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Labour market reforms in Estonia: background summary

Overall, the Estonian labour market is in a rather good state. The unemployment rate of 15-64 year olds has fallen from 17.1% in 2010 to 7% in 2016, below the EU28 average (8.7% in 2016), and the employment rate of the same age group increased over the same period from 61.2% to 72.1%, which is above the EU28 average (66.6%) (Eurostat). On the other hand, there are several issues which need to be tackled: a decreasing and aging population, a large share of unskilled workers and extensive skills mismatch problem, in-work poverty and a high gender pay gap (26.9% in 2015, the highest in the EU according to Eurostat). Smaller amendments to labour-related legislation are often made in Estonia, but there have also been rather large-scale reforms.

Employment Contracts Act

  • The new law for regulating individual employment relations, the Employment Contracts Act, was adopted in December 2008 and took effect from 1 July 2009. It aimed at greater flexicurity – making the labour market more flexible, while increasing social security provisions for employees.  
  • To increase labour market flexibility, some of the measures included: easier dismissal procedures, decreasing the financial burden of redundancies for the employer by sharing the payments of redundancy benefits between the employer and the Estonian Unemployment Insurance Fund (EUIF), and promoting the use of flexible employment forms by allowing the use of fixed-term contracts in all cases.
  • To increase social security, the unemployment insurance benefit was increased, compensations for the unlawful termination of an employment contract were introduced, parental leave was counted into the reference period when calculating the unemployment insurance benefit, etc.
  • Additional measures included changes in the regulation of labour dispute committees (reducing state supervision), and measures concerning lifelong learning, such as annual study leave and taxation of expenses on employee education, along with administrative procedures, working time regulations and the reform of labour market institutions (the EUIF was established to take over the Labour Market Board’s role of paying unemployment benefits and providing active labour market measures). 
  • In 2016, The Ministry of Social Affairs began consulting with social partners regarding claims that the Employment Contracts Act does not meet the changed needs of the labour market and business environment, and specifically requested suggestions about the regulation of working time. Both the EAKL and ETKL have proposed their views, but currently no further steps have been reported.

Civil Service Act reform

  • The new Civil Service Act, in preparation since 2001, was approved in June 2012 and took effect from April 2013. It aimed at modernising public services while making them more effective. The changes also resulted in the loss of some benefits for civil servants and a reduction in the number of civil servants by around 25%.
  • The number of civil servants was reduced by changing the status for some. Previously all persons working in the public sector (central public administration as well as other state bodies and local governments), irrespective of their duties or responsibilities, were defined as civil servants. With the new act, only those who actually enforce public authority are defined as civil servants. Other persons who work in the public sector but do not enforce public authority (e.g. accountants, administrative personnel, etc.) are no longer defined as civil servants; they are employed on the basis of employment contracts and their work is regulated by the Employment Contracts Act.
  • The cutting of some benefits aimed to bring the working conditions of civil servants in line with those of the private sector. Civil servants are no longer entitled to: additional remuneration for service tenure, an academic degree or proficiency in foreign languages; additional holiday days according to tenure length; a holiday benefit of up to one month’s salary in connection with basic holidays; an increase in pension entitlement depending on tenure length; an allowance upon death or disability. They are still entitled to an annual holiday allowance of 35 calendar days, while private sector employees are entitled to 28 calendar days.
  • To ensure the salary system is transparent and understandable, all salaries and guidelines for determining salary levels in the public sector were made public and are updated annually.

‘Incapacity to work’ reform

  • In June 2013, the government proposed reform of the Estonian ‘incapacity to work’ policy. This was a response to the increasing number of people who receive a pension because of their incapacity to work and their low participation in the labour market.
  • The main characteristic of the reform was a conceptual and terminological change from ‘incapacity to work’ to ‘work ability’ and the main aim was to activate those who are outside the labour market due to reduced work ability.
  • Previously, those with reduced work capacity were assessed by the Estonian Social Insurance Board and they received a monthly incapacity for work pension. The amount depended on their level of incapacity and it was paid from the state pension insurance fund.
  • As of July 2016, the assessment is done by the Unemployment Insurance Fund (EUIF), which determines a person’s ‘work ability’ (rather than their ‘incapacity to work’). The work ability benefit is paid by the EUIF from the state budget.
  • There are some substantial differences between the previous incapacity to work pension and the work ability allowance. Firstly, the new allowance has only two possible levels: total incapacity to work or partial work ability. Secondly, there were no activity requirements for receiving the pension, while in the case of the new allowance (and also services) people with partial capacity to work are eligible for the allowance if they are employed, unemployed, actively seeking a suitable job, participating in active employment services or in formal education. Thirdly, the work incapacity pension could be received simultaneously with labour earnings without any limits, while the new allowance is reduced in cases where labour earnings are higher than the average wage (by 90 times the daily rate).

Aliens Act

  • In recent years, several changes have been made to the Aliens Act in order to simplify the procedures for third-country nationals to enter the Estonian labour market, with the main aim of attracting highly qualified foreign labour to Estonia.
  • Residence permit procedures were made less bureaucratic with the adoption of simplified application forms. Third-country nationals (TCNs) also have the right to stay in Estonia for 90 days after the expiry of their residence permit and apply for a new one. Moreover, as the basis for applying for the permit may change, TCNs have the possibility to apply for a new permit on different grounds after the expiry of the current permit (e.g. instead of a permit for working, they may apply for it on the grounds of pursuing entrepreneurship).
  • As of January 2016, foreigners are allowed to work in Estonia as rental workers and Estonian employers can hire them through temporary work agencies.
  • For hiring foreign workers, the employer must have the permission of the Estonian Unemployment Insurance Fund (EUIF). With the amendments, the EUIF may give permission for hiring several foreigners instead of the previous limit of hiring only one employee, and the permission is not related to specific employees, but given generally to the company.
  • The salary criterion was eased. Previously, employers had to pay foreign workers an  amount equal to at least the annual average gross monthly salary in the employer’s main area of activity, but not less than the annual national average salary multiplied by a coefficient of 1.24. Now, the employer must pay at least the national average salary, without the coefficient.
  • According to the Aliens Act, annual immigration cannot exceed 0.1% of the permanent population of Estonia. In response to the lack of skilled information and communications technology (ICT) workers in Estonia, the changes also excluded ICT workers from the current immigration quota. Furthermore, those who receive a residence permit for establishing a start-up in Estonia are excluded.

Posted workers

  • In December 2016, the amendments to the Working Conditions of Employees Posted to Estonia Act took effect. The main aim of the changes was to transpose the Posting of Workers Enforcement Directive 2014/67/EU into Estonian legislation.
  • With these amendments, state supervision over the working conditions of posted workers was simplified and the Labour Inspectorate was appointed as the implementing agency.
  • Posted workers can now turn to labour dispute committees in addition to the courts.
  • In the construction sector, the local contracting entity is now responsible for the payment of wages to posted workers in cases where there is a court order but it is impossible to collect it from the employer who posted the worker.
  • The act is no longer applied to workers arriving from third countries, who now enter the Estonian labour market under the Aliens Act.

Undeclared work

  • Undeclared work and fraudulent employment relations have also been in the spotlight in recent years.
  • Since July 2014, all workers, whether paid or working on a voluntary basis, must be registered by their employers in the employment register. The purpose of the register is to reduce undeclared work, since workers must be registered before their employment starts. Previously, the employer could submit information about new employees to the Estonian Health Insurance Fund within seven calendar days. This made possible the practice that during an inspection by tax officials an employer could claim that a worker had only just been employed and their registration had not yet been organised. However, although the tax revenue and the number of registered employees has increased, there are concerns that fully undeclared work has been replaced by partially undeclared work, as a high share of the newly registered workers’ wages have been at the level of the national minimum wage, which does not seem credible.  However, the register is also being used by several state institutions to determine workers' employment statuses and eligibility for certain allowances and benefits, thus overall it has proved to be useful.
  • Recent developments also include debate and resolutions regarding fraudulent work forms. The Estonian Supreme Court made decisions which supported the Estonian Tax and Customs Board’s (EMTA) position that in some cases service agreements could be considered fraudulent schemes that aim to avoid employment taxes and thus should be defined as employment relationships regulated by employment contracts. The court decisions gave EMTA the right to requalify such service agreements as employment contracts and oblige the employer to declare and pay labour taxes.

Other recent labour-related changes

  • In 2015 the parliament approved an annual income tax refund to low-wage earners with the main aim of reducing in-work poverty, although it was implemented only once. It was a lump sum, paid once a year, with the first payments in 2017; the amount of the refund depended on the amount earned, the number of months worked and the structure of the income. According to the scheme, the refund was the highest for a gross salary of €480; after that, it began to decrease and reached zero for a gross salary of €649. However, in December 2016 another measure was approved by the parliament which will also replace the income tax refund. With the new measure, the income tax system is reformed so that as of 2018 the general basic income tax exemption will be €500 per month (it is currently €180 in 2017 and was supposed to increase to €205 by 2019). From a gross wage of €1,200 the basic exemption starts to decrease and from €2,100 it equals €0. This increases the income of low-wage earners by €62 per month. The income tax rate will remain unchanged, at 20%.
  • Social partners have promoted the need for measures that support employees’ health. Firstly, since 2009, the first three sickness leave days are not compensated; employees have the right to receive sickness benefit only from the fourth day of illness. The first five days are paid by the employer (fourth to eighth day of sickness), and from the ninth day of sickness by the Health Insurance Fund. In 2016, trade unions promoted the idea of restoring compensation for the first days of sickness, especially because a number of employers were already providing compensation for these days but had to pay social tax from the payments. As of 2017, employers can (but are not obliged to) provide social tax-free compensation for the second and third days of sickness leave at the maximum amount of 100% of the person’s average wage. Secondly, as of 2018 employers will have the possibility to compensate the costs incurred for the promotion of employees’ health fringe-tax free in the amount of €100 per quarter. The costs must be related to sporting activities, therapy or payments of voluntary health insurance. This measure was promoted by the Estonian Employers’ Confederation.
  • The Estonian parental leave and benefits system is rather generous. It includes a maximum of 140 calendar days of maternity leave benefit (only for mothers) and, after this, 435 calendar days of parental leave benefit at the amount of the parent’s average wage in the previous calendar year, which can be used by the mother or the father. Basically, the benefit ends when the child reaches 1.5 years of age; the parent, however, can stay on parental leave until the child reaches the age of 3. In 2017, the government agreed on certain reforms of the parental leave and benefits system, making it more flexible and promoting work and family life reconciliation. The planned changes would provide more flexibility to the system by allowing parents to receive the parental benefit and income from employment simultaneously, and to choose whether to receive a higher benefit for a shorter time or a smaller benefit for a longer time, as well as allowing both parents to share parental benefit and leave simultaneously (while 30 days would be reserved only for fathers).
  • In 2017, the government approved amendments to the Individual Labour Dispute Resolution Act, which has remained almost the same for two decades. Current changes aim at improving legal certainty and making the out-of-court dispute resolution process easier and clearer, while also giving labour dispute committees (LDCs) more authority. The most important changes include:
    • the possibility to turn to an LDC regarding monetary claims exceeding €10,000, which are currently accepted only by the courts;
    • the possibility to turn to an LCD regarding issues related to working conditions (for example, health and safety at work) and issues arising from the performance of a collective agreement; currently only issues related to employment contracts are resolved in LDCs;
    • new resolution mechanisms, i.e. written proceedings, conciliation procedure and agreement procedure; the latter is currently used in practice, but outside the formal procedure and it does not result in a formal enforcement instrument.