Lay-Off – Comprehensive Guide for Employers

When the continuation of an employment relationship between an employer and an employee under agreed conditions becomes impossible due to economic reasons such as a reduction in workload or restructuring of work, or in any other case of cessation of work, the employer may cancel the employee’s employment contract extraordinarily, i.e., lay-off the employee.

When laying-off employees, the employer must comply with several requirements arising from the Employment Contracts Act to carry out the lay-off lawfully.

Otherwise, cancellation of the employment contract due to lay-off may be deemed unlawful, and the employer may be required to pay significantly higher compensations to the employee than in the case of proper lay-off.

Below is an overview of the main requirements that the employer should consider when laying-off an employee.

Lay-Off Situations

For the employer to be entitled to lay-off an employee, there must be a lay-off situation. One of the most common lay-off situations occurs when the employer has reorganized work within the enterprise, resulting in a significant reduction in workload.

Typically, such reorganizations include, for example, the elimination of certain positions, merging multiple positions into one, outsourcing services, or automating certain tasks.

A lay-off situation due to cessation of work may also arise if the employer ceases operations (liquidates) or goes bankrupt.

Lay-off is an economic decision of the employer, which the employee cannot demand. Lay-off must also not take place “by agreement” with the employee.

Restrictions on Lay-Off and Preferential Right of Keeping the Job

If the employer needs to lay-off employees, it must determine whether there are individuals among the employees who must be excluded from the group of employees subject to lay-off due to restrictions arising from the Employment Contracts Act.

A pregnant woman, a woman entitled to maternity leave, and an employee who is on paternity leave, adoptive parent leave or parental leave may only be laid-off in the event of the employer’s liquidation or bankruptcy.

However, this restriction applies only if the employee has notified the employer of pregnancy or the right to use the respective leave before lay-off or within two weeks after receiving the lay-off notice.

In a lay-off situation, employees with a child under three years of age and employee representatives (e.g., working environment representative, employees’ representative in the working environment council, representative of employees and trade unions, community-scale representative) have a preferential right of keeping their job, except in case the employer’s liquidation or bankruptcy.

However, an employee with a preferential right of keeping their job may still be laid-off if the position of the employee with a preferential right is laid-off, and there are no other employees or comparable individuals in the same position (e.g., if the employer purchases the work of the laid-off employee as a service from another source).

After identifying employees with a preferential right to keep their job, the employer may freely choose whose employment contract to cancel.

When making this choice, the employer must follow the principle of equal treatment, and is prohibited from preferring employees based on their age, gender, race, or any other similar characteristic unrelated to the job.

However, the employer may also consider other factors in addition to the employee’s skills, such as communication skills and personal qualities, when making the selection.

Before cancelling the employment contract of an employee’s representative, the employer must consult the employees or trade union that elected the representative, seeking their opinion on the cancellation of the employment contract, and consider such opinion to a reasonable extent or justify the non-consideration thereof.

Lay-Off and Obligation to Offer Other Work

Before laying-off an employee, the employer must, where possible, offer the employee another vacant position, including organise, where necessary, the employee’s in-service training, adapt the workplace 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 may, considering the circumstances, be reasonably expected.

This requirement does not apply in the event of the employer’s liquidation or bankruptcy.

The offered work does not necessarily have to be in the same field or profession; it can be any work that the employee can do, including substituting a temporarily absent employee.

The employer must offer the employee another job in all locations where the employer operates – for example, if the employer has stores in different cities, the employer must also offer another job in a store located in another city if possible.

If, for example, due to a reduction in workload, the employer no longer has full-time work to offer to an employee, the employer must offer other work or a part-time position to the employee.

It is worth noting that offering other work does not mean that the employer may require the employee to be laid-off to apply for another position.

Employers should not take offering other work lightly – in a situation where the employer has not offered other work to the laid-off employee, even though such an opportunity existed, the cancellation of the employment contract due to lay-off is void.

Therefore, we recommend making the offer of other work in writing so that the employer can later prove that it did indeed offer other work.

Preparation and Delivery of Lay-Off Notice

In order to cancel the employment contract due to lay-off, the employer must prepare and deliver a lay-off notice, i.e. a declaration of cancellation of the employment contract, to the employee.

The lay-off notice may not be conditional, i.e. the termination of the employment contract must not be contingent upon an uncertain event. A conditional declaration of cancellation is void.

The lay-off notice must be justified, i.e. the employer must explain to the employee the reasons for lay-off. If the employer cannot offer the employee other work, it is advisable to justify this in the lay-off notice as well.

The lay-off notice must be in writing (signed by hand or digitally) or at least in a format reproducible in writing (e.g., email, message), and the reasons must be provided to the employee also in a format reproducible in writing.

A declaration of cancellation made in breach of the format requirement is void. If the breach of the format requirement concerns only the reasons, then this does not lead to the voidness of the cancellation but the employer’s obligation to compensate for the damage.

The employer may deliver the lay-off notice to the employee in person or transmit it by email or registered mail. The employee does not have to sign the lay-off notice, but it is advisable to ask the employee for a signature or confirmation confirming the receipt of the lay-off notice.

If the lay-off notice is delivered to the employee in person, we recommend involving a third party to the delivery process, e.g. a human resources specialist who could provide witness testimony in case of a dispute regarding the delivery of the lay-off notice to the employee.

Advance Notice for Lay-Off

The advance notice period for lay-off depends on the employee’s length of service with the employer. The employer must notify the employee of lay-off in advance if the employee’s employment relationship with the employer has lasted:

  • less than one year – at least 15 calendar days;
  • one to five years – at least 30 calendar days;
  • five to ten years – at least 60 calendar days;
  • ten or more years – at least 90 calendar days.

If the employer fails to adhere to the mandatory advance notice period, it must compensate for the failure to comply with the advance notice period. In such case, the employee is entitled to receive as compensation the average daily wage for each day they were notified less of the cancellation of the employment contract.

To calculate this compensation, the average calendar daily wage, as calculated pursuant to the Government of the Republic of Estonia Regulation No. 91 of June 11, 2009, “Conditions and Procedure for the Payment of the Average Wage,” is multiplied by the number of calendar workdays falling within the less notified period (Monday to Friday, excluding public holidays).

The calendar workdays falling within the less notified period are counted from the day following the termination of the employment relationship until the end of the statutory notice period.

NB! If the employee is covered by a collective agreement, different advance notice periods may be agreed upon in the collective agreement.

Lay-Off Compensation Paid by the Employer

When cancelling an indefinite employment contract for any economic reason and when cancelling a fixed-term employment contract due to bankruptcy, the employer must pay the employee lay-off compensation equivalent to the employee’s average monthly wages.

The lay-off compensation is calculated based on the employee’s average working day wage pursuant to the Government of the Republic of Estonia Regulation No. 91 of June 11, 2009, “Conditions and Procedure for the Payment of the Average Wage.”

If the lay-off compensation calculated based on the average wage is lower than the wages agreed with the employee, the employer has the option not to calculate the average wage and to pay the agreed wages instead.

When cancelling a fixed-term employment contract for economic reasons other than bankruptcy, the employer must pay the employee lay-off compensation equivalent to the wages the employee would have been entitled to receive until the end of the contract term, considering the employee’s legitimate expectation.

For example, if the employee’s contract term is until 31 May 2024 but the contract terminates already on 31 March 2024 due to lay-off, the employer must pay the employee agreed wages for April and May as compensation, without calculating the average monthly wage based on the average working day wage.

When extraordinarily cancelling a fixed-term employment contract concluded for the period of substitution due to economic reasons, the employee’s legitimate expectation must be assessed individually in each case. For example, an employee substituting an employee who is on parental leave would have a legitimate expectation for compensation equivalent to 30 calendar days.

The employee is not entitled to compensation if the employer has cancelled the fixed-term employment contract due to force majeure (e.g., a natural disaster).

Lay-Off Benefit Paid by the Unemployment Insurance Fund

In addition to the lay-off compensation paid by the employer, the Unemployment Insurance Fund pays lay-off benefit to an employee whose employment relationship with the employer lasted at least five years. The amount of the lay-off benefit depends on the duration of the employment relationship. If the employment relationship lasted for five to ten years, the lay-off benefit amounts to one month’s average wages, and upon termination of an employment relationship that lasted more than ten years, the lay-off benefit amounts to two months’ average wages. In order to receive the lay-off benefit, the employer must submit an application to the Unemployment Insurance Fund for the employee within five days from the termination of the employment relationship. If the employer fails to do this within the given term, the employee submits the application themself.

Unemployment Insurance Benefit

Termination of the employment contract because of lay-off is often a prerequisite for receiving the unemployment insurance benefit paid by the Unemployment Insurance Fund.  A person registered with the Unemployment Insurance Fund as unemployed is entitled to the unemployment insurance benefit only if they have not left work on their own initiative, by agreement with the employer, or due to their own wrongful conduct.

It is important to keep in mind that if lay-off occurs “by agreement”, the laid off person is not entitled to receive the unemployment insurance benefit.

Another condition for receiving the unemployment insurance benefit is that the person had worked and paid unemployment insurance contributions for at least 12 months during the 36 months prior to registration as unemployed.

The unemployment insurance period does not include the period of maternity, paternity, adoptive or parental leave, as well as temporary incapacity for work (being on sick leave) or compulsory military service.

The period for the payment of the unemployment insurance benefit depends on the person’s unemployment insurance period. If the total unemployment insurance period is:

  • shorter than 5 years, the Unemployment Insurance fund grants the lay-off benefit for 180 calendar days;
  • 5 to 10 years, the Unemployment Insurance Fund grants the lay-off benefit for 270 calendar days;
  • 10 years or more, the Unemployment Insurance Fund grants the compensation for 360 calendar days.

During the first one hundred days of receiving the lay-off benefit, the lay-off benefit amounts to 60% of the average wage of one calendar day for each calendar day, and thereafter 40% of the average wage of one calendar day for each calendar day.

Collective Lay-Off

If the employer lays off many employees in a short period of time, the lay-off is considered collective and additional rules apply (including obligation to notify the Unemployment Insurance Fund).

Collective cancellation of employment contracts is cancellation of employment contracts within 30 calendar days due to lay-off with at least:

  • 5 employees in a company employing on average up to 19 employees;
  • 10 employees in a company employing on average 20-99 employees;
  • 10 percent of employees in a company employing on average 100 to 299 employees;
  • 30 employees in a company employing on average at least 300 employees.
Consequences of Unlawful Lay-Off

If the employer lays off an employee without the occurrence of a lay-off situation, and/or does not comply with the restrictions and requirements for lay-off set forth in the Employment Contracts Act, the lay-off may be void.

In such case, the employee may demand compensation from the employer for unlawful lay-off in the labour dispute committee or court.

If the labour dispute committee or court finds that the lay-off is void and terminates the employment relationship that was unlawfully terminated by the employer, the employer must pay the employee compensation in the amount of three months’ average wages or even twelve months’ average wages if the employment contract is terminated with an employee who is pregnant, has the right to maternity leave, or who has been elected as the employees’ representative.

Considering the circumstances of the cancellation of the employment contract, the labour dispute committee or court may change the amount of compensation.

Summary

Although lay-off may seem like a simple procedure to the employer at first glance, it is subject to several restrictions and requirements established by the Employment Contracts Act breach of which may result in an exhausting and costly labour and court dispute for the employer.

Therefore, we advise employers to be very attentive to all requirements that must be followed when carrying out a lay-off, and to seek legal assistance in good time if necessary.

Do you need help with the legal management of the lay-off process? The specialists at Hedman Law Firm are ready to support you every step of the way, ensuring that your actions comply with all the requirements of the law.

NB! Contact us already today to discuss how we can help your business.

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