Employer of Record (EOR) Estonia
Article Navigation
An Employer of Record (EOR) functions as the legal employer of workers in Estonia. This role, also known as a Global Professional Employer Organization (Global PEO), encompasses a wide array of employment responsibilities, ensuring full compliance with local labor laws and regulations. The EOR is tasked with managing critical functions such as payroll, taxes, legally mandated benefits, and the preparation of employment contracts.
The Employer of Record (EOR) in Estonia is responsible for:
- Ensuring compliance with Estonian labor laws for employee engagements.
- Overseeing local payroll processes.
- Managing the filing of employment-related taxes and necessary documentation.
- Providing employees with detailed payslips.
- Ensuring timely payment of employee salaries.
Streamline your global expansion with our Global PEO services, offering a seamless solution that eliminates the need for establishing a local entity. Choose Mercans as your trusted Employer of Record in Estonia, where we ensure legal presence, compliance, and protection of intellectual property, allowing your business to concentrate on its core operations. We facilitate a smooth global mobility experience, including work visas, while helping you cultivate a diverse and effective international workforce. Partner with Mercans, your Employer of Record in Estonia, for a compliant and efficient employment experience for your global team.
Employment Contracts in Estonia
This contract specifies that the employee will perform particular work under the employer’s supervision and management. In return, the employer agrees to compensate the employee and provide the working conditions stipulated in the contract, which are often governed by collective agreements, laws, or administrative regulations.
Key Elements of an Employment Contract
In Estonia, an employment contract must be drafted in duplicate, with one original copy for the employer and another for the employee. Contracts can be either fixed-term or indefinite, depending on the nature of the work required.
To ensure validity, every Estonian employment contract must include the following essential information:
- Identities of the Parties: Names, registration numbers, and residences of both the employer and employee.
- Contract Dates: The date of entry into the contract and the employee’s starting date.
- Duration: The validity period, specifically if it is a fixed-term contract.
- Job Description: Details of the position, qualifications required, and professional title.
Additional information must also be included in the contract, such as:
If applicable, the contract must reference any relevant collective agreements.
Termination of Employment Contracts
There are several valid reasons for terminating an employment contract in Estonia:
- Mutual Agreement: Both parties can agree to terminate the contract at any time.
- Expiry of Term: This applies to fixed-term contracts when the agreed period concludes.
Both the employer and employee can initiate termination; however, the employee must provide a written notice at least one month before the desired termination date. The employer, on the other hand, is required to state a valid reason for termination. Notably, in cases of bankruptcy, the employer is not obligated to provide advance notice to the employee.
In specific situations, third parties, such as parents or guardians, may request the termination of a contract involving a minor if the work poses risks to the child’s safety, moral development, or education.
Working Hours
Monday to Friday, from 9 AM to 5 PM, with a lunch break of 30 minutes to 1 hour. This lunch break is not counted as part of the working hours. The standard work week consists of 40 hours.
Probationary Period
Estonia allows for a probationary period of up to four months, during which the employer can evaluate the employee’s suitability for the role. During this period, the employee retains all legal rights. If the employment contract is to be terminated during the probation, the party initiating the termination must notify the other party 15 days in advance.
13th Month Salary
Employers in Estonia are not required to pay a 13th-month salary to their employees. However, it is common practice for companies to offer annual bonuses as part of their compensation packages.
Termination, Severance Pay and Notice Period
- Less than 1 year: 15 calendar days’ notice
- 1 to 5 years: 30 calendar days’ notice
- 5 to 10 years: 60 calendar days’ notice
- 10 years or more: 90 calendar days’ notice
The notice period commences the day after the employee is informed of the termination. If the employer fails to give the required notice, they must compensate the employee for the equivalent number of days.
Employees vs Independent Contractors
In Estonia, the distinction between independent contractors and employees is crucial, impacting legal rights, obligations, and benefits. Understanding these differences is vital for both workers and employers to ensure compliance with Estonian labor laws. While independent contractors enjoy flexibility and autonomy in their work arrangements, employees benefit from statutory protections and entitlements under the Employment Contracts Act. This guide outlines the key aspects of independent contractors and employees in Estonia, focusing on contract regulations, classification criteria, and the legal implications of misclassification.
Employees vs. Independent Contractors in Estonia
| Feature | Employees | Independent Contractors |
|---|---|---|
| Contract Type | Governed by the Employment Contracts Act | Governed by service agreements |
| Contract Duration | Fixed-term contracts limited to 10 years with conditions | No time limit for genuine independent contractors |
| Subordination | Generally subordinate to employer’s management | Generally independent; self-regulated |
| Regular Remuneration | Paid regularly by employer | Paid per project or deliverable |
| Work Flexibility | Limited choice over work manner, time, and place | Free to choose manner, time, and place of work |
| Statutory Protections | Entitled to protections under labor laws | No statutory protections like sick pay or overtime |
| Holiday Pay | Entitled to paid holidays | No paid holiday entitlement |
| Social Security Contributions | Employer makes contributions to social security | Responsible for own contributions (33% of business gains) |
| Unemployment Insurance | Covered by employer's contributions | Not covered; only entitled to a flat-rate state allowance |
| Maternity/Paternity/Parental Leave | Eligible for statutory benefits | Same conditions apply for natural persons |
| Sick Pay | Provided for employees covered by health insurance | Not guaranteed unless registered and contributing to health insurance |
| Pension Contributions | Contributions made by employer | Can join second pillar of pension insurance if registered as an individual |
| Penalties for Misclassification | Full legal protection if misclassified | May face fines; misclassification claims can be filed in court |
Social Security in Estonia
Employers operating in Estonia, including non-residents with a permanent establishment (PE) or employees in the country, are required to pay a social tax of 33% on certain payments made to individuals. This tax consists of 20% allocated for public pension insurance and 13% for public health insurance. There is no cap on the social tax that employers must pay, and it primarily applies to salaries, directors’ fees, service fees, and fringe benefits provided to individuals. The tax is assessed on a monthly basis.
Individuals registered as sole proprietors are also subject to a 33% social tax on their net business income, although this is capped. Sole proprietors must make quarterly advance payments of social tax in fixed amounts, which will be credited toward their final annual social tax obligation.
Payroll in Estonia
Government Requirements
Establishing a Company
- Companies must be established in accordance with the Estonian Commercial Code.
- All businesses must register with the Estonian Commercial Register.
- Foreign companies can establish branches in Estonia; however, branches are not considered separate legal entities, and the foreign parent company is liable for the branch’s obligations.
Registration of Employment
- All employers, whether natural or legal persons, must register with the Estonian Tax and Customs Board.
- This requirement includes registering employees, individual contractors, managers, board members, trainees, and volunteers who receive remuneration.
- Registration must be completed before an employee starts working.
Registration as Taxpayer
- Taxpayers registered in the Commercial Register (e.g., subsidiaries, branches) are automatically entered into the taxpayer register by the Estonian Tax and Customs Board.
- Foreign companies may register under specific conditions, such as being a foreign employer or having a permanent establishment in Estonia.
Monthly Payroll Tax Return (TSD)
- Employers must submit the combined corporate income and payroll tax return, known as Form TSD, by the 10th of the month following any taxable distributions or payments.
- Social security contributions are calculated from gross employment income and are payable by the employer.
Monthly Payroll Tax Return (TSD)
- Employers must submit the combined corporate income and payroll tax return, known as Form TSD, by the 10th of the month following any taxable distributions or payments.
- Social security contributions are calculated from gross employment income and are payable by the employer.
Payroll Taxes
- The social tax rate is set at 33% of an employee’s gross earnings.
- There is a minimum social tax obligation of €239.25 per month, even if no salary is paid.
- Unemployment insurance contributions are shared between the employer (0.8% of gross salary) and the employee (1.6% of gross salary).
- These contributions do not apply to payments made to members of management or supervisory boards.
- Resident employees contribute 2% of their gross salary to a mandatory funded pension scheme.
- The state contributes an additional 4% from the 33% social tax calculated on the employee’s salary.
- Personal income earned by employees is subject to a 20% income tax, which will increase to 22% in 2025.
- The tax-free minimum for 2024 is structured based on annual income levels, with specific thresholds for tax-free amounts.
Pension Requirements
Registration Requirements
- To apply for a state pension, individuals must submit an application along with the required documents to the local pension office.
Ongoing Compliance Requirements
- The Estonian pension system comprises three pillars:
- First Pillar: State pensions funded through social tax contributions.
- Second Pillar: Mandatory funded pensions for those born in 1983 or later.
- Third Pillar: Voluntary supplementary funded pensions.
Employment Obligations
Labor Relations
- Employment and labor relations are governed by the Employment Contracts Act and related legal frameworks.
- Employers are responsible for withholding all applicable payroll taxes.
Holiday
- Employees are entitled to 28 calendar days of paid annual leave, unless a different arrangement is agreed upon.
Rest Hours
- Employees must have at least 11 consecutive hours of rest within a 24-hour period.
- Employers must compensate employees for work exceeding 13 hours in a day with additional time off.
Termination of Employment
- Employment contracts can be terminated for economic reasons or employee-related issues, following guidelines in the Employment Contracts Act.
Minimum Wage
- The minimum wage in Estonia for 2024 is €820 per month, effective from January 1, 2024.
Payroll Requirements
Pay Slips
- Employers must provide employees with information regarding wages paid and employment conditions upon request.
- Pay slips are typically issued monthly.
Banking Requirements Related to Payroll
- Employers are required to pay wages on a monthly basis, transferring them to the bank accounts specified by employees, unless otherwise agreed.
Minimum Wages
- The current minimum wage in Estonia is €820.00 per month in 2024, valid from January 1, 2024.
Payroll Cycle
- The payroll cycle is generally monthly, with payments to be made on or before the last working day of the month.
Overtime Pay
- If an employer compensates overtime work in monetary terms, this must be mutually agreed upon with the employee.
Overtime Compensation Calculation:
Hourly / Piece-Rate Basis:
Monthly Basis:
Mercans’ payroll capabilities
Payroll Cycle
Mercans offers a well-organized payroll cycle designed to ensure timely and accurate payments to employees and contractors. The payroll cycle generally follows a monthly schedule, in accordance with Estonian labor laws. Employers have the flexibility to pay their employees either at the end of the month or on a designated date, ensuring compliance with local regulations.
Pay Employees and Contractors in the Local Currency
Mercans enables payroll processing in Euros (EUR), ensuring that all payments are made in the local currency. This capability helps businesses avoid complications related to currency conversion and guarantees that employees receive their salaries without deductions for exchange rates. Furthermore, Mercans provides solutions for paying contractors, ensuring that all financial transactions adhere to Estonian fiscal policies.
Payroll Setup, Payroll Processing, and Payroll Administration
Mercans delivers comprehensive payroll setup and processing services tailored to the Estonian market. This includes:
- Payroll Setup: Establishing the essential infrastructure to comply with local labor laws, including configuring employee categories, salary structures, and benefit entitlements.
- Payroll Processing: Accurately calculating employee wages, deductions, and benefits, ensuring timely disbursement of salaries. This process also accommodates overtime, bonuses, and any other variable pay components in line with Estonian labor regulations.
- Payroll Administration: Ongoing management of payroll operations, including updates to employee records, addressing employee inquiries, and ensuring compliance with evolving labor laws and regulations.
Statutory Filings and Payments
Mercans guarantees that all statutory filings and payments are executed in compliance with Estonian labor laws. This includes:
- Social Security Contributions: Calculation and remittance of employee and employer contributions to social security, encompassing health insurance, pension funds, and unemployment insurance.
- Tax Filings: Management of income tax withholdings and ensuring adherence to Estonian tax authorities. This includes providing accurate documentation for all required filings.
- Labor Compliance: Adhering to all labor laws, including severance payments, vacation entitlements, and other statutory benefits. Mercans offers support to ensure that all employer obligations are met, minimizing the risk of penalties or legal issues.
Personal Income Tax in Estonia
Estonia employs a straightforward and efficient personal income tax system, characterized by a flat tax rate and a clear set of regulations regarding taxable income. Here’s a detailed look at how personal income tax operates in the country:
Tax Residency
- Residents: Individuals who are considered residents of Estonia are subject to taxation on their worldwide income, regardless of the origin of that income.
- Non-residents: Conversely, non-residents are only taxed on income sourced within Estonia, such as earnings from local employment or business activities.
Taxable Income
Taxable income encompasses a wide array of earnings, including:
- Active Income: This includes employment income and profits from business activities.
- Passive Income: Various forms of passive income are also taxable, such as:
- Capital gains
- Rental income
- Royalties
- Interest income
- Dividends
- Certain insurance payouts
- Pensions
- Scholarships, grants, prizes, and lottery winnings
This list is not exhaustive; essentially, any income derived by a resident individual that does not fall under a specific tax exemption is subject to taxation.
Taxation Basis
- Withholding Tax: Most items of personal income are taxed on a gross basis, primarily through withholding at the source. This means that taxes are deducted before the individual receives their income.
- Business Income and Capital Gains: These types of income are taxed on a net basis, which means that allowable deductions are considered before tax liability is determined.
Special Considerations
- Expatriates: Estonia does not have special taxation rules tailored for expatriates, meaning they are subject to the same tax rules as residents and non-residents based on their residency status.
Personal Income Tax Rates
- Flat Tax Rate: Estonia has implemented a proportional tax rate of 20% on all forms of income earned by resident taxpayers. This simple flat rate facilitates easier compliance and administration.
- Dividends: Since 2018, dividends that have been subject to a reduced tax rate of 14% at the level of the distributing Estonian company are subject to a withholding tax of 7%.
- Pension Payments: Certain pension payments are taxed at a 10% income tax rate, reflecting a lower burden on retirement income.
Estonia Employee Hiring Cost
Employing individuals in Estonia involves several employer costs, including social tax contributions, income tax withholding, and other mandatory benefits. Let’s break down the employer costs for an employee with a Gross Annual Salary of €40,000:
Social Tax Contributions
Employers in Estonia are required to contribute to social security programs through social tax. The total annual employer cost for social tax contributions would amount to €13,200, which is 33% of the gross annual salary.
Total Annual Cost
When considering additional expenses such as private pension contributions and any other potential benefits or allowances, the total annual cost of employing an individual with a Gross Annual Salary of €40,000 could be estimated at €53,200.
For more detailed calculations and information about employer costs, you can refer to Estonian labor laws and social security regulations.
Employee Benefits in Estonia
In Estonia, employee benefits are structured into mandatory and supplementary categories. Mandatory employee benefits ensure a basic standard of living and security for workers, while supplementary benefits enhance the overall employment package.
- State Pension The state pension provides a regular income for those who have reached retirement age (currently 63, increasing to 65 by 2026) and have worked for at least 15 years. This includes various pensions, such as old-age, incapacity, and survivor’s pensions. Funded by social tax, employers contribute 33% of the employee’s salary, which is allocated to health insurance and pensions.
- Mandatory Funded Pension Employees contribute 2% of their gross salary to a personal pension fund, with an additional 4% contributed by the state from the social tax. This system is compulsory for individuals born in 1983 or later, ensuring that they have a supplementary income in retirement.
- Supplementary Funded Pension This optional pension allows individuals to make voluntary contributions to either a pension insurance contract or a voluntary pension fund. Contributions can be adjusted, and if they are below €6,000 or 15% of gross income annually, they are exempt from income tax.
Legislated Leaves:
- Annual Leave: Employees are entitled to a minimum of 28 days of paid annual leave, with some professions enjoying extended leave.
- Maternity Leave: Women are entitled to 100 calendar days of maternity leave, starting at least 70 days before the estimated due date.
- Parental Leave: Parents can take leave until their child is three years old, with benefits provided by the state.
- Sick Leave: Employees can receive up to 182 days of paid sick leave, with 70% of their average salary covered after the third day of sickness.
Unemployment Insurance: Unemployment insurance is mandatory, with employees contributing 1.6% of their gross salary and employers contributing 0.8%. To qualify for benefits, individuals must have contributed for at least 12 months in the previous 36 months.
Dental Care: Dental care is free for children under 19, while adults with health insurance can receive reimbursement of up to €60 annually. Special benefits are available for pregnant women and vulnerable groups.
- Healthcare: The Estonian Health Insurance Fund (EHIF) provides public healthcare for employees whose employers pay social taxes. Private health insurance options are also available
- Voluntary Benefits: Employees can opt for voluntary insurance contracts with the EHIF, provided they have been insured for a minimum period and meet specific criteria.
- Gym Memberships: Employers may offer gym memberships or subsidies to promote employee health and wellness.
- Workplace Canteens: Although not widespread, some larger companies provide subsidized meals or on-site cafeterias, particularly in competitive industries.
- Additional Vacation Days: Beyond the mandatory 28 days, some companies provide extra vacation as a perk.
- Company Cars: Typically offered to salespeople and executives, these are often taxed as benefits.
- Health Insurance: Supplemental health insurance is becoming increasingly popular, with a significant rise in contracts in recent years.
- Telecommuting Options: Flexibility in work arrangements, such as remote work, is common in many industries.
- Personal Accident Insurance: This coverage for death or disability is gaining traction among employers.
- State Pension The state pension provides a regular income for those who have reached retirement age (currently 63, increasing to 65 by 2026) and have worked for at least 15 years. This includes various pensions, such as old-age, incapacity, and survivor’s pensions. Funded by social tax, employers contribute 33% of the employee’s salary, which is allocated to health insurance and pensions.
- Mandatory Funded Pension Employees contribute 2% of their gross salary to a personal pension fund, with an additional 4% contributed by the state from the social tax. This system is compulsory for individuals born in 1983 or later, ensuring that they have a supplementary income in retirement.
- Supplementary Funded Pension This optional pension allows individuals to make voluntary contributions to either a pension insurance contract or a voluntary pension fund. Contributions can be adjusted, and if they are below €6,000 or 15% of gross income annually, they are exempt from income tax.
Legislated Leaves:
- Annual Leave: Employees are entitled to a minimum of 28 days of paid annual leave, with some professions enjoying extended leave.
- Maternity Leave: Women are entitled to 100 calendar days of maternity leave, starting at least 70 days before the estimated due date.
- Parental Leave: Parents can take leave until their child is three years old, with benefits provided by the state.
- Sick Leave: Employees can receive up to 182 days of paid sick leave, with 70% of their average salary covered after the third day of sickness.
Unemployment Insurance: Unemployment insurance is mandatory, with employees contributing 1.6% of their gross salary and employers contributing 0.8%. To qualify for benefits, individuals must have contributed for at least 12 months in the previous 36 months.
Dental Care: Dental care is free for children under 19, while adults with health insurance can receive reimbursement of up to €60 annually. Special benefits are available for pregnant women and vulnerable groups.
- Healthcare: The Estonian Health Insurance Fund (EHIF) provides public healthcare for employees whose employers pay social taxes. Private health insurance options are also available
- Voluntary Benefits: Employees can opt for voluntary insurance contracts with the EHIF, provided they have been insured for a minimum period and meet specific criteria.
- Gym Memberships: Employers may offer gym memberships or subsidies to promote employee health and wellness.
- Workplace Canteens: Although not widespread, some larger companies provide subsidized meals or on-site cafeterias, particularly in competitive industries.
- Additional Vacation Days: Beyond the mandatory 28 days, some companies provide extra vacation as a perk.
- Company Cars: Typically offered to salespeople and executives, these are often taxed as benefits.
- Health Insurance: Supplemental health insurance is becoming increasingly popular, with a significant rise in contracts in recent years.
- Telecommuting Options: Flexibility in work arrangements, such as remote work, is common in many industries.
- Personal Accident Insurance: This coverage for death or disability is gaining traction among employers.
Work Permit in Estonia
Long-Stay Visa Types in Estonia
Estonia offers several long-stay visa options for individuals looking to reside and work in the country for more than 90 days. The primary visa types include:
- D-Visa: The D-visa is designed for non-EU citizens, permitting them to live and work in Estonia for up to one year. Employers are responsible for registering their employees with the Estonian Police and Border Guard Board when they obtain this visa.
- Temporary Residence Permit: For those intending to work in Estonia for more than one year, a temporary residence permit is required. This permit is valid for up to five years and must be applied for initially.
- Long-Term Residence Permit: After holding a temporary residence permit for five years, individuals may apply for a long-term residence permit. Applications should be submitted at least two months before the expiration of the temporary residence permit.
Eligibility Requirements for a Work Visa in Estonia
To qualify for a work visa, either as a D-visa or residence permit, applicants must meet the following requirements:
- The employer must register the employee’s employment with the Estonian Police and Border Guard Board.
- The employer must have the legal capacity to operate and hire in Estonia.
- The employee must possess a valid work contract.
- The employee must meet the qualifications required for the specific position.
- The employee must be in good health.
- The employee must not have any criminal offenses.
The same eligibility criteria apply for obtaining a temporary residence permit. To qualify for a long-term residence permit, individuals must have held a temporary residence permit for five years.
Obtaining an Estonia Work Permit
To secure a work visa in Estonia, candidates should submit their applications through their local Estonian consulate. Typically, employers facilitate the visa application process and cover associated costs for their employees. The average processing time for a visa application is approximately 30 days.
Required Documents for a Work Visa Application
- Completed application form
- Valid passport
- Two passport-sized photographs
- Health insurance coverage for the Schengen area, with a minimum coverage of €30,000
- Copy of the employment contract
- Fingerprints (to be taken in person at the consulate)
- Application fee
Process for Employee Work Visa Sponsorship in Estonia
In most cases, employers sponsor work visas for their employees in Estonia. This involves managing the application process and covering the associated fees.
To initiate a work visa application for employees, your company must legally operate and be able to hire in Estonia. This can be achieved if your business has a physical presence in Estonia, such as a subsidiary or local entity, or by utilizing an Employer of Record (EOR) service. Partnering with an EOR like Mercans enables companies to hire internationally in Estonia without needing a foreign subsidiary.
Once your company is authorized to employ individuals in Estonia, you can begin the visa application process. Employers will follow the same steps as individual applicants, submitting the required documents listed above. Additionally, employers may designate representatives to submit applications at a local consulate. If the visa is approved, employees will be granted the ability to live and work in Estonia for the duration permitted by the visa.
EOR Solutions in Estonia
Best Employer of Record Estonia
Conclusion
Discover the simplicity of global expansion with Mercans’ all-inclusive Employer of Record (EOR) solutions in Estonia. From payroll management and regulatory compliance to effortless workforce integration, Mercans guarantees a seamless experience for businesses entering the Estonian market, backed by exceptional support and industry expertise.