Applying the new Employment Contract Act - six months later
Soviet legacy

The previous Employment Contract Act was one of the first main laws established in 1992 after restoration of Estonian independence. As a legacy from the Soviet Employment Code, rules on termination of employment contracts were very rigid, the underlying assumption being that a person works for the same employer for decades, if not a lifetime.

Consequently, the law applicable until 1 July 2009 bound employers by long notification periods for termination of employment contracts and required them to pay high termination compensation. In addition, employers were required to follow a number of formalities and restrictions. The liability of employees for damage caused by breach of duty was quite limited. The position of the employment contract in civil law was also somewhat ambiguous - it was unclear into which category of service agreements such a contract falls within the civil law and to what extent civil law principles and terms may be applied in the employment relationship.

Changes introduced

According to the drafting notes of the Employment Contract Act 2009, the main aim of the Act is to enhance the concept of “safe flexibility” in employment relations, allowing the parties more freedom for negotiation, at the same time protecting employees as the weaker party. Due to the economic background characterizing the time of entry into force of the new act, some of the “safety measures” were waived, as the state backed out on the issue of taking over certain employer’s responsibilities secured to employees by earlier regulation. However, at the same time it was urgently necessary to achieve more flexibility in employment relations in order to enable employers to reduce the workforce without extensive costs threatening employer solvency and to encourage employers to create new positions - even temporary ones.

The Employment Contract Act 2009 defines more clearly the place of employment contracts in the civil law system developed after 1992, enabling application of civil law principles in employment relations with more certainty. In comparison with the previous employment law, the Employment Contract Act of 2009 provides a wider basis for concluding an employment contract for a fixed term, sets shorter notification terms for terminating employment contracts by the employer, and stipulates smaller compensation payable by the employer upon termination of an employment contract. In addition, the Act widens the liability of the employee for violating obligations, sets a more moderate role for the Labour Inspectorate in employment relations, and decreases the employer’s burden of formalities. At the same time, employees also receive certain additional protections – for example, working at night is restricted, while in certain cases the employer is obliged to offer in-service training to employees before terminating their employment.

The Employment Contract Act 2009 was not adopted only as a crisis measure. The need for changes was particularly obvious during the years of economic growth, as it was clear that the existing employment laws had become obsolete.

It is too early to assess whether the Employment Contract Act 2009 has achieved its main purpose – that is, to provide a safe and flexible legal environment for employment relations. However, it may be stated that in comparison with the previous law, which provided unreasonably high protection to employees, the Employment Contract Act 2009 sets a better balance to the parties’ rights, obligations, and liability in the context of today’s labour market and economic situation. In order to fully promote benefits from the changes, employment documentation needs to be reviewed by employers, as internal regulation based on the earlier law may still be in effect in parties’ relations.

Recent trends in the labour market

According to Statistics Estonia, the unemployment rate started to increase in Estonia in the second half of 2008 (compared with approx 4.7% in 2007 and approx 4.1% in the first half of 2008) while in the fourth quarter of 2009 it achieved a rate of 15.5%. This is the highest rate of unemployment since restoration of independence. Although the unemployment rate has also increased since entry into force of the Employment Contract Act 2009, the increase has not been sharper than earlier, but rather a continuation of the same tendency.

In general, hot topics in the labour market remain the same at the beginning of 2010 as they have been since the end of 2008 – decrease of salaries and rearrangement of incentive schemes, temporary reduction of working hours (and remuneration), reorganisation of work (as well as workforce structure), and termination of employment contracts.
This article was written by senior associate Heili Haabu. Heili advises clients mainly on corporate and employment law matters. She also provides legal counsel in correspondence with state authorities and represents clients in employment law disputes.