New labour law to increase flexibility

Estonia’s new Employment Contracts Act will take effect from 1 July 2009, bringing about a number of significant changes in the country’s labour market. The legislation primarily aims to make the labour market more flexible and to increase the social security provisions of workers. Although the new act is based on a tripartite agreement, the consultation process has been subject to severe criticisms by the trade unions as well as several political parties.

Concerns over timing of implementation

On 17 December 2008, the Estonian parliament (Riigikogu) passed the new Employment Contracts Act (Töölepingu seadus), which will take effect from 1 July 2009. Initially, it had been planned that the act would enter into force in 2010. However, due to the rapid changes in the labour market and expected further economic decline, the parliament decided to bring the date forward. It made the decision despite opposition from the trade unions, which expressed concern regarding the timing of the adjustment of the institutional framework, as the new act is being adopted six months before it was initially planned. A number of political parties have also criticised the move.

Some of the act’s provisions requiring significant additional expenses from the state budget are still due to take effect on 1 January 2010. These include the following measures:

  • increasing the benefits for additional childcare leave from the flat rate of EEK 66 (€4.22 as at 29 January 2009) a day up to the same level as the national minimum wage;
  • administering the electronic registration of employment record books instead of the current paper version;
  • raising the flat rate of unemployment allowance up to 50% of the national minimum wage of the previous year instead of the current monthly level of about EEK 1,000 (€64), which amounts to around 23% of the minimum wage.

Objectives of new act

The content of the Employment Contracts Act was negotiated by the social partners and concluded through a tripartite agreement after long disputes (EE0802019I, EE0805029I). The new act primarily aims to make the labour market more flexible and to increase the social security provisions of workers.

Greater flexibility

In order to increase labour market flexibility, dismissal procedures will be made easier by reducing the term of advance notice by 30 calendar days to between two weeks and three months, depending on the length of the previous employment contract. In addition, the employer will be obliged to provide additional free time for workers to enable them to find a new job before the actual dismissal.

To ease the financial burden of redundancies for the employer, the payment of redundancy benefits will be shared by the employer and the Estonian Unemployment Insurance Fund (Eesti Töötukassa). In all redundancy cases, the employer will pay a proportion of the redundancy benefit amounting to one month’s average wage of the employee, while the Unemployment Insurance Fund will finance the rest of the benefit. In addition, the redundancy benefit amount will be reduced by one month’s salary and will remain in the range of between one and three months’ average wages, depending on the length of previous employment. In the case of people who have an employment tenure greater than 20 years, a five-year transition time will be implemented, during which they will retain the existing level of redundancy benefits – that is, four months’ earnings.

To promote the use of flexible forms of employment, the conclusion of fixed-term contracts will be allowed in all cases. In the event of the premature cancellation of a fixed-term employment contract due to economic difficulties, the employer will have to pay an additional fee to the worker to compensate them for the loss of income that they would have been entitled to up to the end of the contract term.

Improved social security

The unemployment insurance benefit will be raised from 50% to 70% of the previous average remuneration during the first 100 days of unemployment, and from 40% to 50% after that period. In addition, to increase the number of persons eligible for the unemployment insurance benefit, persons who terminated their employment relationship voluntarily will also be eligible. In the latter case, the rate of the unemployment insurance benefit will be 40% of the previous average remuneration and the person must have been employed for at least four years during the last five-year period. Moreover, in order to provide more security to those who have been on parental leave, the reference period for unemployment insurance benefit will be prolonged by taking into account the length of their parental leave.

In the case of the unlawful termination of an employment contract, the employee will be entitled to compensation equal to three months of their salary. Special provisions will also be put in place for pregnant women and employee representatives, for whom the compensation is six months’ salary.

Additional measures

Under the tripartite agreement, a number of other changes are also to be introduced to the labour market. These include changes in the regulation of labour dispute committees, measures concerning lifelong learning, such as annual study leave and taxation of expenses on employee education, along with administrative procedures, working time regulations and reform of labour market institutions.

Kirsti Nurmela, PRAXIS Centre for Policy Studies

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