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Final settlement

Last updated: 05.01.2024
  • On the day of expiry of the employment contract, the employer pays the employee all remuneration and compensation earned by the employee.
  • If the employer does not fulfil their financial obligations on time, the employee has the right to demand a penalty for late payment.
  • An employee has the right of recourse to a labour dispute resolution body with a claim for wages not received.
Palk, eurod

Final settlement

By expiry of employment contract, all claims arising from the employment relationship fall due. Thus, on the day of expiry of employment contracts entered into for a specified as well as unspecified term, the employer pays the employee all the remuneration and compensation earned by the employee. In particular, the final settlement consists of the employee’s earned wages and unexpired and unused annual holiday compensation. Upon expiry of the employment contract, the employer must also pay other remunerations if they have fallen due, such as sickness benefits, daily allowance related to a business travel abroad, and additional payments.

The employee must return to the employer the means provided for the work (e.g. keys, door cards, mobile phone, etc.).

By way of exception, the parties may agree on the time at which the remuneration for the transactions falls due, but only in the case of transactions which are performed, in whole or in part, after the expiry of the employment contract. Time when remuneration falls due can be postponed for up to six months. In the case of performance of transactions in parts, the time when the claim falls due may be extended up to one year; in the case of insurance contracts and other contracts which require more than half a year to be performed, not more than two years. The parties must agree in writing to change the time when the claims fall due.

What should be done if the employer does not pay the final settlement?

Pursuant to subsection 84 (1) of the Employment Contracts Act, upon expiry of an employment contract, all claims arising from employment relationships fall due. The claims that fall due are, in particular, wages and unused holiday compensation. Thus, on the date of expiry of the employment contract, the employer must pay the employee all amounts earned but not yet received.

If the employer fails to perform their financial obligations on time, the employee has the right to demand penalty for late payment pursuant to sections 94 and 113 of the Law of Obligations Act. Currently, the interest rate is 12,5% per year (i.e. 0.0342% per day). The website www.viivisekalkulaator.ee is helpful in calculating penalty for late payment.

It is reasonable for the employee to seek recourse from the employer first (preferably in writing) concerning the final settlement not received. If the employer has not transferred the final settlement to the employee by the deadline specified by the employee, the employee has the right of recourse from a labour dispute resolution body (court or labour dispute committee) with the claim for wages not received.

In the case of a financial claim, the petition filed to the labour dispute committee must indicate the calculation procedure, the amount of the claim (gross), the period for which the claim is filed and the total amount of the claim. The petition needs to be accompanied by all the documents that serve as evidence for the claim (documents certifying the employment relationship, correspondence with the employer, account statement, etc.) and the claim must be substantiated.

The claim for payment of wages shall expire within three years as of the date on which it falls due. The general time limit for filing a claim for the recognition of rights arising from employment relationships and for the protection of violated rights for the purpose of recourse to a labour dispute committee or court is four months as of the time the person became or should have become aware of the violation of their rights. The limitation period shall apply if the other party so requests.

The petition to be filed with the labour dispute committee, instructions for its completion and the contact information of the labour dispute committees can be found  on the website of the Labour Inspectorate.

We also recommend watching the tutorial video for filling in the petition.

What should be done if the employer is insolvent?

If the employment relationship has ended on the basis of the employee’s application but the final settlement has not been paid by the employer, the employee can apply to the labour dispute committee or a court with a financial claim. The decision of the labour dispute resolution body that has entered into force can be applied to a bailiff, who initiates execution proceedings. A decision must have a notation on entry into force in order for a bailiff to be able to enforce a decision.

Unfortunately, this may not give the desired result if the company no longer has any money. It is the obligation of the company’s management board to file a bankruptcy petition with a court in the event of insolvency. Employees can also file for bankruptcy against their employer. If the employer is insolvent, i.e. unable to satisfy the creditor’s claims that have fallen due and this failure is not temporary due to the employer’s financial situation, the court can initiate bankruptcy proceedings.

First of all, it is worth examining whether another creditor has already initiated bankruptcy proceedings against the employer, because then the employees could also submit their claims directly to the trustee in bankruptcy. Relevant information is published on the website of the publication of Ametlikud Teadaanded (https://www.ametlikudteadaanded.ee/).

A bankruptcy petition can be filed by both the debtor and the creditor (subsection 9 (1) of the Bankruptcy Act). The bankruptcy petition of a creditor shall substantiate the debtor's insolvency and prove the existence of a claim (subsection 10 (1) of the Bankruptcy Act).

A bankruptcy petition filed with a court must clearly state that at least one of the following circumstances exists:

  1. The employer has not paid the employee the wages and/or the final settlement within 30 days after it fell due and the employee has warned the company in writing of the intention to file for bankruptcy, but the company has not paid its debts within 10 days.
  2. Execution proceedings are already pending against the company, but in the course of them the claim has not been satisfied due to the lack of assets within three months or if the execution proceedings reveal that the company does not have enough assets to fulfil all its obligations.
  3. The company has destroyed, hidden or squandered (incl. transfers to another company) its property or made grave errors in management as a result of which the company has become insolvent.
  4. The employer has informed (at least by e-mail) the employee, the court or the public of the inability of the employer to perform their obligations.
  5. The member (or members) of the management board of the employer's company has left Estonia with the aim of refraining from performing their obligations or hiding for the same purpose.

However, if it turns out that the employee who filed for bankruptcy knew or should have known that there were no grounds for filing for bankruptcy, they must compensate the company for the damage caused.

The costs of bankruptcy proceedings must also be taken into account. According to the State Fees Act, upon filing a bankruptcy petition against an employer by an employee on the basis of a claim arising from an employment relationship, a state fee of 10 euros must be paid. In addition, the court may, by ruling, order the creditor who filed the bankruptcy petition to pay the interim trustee fee and expenses in the amount determined by the court as a deposit to a special account, if there is reason to believe that the bankruptcy estate will not be sufficient.

If the employees as creditors are not able to pay the deposit, the court may not appoint a temporary trustee in bankruptcy or not review the bankruptcy petition, which also gives the right to apply for bankruptcy compensation from the Unemployment Insurance Fund. To do this, the employee must have filed a sufficiently substantiated bankruptcy petition with the court and proved the existence of their claim. The claim can be proved, for example, by a relevant decision of the labour dispute resolution body that has entered into force.

The insolvency of an employer, i.e. the declaration of bankruptcy, or the abatement of the bankruptcy proceedings, gives employees the opportunity to receive compensation for claims arising from their employment relationship at least in parts from the resources of the Estonian Unemployment Insurance Fund. An employee has the right to apply for bankruptcy compensation if they do not have the means to pay the interim trustee’s fee and the court has failed to appoint an interim trustee or to review the bankruptcy petition.

The amount of compensation is calculated by the type of unpaid remuneration and the amounts of compensation have the following maximum limits:

  • Wages not received (before the employer is declared insolvent) are compensated up to the amount of the gross earnings of the employee in the last three months of employment, but not more than three Estonian average gross monthly wages in the quarter preceding the insolvency of the employer;
  • lost holiday pay (before the employer is declared insolvent) is compensated up to the amount of one month’s holiday pay of the employee, but not more than one average gross monthly wages in Estonia in the quarter preceding the declaration of the employer's insolvency;
  • benefits not received upon cancellation of the employment contract (before or after the employer is declared insolvent) are compensated in the amount of up to two months’ gross wages of the employee, but not more than one Estonian average gross monthly wage in the quarter preceding the employer’s insolvency.

If the compensation paid by the unemployment fund does not cover the entire claim of the employee, the employee retains the right to demand the satisfaction of the remainder through bankruptcy proceedings.