4 months' average salary, depending on the length of the employee's continuous employment with the employer; according to the new Act, however, compensation is reduced to 1 to 3 months' average salary, depending on the length of employment. Another important change is that under the current Act the payment of lay-off compensation is solely the obligation of an employer but, according to the new Act, the Unemployment Insurance Fund must pay part of the compensation. For instance, if an employee has been working for the same employee for 5 to 10 years, the employee is entitled to compensation in the sum of 2 months' average salary, of which a sum equal to 1 month's average salary will be paid by the Unemployment Insurance Fund.

To counterbalance the cutting of notification periods and reduction of lay-off compensation, the new Act offers employees better protection by an increase in the amount of unemployment insurance benefits. For the first 100 days after a lay-off, for example, an employee will receive unemployment insurance benefits to the extent of 70 per cent of the employee's former salary, not 50 per cent as under the current Act, and thereafter the employee will receive 50 per cent of the salary instead of the current 40 per cent. Moreover, the new Act allows employees whose employment contract has been terminated by agreement of the parties or on the initiative of the employee also to receive unemployment insurance benefits to a certain extent.

The new Act also introduces some changes to the principles governing payment of additional remuneration for work during days off, evening or night time. The new Act does not make it mandatory to pay additional remuneration for work during evening time or days off; however, the amount of additional remuneration payable for work during night time is increased.

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