What Severance Pay Rules Must Employers Follow in Estonia?

Which Employees Qualify for Severance Pay?

• Employees whose employment is terminated by the employer for economic reasons, redundancy, or cessation of business generally qualify for statutory severance.
• Employees dismissed due to long-term incapacity for work or health reasons not caused by the employer may be entitled to a smaller statutory compensation.
• Employees on fixed-term contracts may qualify if the employer ends the contract early for reasons not related to the employee’s misconduct.
• Employees with at least five years of service gain access to additional benefits from the Estonian Unemployment Insurance Fund when terminated for economic reasons.
• Employees dismissed for serious misconduct or breach of duties typically do not qualify for statutory severance pay.
• Employees who resign voluntarily or mutually agree to end the contract usually only receive agreed benefits, not statutory severance.

What Are the Legal Timelines for Paying Severance?

In Estonia, you must pay statutory severance at the same time you settle the employee’s final wages, which is usually on the next regular payday after termination unless you agree on an earlier date. In practice, many employers pay severance on the last working day to avoid disputes and show good faith. The Employment Contracts Act requires that all employment-related payments be made promptly and no later than the due date agreed in the employment contract. If you delay payment, default interest can accrue, and the employee may bring a claim to the Labour Dispute Committee or court. To stay safe, align your internal payroll cutoffs so severance is calculated and approved before the final payroll run.

What Penalties Apply if Severance Is Not Paid Correctly?

If your company fails to pay severance correctly in Estonia, you risk financial, administrative, and reputational consequences. Employees can challenge the termination, claim unpaid amounts, and seek compensation for unlawful dismissal. Authorities and courts will look closely at whether you followed the Employment Contracts Act and documented your reasons for termination.

• Courts or the Labour Dispute Committee can order you to pay outstanding severance plus default interest.
• If termination is found unlawful, you may owe compensation of up to several months’ average wages.
• You may be required to reinstate the employee in some dispute outcomes if both parties agree.
• Legal and administrative costs can increase if the dispute escalates to court proceedings.
• Non-compliance can damage your employer brand and complicate future workforce reductions.

Does Outsourcing Employment via an EOR Change Severance Liability?

Using an Employer of Record (EOR) such as https://www.playroll.com/employer-of-record does not remove the need to follow Estonian severance rules, but it can shift who is the legal employer of record. In Estonia, the EOR is typically responsible for drafting compliant contracts, calculating severance, and executing payments under the Employment Contracts Act. However, your company still drives the business decisions behind terminations and must provide accurate reasons and documentation. If an employee challenges a dismissal, both your company and the EOR may be scrutinized for how the decision was made and communicated. A well-structured EOR agreement should clearly allocate responsibilities for severance calculations, funding, and dispute handling.

Be 100 Percent Compliant in Offering Severance with Playroll

Playroll helps your company navigate Estonia’s severance rules by embedding the Employment Contracts Act requirements into every local contract and termination workflow. Your team gets clear guidance on when severance is triggered, how to calculate it based on average wages and tenure, and what documentation is needed to justify economic or redundancy-based terminations. With local experts and standardized processes, you reduce the risk of misclassifying the reason for termination or missing a statutory payment.

Beyond calculations, Playroll coordinates timelines so severance is approved, funded, and paid together with final wages, whether you employ directly or via an Employer of Record. You gain a single dashboard to track offboarding steps, from notice periods to final payslips, while Playroll handles local filings and communication with affected employees. That way, your company can restructure or downsize in Estonia with confidence that severance is handled correctly, consistently, and on time.