Labor law

The compensation system set forth in the Employment Contracts Act got overhauled

Merli Kesküla
Merli Kesküla ja Anastassia Volmerson Grant Thornton Baltic

Co-author: Anastassia Volmerson

The Employment Contracts Act provides for compensation for both employees and employers in a number of situations. In Supreme Court practice, the compensation has been viewed as indemnifying a loss, and as such, both parties have to prove that they incurred losses. This interpretation has made it complicated and often unreasonably costly to receive compensation, because the body that resolves a dispute may change the amount of the compensation in light of the circumstances and the interests of both parties. The original aim of the law was something else.

The purpose of the amendment which entered into force on March 17th, 2023, was to ensure legal certainty and implementation of the law for the intended purpose. The compensation set forth in the Employment Contracts Act should fulfil the function of compensating and preventing violations, not compensating loss. The amendments pertain to compensation paid out for unlawful cancellation of the employment contract, cancellation of employment contract by employee due to a material violation by the employer, and if the parties fail to follow the terms for giving advance notice of cancellation of employment contract as provided for in legal acts.

Compensation the employer must pay if the employee cancels the employment contact extraordinarily due to material breach of obligation by the employer

If an employee cancels the employment contract extraordinarily because the employer is in material breach of the contract, the employee may demand compensation from the employer in the amount of three months’ average wages. If the payment were viewed as a compensation of a loss, the amount received by the employee may be reduced substantially up to a point where the employee receives no compensation. For example, courts might reduce the amount of compensation by the amount of unemployment insurance benefits and other allowances paid by the state to the employee if the employee quickly found a new job. In the new wording of the act, such offsetting is prohibited. However a court or labour dispute committee may still change the amount of compensation, in light of the circumstances for cancellation of the employment contract. It is not yet clear what the practice will be: will the amount of compensation be reduced or increased.

Compensation the employer must pay if the body resolving a dispute establishes that the cancellation of employment contract was unlawful

If the employment contract was cancelled unlawfully, a court may also cancel the contract at the request of employee or employer. In such a case, the employee also has right to demand compensation amounting to three months’ average salary. The compensation amount is different for a woman who is pregnant or entitled to receive maternity benefit or an employees’ representative – they can seek compensation in the amount of 12 months’ average salary. Here the same rule applies: the body resolving the dispute reserves the right to change the compensation amount, but the compensation may not be reduced by the amount of benefits and allowances paid by the state to the employee.

Compensation that must be paid if the advance notification term was not followed for cancellation of employment contract

Compared to the previous wording, the amendments clarify the employee’s and employer’s right to compensation in cases where the counterparty did not abide by the term for advance notification of cancellation of contract. In the case of ordinary cancellation of employment contract, an employee must provide at least 30 calendar days advance notice to the employer. An employer must provide 15-90 calendar days’ advance notice to an employee; the number of days depends on how long the employee has worked for the employer. According to the new wording, the employee or employee may demand the average work day’s remuneration for each working day short of the term for advance notice. In the past; the employer had to prove that it had incurred a loss through paying other employees overtime or having to hire a temporary employee. The change will relieve the burden of proof for the employer in demanding compensation if the employee does not abide by the term for advance notice of cancellation. The same holds true for employees, who also have the right to demand average remuneration for every working day short of the required term for advance notice if the employer failed to abide by it.

The above-mentioned amendments reaffirm the original intent of the compensation system set forth in the Employment Contracts Act to fulfil the function of compensating and preventing violation. In this connection, Supreme Court practice will also certainly change, which up to now interpreted the relevant compensation as a compensation of a loss. As to how courts will interpret and apply provisions pertaining to compensation in practice, time will tell.