Employment/work contracts examined

In May 2004, the draft of a controversial new Employment Contracts Act is still under discussion in Estonia. This article looks at the current legislative framework for employment contracts and other forms of work contract, and at their use in practice.

This article provides an overview of the legislative framework for the various types of employment and work contract in Estonia, and of the extent to which they are used in practice.

Legislative framework

Employment Contracts Act

According to the present Employment Contracts Act, the employment contract is an agreement between an employee and an employer under which the employee undertakes to do work for the employer, in subordination to the management and supervision of the latter. The employer takes on an obligation to pay the employee for such work and to provide the employment conditions lad down in the agreement between the parties and in the relevant collective agreement, law or administrative legislation. The rights and obligations provided by the employment contract do not apply to the other types of 'work agreement' , such as civil law contracts.

The employment contract may be for an unspecified term (in the case of a 'regular' contract) or for a specified term (fixed-term contract). The maximum duration of a fixed-term contract is five years. A probation period may also be included in an employment contract, unless the contract is concluded for specified term. The maximum duration of the probation period is four months and such periods may not be applied to minors or people with disabilities. During the probation period, the employee enjoys the same rights as any other employees.

The current Employment Contracts Act was ratified by parliament (the Riigikogu ) in April 1992, and with several amendments is still in force today. A draft of a new version of the Act has been under discussion for some time, aimed at making employment relationships more flexible ( EE0309101N ). In February 2004 the draft of the new Employment Contracts Act passed its first reading in parliament, but the second reading in April was postponed. Meanwhile, however, on 22 April 2004, parliament passed legislation amending the Employment Contracts Act in other areas, in the context of Estonia's accession to the European Union (on 1 May) and the necessity arising from this to implement the requirements of various EU Directives in national legislation. The amendments concern: limitations on work by minors: the validity of the employment contract in the event of a change in the identity of the employer; informing and consulting employee representatives where the identity of the employer changes; and a prohibition on treating employees directly or indirectly in an unequal manner on the grounds of gender, race, age, nationality, language proficiency, sexual orientation and a number of other grounds.

Public Service Act

The Public Service Act (which cam into force in January 1996) regulates the employment of civil servants. Public servants are people working in the public service - ie for a state or local government administrative agency. There are three kinds of public servants: officials, support staff and 'non-staff' public servants. Officials are elected or appointed to an office on the staff of an administrative agency, and have the status of civil servants. Support staff are clerical workers in support positions on the staff of an administrative agency, and are employed under employment contracts. 'Non-staff' public servants are employed for a specified time period and, depending on circumstances, they are appointed or hired on employment contracts. Thus, in general (with some exceptions) support staff and non-staff public servants are subject to the Employment Contracts Act.

There are differences in the employment conditions of civil servants and employees working under employment contracts, with the former having both advantages and disadvantages.

The period of employment in the public service is generally unspecified. A probation period of up to six months can be applied to officials, though not those: appointed by the government or the Prime Minister; employed through a competition; promoted to the post; substituting for an absent official. Work in the public service is paid according to the scale provided in the State Public Servants Official Titles and Salary Scale Act. There are 35 salary grades for public servants.

Contract of agreement

Besides the employment contract, the 'contract of agreement' is the second common way of regulating a worker's position A contract of agreement is a civil law contract between equal 'civil subjects' , whereby one of them make a commitment to perform certain work at his or her own risk, while the other party makes a commitment to accept the work done and to pay for it.

The main difference between the two types of contract is that under an employment contract - unlike a contract of agreement - the worker makes a commitment to work for the employer under the latter's supervision, while the employer makes a commitment to pay to the employee a wage for the work done and provide the the employment conditions laid down in the individual employment contract and in the relevant collective agreement, law or administrative legislation. Another difference is that the contract of agreement regulates the outcome of the work while the employment contract regulates the process of the work. The contract of agreement assumes two equal parties while the employment contract establishes a relationship of subordination. Thus, when working under a contract of agreement, the guarantees laid down in labour law do not apply to the person undertaking the work.

Contracts in practice

The table below sets out the statistics available from a number of sources that break down total employment into three types of employment relationship: employment contracts and contracts of agreement combined; work regulated by the Public Service Act; and work on the basis of oral contract.

Sources: Estonian Labour Force Survey (ELFS) 2002; Working Life Barometer in the Baltic Countries in 2002 (WLB); and NORBALT survey 1999.

As the table indicates, the majority of workers have an employment contract. However, all the surveys find that a relatively significant percentage of workers have no written contract - ie the conditions are agreed orally. According to law, oral agreements may be used only if the period of work is shorter than two weeks. In such cases, the equivalent of an employment contract is the employer’s permission to start work, even if the contract is not formalised - when the contract is subsequently formalised, this must be lay down the conditions that have applied in practice.

According to the NORBALT survey, employment contracts are more common, and contracts of agreement less common, among older employees, women, Estonian citizens, workers in public enterprises, and people with a higher income. Employment contracts are also more frequent among white-collar workers than among blue-collar workers, and the difference is most notable between skilled and unskilled blue-collar workers (of whom 85% and 75% respectively had employment contracts). Among those who were unemployed at the time of the survey, 77% had previously had an employment contract (ie people with an employment contract had a lower probability of becoming unemployed).

Temporary employment relationship

According to a survey by the European Foundation for the Improvement of Living and Working Conditions (EFILWC) 85% of employees had a 'regular' employment contract in 2001 (Working conditions in the acceding and candidate countries). The Working Life Barometer in the Baltic Countries in 2002 (WLB) put the share at 75% and found an upward trend. Open-ended employment relationships are more common in the public than in the private sector.

The 2002 WLB survey put the share of fixed-term employment at 25%, while the EFILWC research put the level at 12%. Fixed-term contracts are equally frequent in the private and public sectors and for women and men. However, the frequency of fixed-term employment relationships is linked to age: of employees under the age of 30, 31% were in fixed-term employment relationships, whereas among those over the age of 50 the proportion was only 18%. One possible explanation could be that newly created jobs are increasingly based on fixed-term contracts.

Another form of temporary employment relationships is temporary agency work. Information on the frequency of temporary agency contracts is available only from the EFILWC survey, which found that 1.2% of all employed and self-employed people had such contracts in 2001, compared with a (then) EU average of 1.8%. The reasons for the relatively low level of temporary agency work could be that employers use other means to achieve flexibility in employment relationships and that many firms are not aware of the possibility of such arrangements. However, it can be predicted that the share of agency work may increase in the future, as present labour legislation does not limit the use of temporary agency contracts in any way.

Commentary

Compared with many other central and eastern European and EU countries, in Estonia: fixed-term contracts are used more frequently among employees; the share of self-employment is lower; and the use of temporary agency contracts is rather limited. In many cases, employers achieve flexibility in employment relationships through the use of oral agreements and 'additional agreements' complementing the usual employment contract that reduce the protection of employees against dismissal and the risk of unemployment. The reason for such 'additional agreements' could be the relatively 'employee-friendly' labour legislation in Estonia, but could also simply be a desire to avoid paying taxes (in the case of oral agreements). The importance of the second reason is underlined by the high share of people receiving undeclared wages, put at 10% by the WLB in 2002.

The second reading of the draft of new Employment Contracts Act is currently postponed. Trade unions claim that the proposed new law will create additional obligations for employees, diminish some employment protection guarantees and reduce financial benefits paid to workers. According to employers’ organisations, the draft contains a large number of contradictions and unclear regulations. The proposal does not comply with the rules for drafting legislation nor with relevant EU Directives, as has been pointed out by officials at the European Commission. The implementing provisions in the draft are also deficient. (Kaia Philips and Raul Eamets, University of Tartu)