Independent Contractors & Employment Guidelines in Estonia
Contractor length allowance
There is no time limit for genuine independent contractors.
Fixed-term contract limitation
Up to 10 years if it is justified by good reasons arising from the temporary fixed-term characteristics of the work. If the contract is extended more than once, the employment relationship is deemed to have been entered into an unspecified term from the start. Entry into fixed-term employment contracts is deemed “consecutive” if the time between two contracts does not exceed two months.
What makes someone an employee
In Estonia, the classification of an employee has less to do with the type of contract, and more to do with the relationship between the employer and the worker.
The most important characteristics on how to determine whether the contract can be classified as an employment contract are:
- Is the worker subordinated to the management and control of the employer? To what extent?
- Does the employer remunerate the worker on a regular basis for their work?
- Can the worker choose a suitable manner, time and place for performing the work tasks?
Since distinguishing an employment contract from other service contracts can be complicated, the Employment Contracts Act states that, if an individual does work for another person which, under the circumstances, can be expected to be done only for remuneration, it is presumed to be an employment contract.
Employee vs contractor
The following Acts that regulate employees’ working conditions do not apply to self-employed persons:
Individuals who offer their services as contractors are responsible for regulating their working time and vacations and are not paid for the holidays they take. Statutory employment law protections such as ill-health insurance benefits, overtime regulations or benefits related to absence from work and termination do not apply to contractors. Moreover, contractors are responsible for making contributions to the social security tax equivalent to 33% of their own business gains (if services are provided by a registered sole proprietor or by a legal entity, taxes must be paid by the service provider themselves) and cannot benefit from unemployment insurance (just a flat-rate state unemployment allowance).
As for maternity, paternity, parental leave and other non-contributory social security benefits, the same conditions apply to both employees and contractors (as long as they are natural persons providing the services. Other service providers such as sole proprietors or legal entities are not entitled to such benefits). Sick pay and leave are provided for all individuals covered by health insurance, as long as they are registered with the Estonian Health Insurance Fund and pay their social taxes. Contractors also have the right to join the second pillar of pension insurance (not possible if services are provided through a legal entity).
Penalties for Misclassification in Estonia
If caught by the government, in the first instance, employers are issued a warning, giving them an opportunity to revise their business activities and change them in accordance with the law within a set deadline. If the misclassification persists, employers can be fined up to €3,200 for not registering a worker as an employee, and up to €32,000 if misclassification involves a foreign employee.
The misclassified worker might file a claim to the Labour Dispute Committee or to court for determining an employment relationship at any time. If the Labour Dispute Committee /court identifies that the relationship corresponds to an employment relationship, the employee will be entitled to full protection from the start (e.g. minimum salary requirement, holiday entitlement, termination protection, taxation, etc.).