Employment relations - Doing Business in Estonia
Estonia is renowned for its business-friendly environment with a simple tax system and digital-first approach to government services.
Whether you wish to launch a startup, expand your corporation through a local branch, or work here as a freelancer, Estonia offers excellent opportunities and an efficient digital ecosystem.
Here are a few reasons why Estonia is an ideal place to do business:
- A company can be established in a day through a fast and straightforward registration process.
- The minimum share capital of a private limited liability company is 0.01 euros.
- Almost all reports and applications can be easily submitted online.
- Estonia's tax system is simple, with a 0% corporate income tax on undistributed profits.
- There are very few restrictions to foreign ownership or management and foreign entrepreneurs are treated equally to Estonian citizens.
- As an EU member state, Estonia provides access to the European single market and operates under the EU legal framework.
Estonia is also an excellent base for your business, even if you don't plan to live here. With the e-Residency program, you can easily manage your company remotely from anywhere in the world. For more detailed steps on establishing a company in Estonia, please see here.
The following guide will answer common questions that may arise when conducting business in Estonia. We hope to provide an overview of the most important things to expect or keep in mind. For any specific inquiries, please contact our team of expert lawyers who are ready to assist you with any issues you may have.
Employment relations
A look into employment relationships, including employment contracts, disputes and work done by service providers.
The main law regulating employment relations is the Employment Contracts Act. This law regulates the rights and obligations of employees and employers, including working hours, daily and weekly rest time, holidays and parental leave, wages, termination of a contract, compensation, and liability. The provisions of the act are mandatory in nature. This means that an agreement between the employee and employer is invalid if it deviates from these provisions to the detriment of the employee.
Estonia has a mandatory minimum wage. This is 820 euros (gross) in 2024 and it is expected to rise at the start of every new calendar year. An employee has the right to 28 calendar days of annual paid holiday leave.
An employee is expected to work 40 hours a week and 8 hours per day. An employer must compensate for overtime work by time off equal to the overtime, unless it has been agreed that overtime is compensated for in money. In that case the employer must pay an employee 1.5 times the wages. Employer must also pay a higher wage when the employee works at night-time (from 22:00 to 6:00) or on public holidays, paying 1.25 or 2 times the wages accordingly.
There are specific rules regarding employment of minors under 15 or minors who have an obligation to attend school. Most importantly, minors cannot do work that exceeds their mental or physical capacity or that is harmful or hazardous to them.
An employer can only cancel the employment contract extraordinarily, meaning that they must have a good reason and must justify their cancellation. Some good reasons provided by the Employment Contracts Act are given here. The reason must arise from the employee, although cancellation for economic reasons (lay-off) is also possible, if it is due to a decrease in work or its cessation or reorganisation. The employee must receive 15-90 days’ notice, depending on their years of employment. In case of lay-off, the employer must pay a compensation of one month’s wages.
The law allows for a probationary period of four months to assess whether the employee’s health, knowledge, skills, abilities, and personal characteristics correspond to the required level. If they do not, the employer may cancel the contract during that period by giving 15 days’ notice.
An employee can cancel an employment contract entered into for an unspecified time without giving a reason. An employee must give a notification 30 days in advance.
Cancellation of an employment contract without a legal basis or in conflict with the law is void. If so, the court or labour dispute committee can terminate the contract. If the employer’s cancellation is found to be void, the employer must pay a compensation to the extent of three months’ wages.
If you have a dispute arising from an employment relationship, then you may file a civil claim to a county court. Alternatively, you may file a petition to a labour dispute committee. This committee provides a more simplified and faster procedure for solving labour disputes than a traditional court. Also, there are no state fees, and each party must cover their own expenses such as legal aid.
The labour dispute committees and the procedure of a labour dispute are governed by the Labour Dispute Resolution Act. There are local labour dispute committees located at Tallinn, Tartu, Pärnu and Jõhvi.
The committee’s decision can be contested in court, according to the rules of civil court procedure. However, if the committee’s decision is not challenged and it becomes final, it has the same power as a court decision. Specifically, the matter cannot be reconsidered in court a second time, and a bailiff can initiate enforcement proceedings based on the committee’s decision.
In addition to employment contracts, long-term service provision is also possible under contracts governed by the Law of Obligations Act, primarily either with a contract for services or an authorisation agreement. The main difference between these contracts is that, under a contract for services, the service provider is expected to achieve a specific result, whereas under an authorisation agreement, the focus is on the process rather than a concrete outcome.
The Employment Contracts Act does not apply to individuals working under these contracts. Thus, a service provider does not have an employee’s rights related to wages, vacation, working hours, contract termination, obligatory compensations etc.
However, simply labelling a contractual relationship as being governed by the Law of Obligations Act does not exempt it from being an employment contract. In case of a dispute, it must be assessed whether the contract has the characteristics of an employment contract. Indicators of an employment relationship include subordination to the employer's management, adherence to fixed work rules and supervision, the employer's control over the work location and schedule, an obligation to perform the work personally, the employer providing necessary equipment and tools, etc.
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