Unexpected termination of employment

Since the COVID pandemic of 2020, news reports indicate that an increasing number of employment relationships are ending with layoffs, company closures and bankruptcies. Unlike termination of employment contract by agreement, where deadlines, terms and conditions, dates and usually the reasons are negotiated, the unexpected termination of employment raises various questions for the employee. Different reasons for termination have different consequences, making the situation even more complicated.
Unexpected termination of employment
Since the COVID pandemic of 2020, news reports indicate that an increasing number of employment relationships are ending with layoffs, company closures and bankruptcies. Unlike termination of employment contract by agreement, where deadlines, terms and conditions, dates and usually the reasons are negotiated, the unexpected termination of employment raises various questions for the employee. Different reasons for termination have different consequences, making the situation even more complicated.
Compensation by the employer | Compensation by the Estonian Unemployment Insurance Fund | |
Termination of employment contract by agreement | Only by agreement of the parties | None |
Decrease in the work volume or reorganisation of work (lay-off). | Benefit upon lay-off in the amount of 1 month's average wages | If the employment relationship lasted over 5 years, the Unemployment Insurance Fund pays the employee an additional insurance benefit (based on the work experience, 1 or 2 months) |
Declaration of bankruptcy of employer | benefit upon lay-off in the amount of 1 month's average wages | If the employment relationship lasted over 5 years, the Unemployment Insurance Fund pays the employee an additional insurance benefit (based on the work experience, 1 or 2 months) |
Cancellation of employment contract by employer and agreement between the parties
The most important thing to remember is that the employer cannot unilaterally and ordinarily cancel the employment relationship with an employee, ie dismiss them without any reason. An employer may extraordinarily cancel an employment contract entered into for a specified term and an employment contract entered into for an unspecified term with good reason arising from the employee or the economic situation. However, cancellation of employment contract by employer for economic reasons means a lay-off, which has its own rules.
Additionally, the employer must not pressure an employee into a mutual agreement, which typically means that the employer suggests the employee leave the job voluntarily. In such a case, the employer often offers small benefits to the employee, but the employee should keep in mind that with the employee's declaration of cancellation, they are deprived of benefit upon lay-off and the benefits from the Unemployment Insurance Fund following the lay-off.
It’s important to note that an employee cannot request a layoff.
Layoff
Lay-off means that the continuance of the employment relationship on the agreed conditions becomes impossible. For example, cessation of work may occur due to a decrease in the work volume, reorganisation of work or bankruptcy. In such cases, the employer has the right to lay off an employee. Before laying off an employee, the employer must offer them other work, organise in-service training or change their working conditions. The employer has no such obligation in the event of bankruptcy and termination of the employer’s activities. The employer shall offer other work to the employee, organise the employee’s in-service training or change the employee’s working conditions if the changes do not cause disproportionately high costs for the employer and the offering of other work is, considering the circumstances, reasonable. Other work offered cannot be limited to the employee’s professional experience. The employer shall also offer other work that the employee would be able to perform.
Before cancelling an employment contract due to lay-off, the employer shall determine the group of employees who have the preferential right of keeping their job. The employees’ representative (for example, the employee’s trustee, working environment representative, member of the working environment council) and employees who are raising a child under three years of age have the preferential right of keeping their job. An employer must not lay off a pregnant employee; an employee who has the right to maternity leave; an employee who is on paternity leave, adoptive parent leave or parental leave. As an exception, these employees may be laid off in case of the upon cessation of the activities of the employer, upon declaration of the employer’s bankruptcy if the activities of the employer cease or upon abatement of bankruptcy proceedings. In these situations, there are no positions left where the employee could continue to work, and excluding the employee from lay-off does not provide any additional protection.
Collective lay-off
According to the law, a case is considered a collective cancellation of employment contracts when, within 30 calendar days, a number of employees exceeding the the rate of collective lay-off are cancelled due to lay-off. Making such decisions requires the employer to involve both their employees and the Estonian Unemployment Insurance Fund, in order to find the best possible solutions in a difficult situation and to quickly find new employment for the employees.
A collective lay-off means that:
- more than five employees are laid off in a company where the average number of employees is up to 19;
- more than 10 employees are laid off in a company where the average number of employees is 20-99;
- more than 10% of the employees are laid off in a company where the average number of employees is 100-299;
- more than 30 employees are laid off in a company where the average number of employees is at least 300.
Before any collective lay-off of employees, the employer must consult their trustee or, in their absence, the employees. In order to carry out the consultation successfully, the employer must provide the employees' representative or, in their absence, the employees, with all the important information about the planned cancellations, simultaneously submitting the referred information to the Unemployment Insurance Fund. With this information, the Unemployment Insurance Fund can efficiently prepare for the mitigation of the consequences of the collective lay-off, for example by organising further training or finding new work for those who lost their jobs. Upon consultation, the trustee or, in his or her absence, the employees have the right to meet with the representatives of the employer and make proposals that shall be submitted within 15 days as from receipt of the relevant declaration. After consultations, an employer shall submit the information about the consultations to the Estonian Unemployment Insurance Fund and the trustee or, in their absence, the employees. The trustee then has the opportunity to submit his or her opinion on the collective lay-off to the Unemployment Insurance Fund within 7 calendar days.
An employer cannot make the decision for a collective lay-off before consultation with employees. Only after consulting with the employees and informing the Estonian Unemployment Insurance Fund does the employer have the right to collective lay-off and he or she can hand over the declarations of cancellation to the employees.
Terms for advance notice in the event of lay-offs
In the case of lay-offs, the employer must comply with the terms for advance notice. If the employer does not follow the term of advance notice, ie terminates the employment relationship earlier, they must financially compensate the employee in the final settlement. Terms for advance notice by the employer in the case of a regular lay-off:
Duration of employment | Term for advance notice |
Less than 1 year | 15 calendar days |
1-5 years | 30 calendar days |
5-10 years | 60 calendar days |
10 and more years | 90 calendar days |
A collective lay-off of employees enters into force upon the expiry of the term for advance notice of cancellation, but no sooner than 30 calendar days after the time when the Estonian Unemployment Insurance Fund received the information on lay-off sent to it after consultation. During the term specified in this section the Estonian Unemployment Insurance Fund shall seek solutions to the employment problems relating to the collective cancellation. If they can be resolved in a shorter period, the term of the Unemployment Insurance Fund may be shortened. At the same time, the Unemployment Insurance Fund can also extend the term up to 60 calendar days.
If the employment contracts expire before the expiry of term of 30 calendar days because the employer has breached his or her obligations, the employees have the right to demand work until the expiry of the 30 calendar days or wages for the shorter period.
Lay-off benefits
First, the employer must pay the employee a final settlement upon expiry of the employment. This consists of wages earned, and compensation for annual holidays that have not expired or been used. In the event of a lay-off, the employer pays compensation to all employees with open-ended contracts, regardless of the length of service, in the amount of one month's average wages.
In addition to the benefit upon lay-off paid by the employer, an employee has the right to receive a benefit upon lay-off paid by the Unemployment Insurance Fund. The Unemployment Insurance Fund pays it to the employees who have worked for the employer for at least five years. In the case of an employment relationship that has lasted from five to ten years, the Unemployment Insurance Fund pays compensation in the amount of one month's average wages. If the employment relationship lasted more than ten years, then in the amount of two months' average wages. In order to pay the benefit upon lay-off, the employer must submit an application to the Unemployment Insurance Fund. If the employer has not done so, the application may also be submitted by the employee.
A laid-off employee can also register as unemployed and apply for unemployment insurance benefit.
What should be done if the employer is insolvent?
As long as the employer has not legally formalized its insolvency, ie the court has declared bankruptcy, all claims, including the benefit upon lay-off and the final settlement, are subject to payment by the employer.
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 insolvency is not temporary, the court can start bankruptcy proceedings.
The bankruptcy petition of a creditor (in this case, the employee) must substantiate the debtor's insolvency and prove the existence of a claim. The employee or several employees jointly must clearly state and justify in the application to the court that at least one of the following circumstances is present:
- 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.
- 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.
- 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.
- 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.
- 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.
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, 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, 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 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 in the amount of up to gross wages of the employee for the last three months worked, but not more than three Estonian average gross monthly wage in the quarter preceding the employer’s insolvency;
- holiday pay not received (before the employer is declared insolvent) is compensated in the amount of up to one month’s holiday pay of the employee, but not more than three Estonian average gross monthly wage in the quarter preceding 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.
In conclusion, if the employees are unable to claim their final settlement from the employer, they can apply for compensation from the Unemployment Insurance Fund after the employer has been declared insolvent.
You can read more about the bankruptcy petition and the process here.