Adopting the Employment Contracts Act in Estonia: From Security Through Flexicurity to Flexibility

by Kairit Kall

Summary and policy recommendations

In the course of the adoption of the Estonian Employment Contracts Act of 2009 state representatives played a dominant role in determining the nature and outcome of the legislative process. Although employers’ organisations and trade unions participated in the tripartite discussion on the draft law, their inclusion was merely a formality and did not bring any tangible gains for labour. The final version of the Act, passed in the Parliament despite strong opposition from trade unions, considerably eased employment protections and represented a direct move from security to flexibility. Due to the new Act the probability of involuntary transition out of employment has increased, yet no sufficient social security system that would ease difficulties related to possible unemployment is in place. The path towards the new law illustrates the illusory nature of corporatism in Central and Eastern Europe and indicates that Estonian unions might consider alternative forms of activism to make their voice heard.


Before July 2009, the Employment Contracts Act that was in force in Estonia dated back to the beginning of the 1990s and provided rather strict rules for actions such as dismissing employees.  Macro level indicators such as the OECD Employment Protection Legislation Index showed Estonian labour market to be relatively rigid and offering higher levels of employment protection compared to the other OECD countries, although due to poor law enforcement labour market has been de facto considerably more flexible than indicators showed (Eamets and Masso 2005). Politicians, employers, trade unionists and labour market experts have long debated over the need for a new act and there had been several failed attempts to reach an agreement, as views on act’s contents have differed.

This paper examines the process of implementation of the new Act as well as its implications for the Estonian labour market. It shows that its adoption can be divided into three stages: (1) First, the Ministry of Social Affairs introduced a new draft of Employment Contracts Act. As there had been no public discussion over it during the preparation period, the draft attracted widespread criticism. (2) Later on, unions and employers’ federations were involved in bargaining over some flexicurity-oriented changes. (3) When the economic crisis unfolded, however, the Government made one-sidedly some changes towards more flexibility, which were passed in Parliament despite trade unions and opposition parties’ objections.

The new Act has increased labour mobility, specifically the probability of involuntary transitions out of employment, yet not the probability of getting hired and moving from job-to-job (Malk 2014). The presentage of those registred as unemployed and recieving unemployment insurance benefits has remained low (Töötukassa 2015), and the proportion of employees engaged in training has remained constant. In addition, there are considerable problems with law enforcement (Masso et al. 2013).

Phase 1: New Government coalition and draft Act without tripartite negotiations

After Parliament elections in March 2007, a newly formed Government coalition consisted of the right-liberal Reform Party, right-conservative Pro Patria and Res Publica Union and the Social Democratic Party. The promise to modernise and to make the labour market more flexible and to implement a new Employment Contracts Act had reached into the coalition agreement. In January 2008 the Ministry of Social Affairs presented a new draft of the Employment Contracts Act that aimed to bring the labour law in line with the principles of private law, lessen administrative burdens, and was supposedly based on flexicurity approach. It gained considerable media attention because during the preparation period there had been no public discussion of it. Seemingly, the draft Act came as a surprise to all who did not belong to the Reform Party: neither the other coalition party members nor social partners were aware that the new draft is ready. According to the Head of Communication of the Estonian Trade Union Confederation (EAKL), EAKL was not aware that the Ministry was even preparing a new draft; in fact, it had been told that it was not doing so. According to the Ministry of Social Affairs, several consultations occurred during the preparation period of the act that included both trade unions and employers’ representatives, yet no negotiations over the contents of the act took place.

Compared to the Act in force, the new draft proposed easier dismissal procedures. Redundancy payments were lowered to one month’s average remuneration and advance notice periods before redundancy reduced to the minimum enabled by the European Social Charter. As a countermeasure, the draft proposed an increase in unemployment insurance benefits from 50% to 60% of previous average remuneration during the first 100 days. There were also other provisions that aimed to make a labour market more flexible. For example, signing fixed-term contracts became easier: before it was allowed only in certain circumstances (closed list), the draft stated that signing a fixed-term contract should be legal if there are compelling reasons to sign one.

The proposed Act was widely criticised. Several labour market experts wrote articles in daily newspapers explaining why the act cannot be considered as carrying the principles of flexicurity. Reelika Leetmaa (2008) from the Praxis Center for Policy Studies reminded that flexicurity does not only mean that hiring and firing should be easy, but also the concept emphasises an effective social security system, active labour market policy and life-long learning system – and in these three latter aspects Estonia lacks behind European Union (EU) average. Furthermore, she noted that although in Denmark – a country that was presented as an example to Estonia by the advocates of the new draft – employment relations are not highly regulated at the state level, trade unions have a strong influence there in setting additional guarantees to employees and this is not evident in Estonia. Social Democratic Party leaders were also negatively inclined towards the draft. The chairman of the party’s parliamentary faction, Eiki Nestor, for example, criticised the draft by emphasising that it sets minimum provisions required by the European Social Charter and it would not be desirable that Estonia gets a reputation as a country with the lowest labour standards possible. Taken together the negative feedback the draft Act got from different actors and interest groups the initial version was taken to the negotiation table.

Phase 2: Tripartite negotiations and flexicurity approach

From February to April 2008, both bipartite negotiations between the representatives of employers’ organisations and trade unions and tripartite ones between social partners and the Government’s representatives were held. Negotiations ended with a written agreement on the contents and further processing of the new Act. The ‘real flexicurity’ approach was something that all negotiating parties agreed on. Although employers and right-wing parties mainly stressed the aspect of easier hiring and firing possibilities for employers, at that time they were willing to support also grater social security for employees in case of redundancy.

The three negotiating sides agreed to loosen the regulation for dismissals. This included shortening the advance notice periods and decreasing the amount of money employers had to pay to employees in case of redundancy. Other aspects also made labour relations more flexible. For example, evening work was not compensated extra as before and signing fixed-term contracts became easier. The new draft did, however, state that those who become unemployed would be eligible to receive a greater amount of unemployment insurance benefits than before – these would have been raised from 50% to 70% from the previous average wage during the first 100 days of unemployment, and from 40% to 50% after that period (maximum period 360 days). Moreover, a wider range of unemployed persons would have become eligible to unemployment insurance benefits, also those who would determine their employment relationship voluntarily. Also, the duration of paid study leave was increased.

These latter aspects made trade unions more inclined to support the act. For example, the President of EAKL at that time, Harri Taliga, stated that they, i.e., trade unions’ representatives consider as a victory the fact that due to the new act those employees who determine their employment contract by mutual agreement with employer will also be eligible to unemployment insurance benefits. Still, the new version gained considerable negative feedback from the opposition parties. For example, they argued that the Act does not provide enough security to employees, there were not sufficient provisions to enhance (re)training of employees and parts of the Act are too abstract and thus enable divergent interpretations.

Despite these controversies, there was an agreement between social partners and the act was passed in Parliament in December 2008 and was supposed to enter into force in July 2009. At that time, economic crisis was already evident. Most notably the unemployment rate grew rapidly, reaching 7.6% in fourth quarter of 2008. Both trade unions and employers’ federations had made several recommendations to state representative for dealing with the economic downturn, but these recommendations went unheeded (Nurmela and Karu 2008).

Phase 3: Economic crisis and the elimination of security from flexicurity

In March 2009, Prime Minister Andrus Ansip announced the need to postpone the introduction of higher unemployment insurance benefits provided in the new Employment Contracts Act otherwise the Unemployment Insurance Board would run out of reserves by the end of the year. EAKL was strongly opposed, saying that in that case the whole Act should be postponed, not only the parts related to higher unemployment benefits. Employers, in turn, disagreed with postponing the enactment of the whole Act, claiming that should that happen, a massive wave of bankruptcy would ensue. Government ignored trade unions’ demand for starting new social dialogue over the Act’s contents and implementation that would correspond to changing economic situation. Members of one coalition party, the Social Democrats, were also against postponing only the ‘security part’ of the Act. This disagreement was one of the reasons why Social Democrats left the Government in May 2009. After that, the IRL and Reform Party – both representing right-wing ideology – continued as a minority Government. The coalition of the IRL and Reform Party proposed a new draft law to amend the Employment Contract Acts and other acts related to it. The latter stated that those persons who become unemployed voluntarily or by agreement between employer and employee would not be eligible for unemployment benefits until January 2013. Furthermore, it eliminated the previously agreed higher unemployment benefit rates.

There was a heated discussion over these planned changes both in the public sphere and in the political arena. Government’s main argument for the necessity of those changes was economic feasibility – it is just not possible to finance the previously agreed on unemployment benefits system, they claimed. Trade unions even organised a picket and a strike – not usual actions in Estonia – to protest against the last-minute changes the government one-sidedly made. About 1,800 people took part in the strike (Nurmela and Osila 2009). However, the protest actions did not bring any changes. Despite the opposition, the Parliament still passed those amendments in June 2009, with the ‘yes’ votes from Reform Party, IRL and some members of Estonian Greens.

It is notable that in 2012, the Reform Party and IRL coalition proposed new changes that eliminated eligibility for unemployment insurance benefits for those leaving a job voluntarily or with an agreement between employer and employee altogether. The Government argued that Estonia cannot waste Unemployment Insurance Fund reserves in this manner. These changes were passed in Parliament in May 2012.

Act’s implications for Estonian labour market

Malk (2014), who analysed Labour Force Survey 2007-2011 data, found that the new Act has increased reallocation of workers and the probability of involuntary transitions out of employment, but there are no significant effects on the probability of hiring. Also, the probability of job-to-job mobility has decreased. Malk (ibid.) hypothesized that the latter might be because employees perceive a higher risk of becoming unemployed and losing income because of the flexible law and therefore they are less willing to search for a new job.

The new Act aimed to make Estonian labour market less regulated and give employees and employers more freedom to agree on employment conditions that would meet their needs. However, as survey conducted in 2012 (Masso et al. 2013) indicates, generally employers determine all employment conditions unilaterally (about 60% of employees claims that), and not rare are cases when these conditions are even lower than minimum provisions that law stipulates. Collective agreements, that could provide additional guarantees for employees, are not widespread and their number has even dropped after 2008. Employees’ awareness of labour rights is also rather low, and even if they acknowledge that their rights are violated, they are reluctant to search for a help. Most employees would just do nothing or leave the job (ibid.).

According to the 2012 survey (ibid.) there are considerable number of cases where employees claim that they have resigned „voluntarily” because employer pressurized them to do that (over 10% of those who left the job voluntarily) or they have resigned because employer did not meet the conditions established in employment contract (about 1/5 of those who left the job voluntarily), however, those employees are not entitled to receive unemployment insurance benefits. Eligibility for unemployment insurance benefits is rather strict. In 2008 33%, in 2009 45% and in 2014 only 28% of newly registered unemployed persons received those benefits (Töötukassa 2015). Although the act also aimed to increase lifelong learning activities, the proportion of employees engaged in formal and professional training has remained largely the same as before (Masso et al. 2013).


About 15 years ago David Ost (2000) proposed that tripartism in Central and Eastern Europe (CEE) only gives a symbolic voice to labour without bringing any real gains. Hence it does not resemble West European-style neocorporatism that traditionally enabled labour to be involved in and benefit from the policy making. The current analysis confirms Ost’s claim about the existence of what he called ‘illusory corporatism’ by showing that inclusive labour policy making has not been characteristic to Estonia. Although the representatives of employers and labour may and even should submit their policy proposals, state representatives still argue that they know what is best for the country, and dominate the whole labour policy making process. This is not only in extraordinary times, i.e., economic crisis – the first draft Act was conducted when the economic situation was good and it was still done without substantive consultations, let alone negotiations.

The new Employment Contracts Act of 2009 has increased the reallocation of workers and the probability of involuntary transitions out of employment (Malk 2014) without simultaneously increasing workers’ security through social security system or life-long learning. In addition, even greater flexibility in Estonian labour market is achieved by circumventing the law, the lack of knowledge about regulations in force, and by the absence (or powerlessness) of trade unions. It is necessary to educate employees about their rights and strengthen law enforcement and surveillance.

The analysis also indicates that flexicurity might not be feasible policy solutions in countries where trade unions are weak and cannot defend the security part needed in order for flexicurity to function. In case of the considered act, it might be argued that negotiating parties’ belief in the necessity of flexicurity approach– recommended also by the EU as a win-win solution to both employers and employees – might have shaped unions’ demands but also limited their bargaining power. As one side of flexicurity is considered to be flexible contractual arrangements (including easy firing practices), it is difficult for trade unionists to argue for the need of secure employment relationships in Estonian context, even if other parts of flexicurity are not well developed and trade unions are mostly too weak to provide workers with additional guarantees – the security part – via collective agreements.

When the economy recovered, the Government still acted one-sidedly, diminishing some provisions they had promised beforehand only to postpone for some years. During the economic downturn Estonian Government took unilateral decisions in several other instances as well, similar evasion of social dialogue was also evident in other Baltic States (Woolfson and Kallaste 2011). This indicates that in the new post-2008 economy it is even more difficult for unions to bring any changes through social dialogue and thus they might consider other forms of activism for making themselves heard, like organizing and mobilising workers at a grassroots level.



Eamets, R., and Masso, J. (2005). The Paradox of the Baltic States: Labour Market Flexibility but Protected Workers? European Journal of Industrial Relations, 11(1), 71-90.

Töötukassa (2015). Estonian Unemployment Insurance Board webpage.  https://www.tootukassa.ee/eng/content/about-tootukassa/statistics-and-analysis

Leetmaa, R. (2008). Ühe jalaga paindlikkus. Postimees webpage, 16.01.2008. http://arvamus.postimees.ee/1748173/reelika-leetmaa-uhe-jalaga-paindlikkus

Malk, L. (2014). Relaxation of employment protection and labour reallocation. International Journal of Manpower35(6), 898-926.

Masso, M., Järve, J., Nurmela, K., Anspal, S., Räis , M. L., Uudeküll, K., Osila, L. (2013). Töölepingu seaduse uuring. Tallinn: Poliitikauuringute Keskus Praxis.

Nurmela, K. and Karu, M. (2008). Employers offer solutions on managing economic downturn. European Foundation for the Improvement of Living and Working Conditions. European Industrial Relations Observatory On-line.http://www.eurofound.europa.eu/eiro/2008/11/articles/ee0811029i.htm

Nurmela, K., and Osila, L. (2009). New labour law enacted despite strike initiative. European Foundation for the Improvement of Living and Working Conditions. European Industrial Relations Observatory On-line.http://www.eurofound.europa.eu/eiro/2009/07/articles/ee0907029i.htm

Ost, D. (2000). Illusory Corporatism in Eastern Europe: Neoliberal Tripartism and Postcommunist Class Identities. Politics and Society, 28(4), 503-530.

Woolfson, C. and Kallaste, E. (2011). ‘Illusory Corporatism “Mark 2”’ in the Baltic States. Warsaw Forum of Economic Sociology, 2(3), 51-72.

All links were checked on 19.01.2015.


Kairit Kall is a PhD Candidate at Tallinn University and the University of Jyväskylä.

Illustration: A sencil depicting Estonian former prime minister at one of the alternative places for gathering in Tallinn. Photo by Gintarė Matulaitytė

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