The Supreme Court of Estonia has recently ruled that the Employment Contracts Act (the “Act”), which does not provide for reinstatement as a remedy to employees that have been unlawfully dismissed, is constitutional, and that the Act entitles such employees to seek compensation much higher than the customary amount of three months’ average wages.
The Act states that the termination of an employment contract is void when the employee is dismissed without a valid reason. However, in most cases no reinstatement will follow once the court or the labor dispute committee (collectively, the “Court”) has established the absence of a valid reason. The Court shall, upon the request of the employer (or the employee), itself terminate the employment contract as of the time when it would have expired in the case of valid dismissal. The Act provides only one exception to the rule, protecting employees who were pregnant or had the right to pregnancy or maternity leave or had been elected as the employees’ representative at the time of dismissal. In these cases the Court shall not satisfy the employer’s request for termination and the employment relationship shall continue, unless it is not reasonably possible considering mutual interests.
The Act provides that the employee is entitled to three months’ average wages as compensation for unlawful dismissal, but at the same time grants the Court the right to change the amount of the compensation, depending on the circumstances of the case and the interests of both parties. In practice, the customary position of the courts has been to award the employee three months’ wages without any analysis of the actual damage suffered by the employee due to the unlawful dismissal.
In the last two years several cases have reached the Supreme Court which have a significant effect on the resolution of unlawful dismissal cases.
In 2014, the Supreme Court was asked to determine whether the Act, which does not provide for reinstatement as a remedy to employees that have been unlawfully dismissed, is compliant with the constitution of the Republic of Estonia. The Supreme Court found that the Act was compliant with the constitution as well as with the specific requirements of the European Social Charter that employees be provided with adequate compensation if they are dismissed without a valid reason. In 2015, the Supreme Court also confirmed that termination of a fixed-term contract by the Court, upon the request of the employer, is constitutional.
The Supreme Court also, however, explained that the compensation amount of three months’ wages stipulated in the Act is not an adequate compensation in most cases, but merely a minimum one which shall be awarded at the initiative of the Court, without any employee’s request even needed.
The Supreme Court has ruled that employees are entitled to seek full compensation for lost income from the date that the unlawful dismissal took place and the date of the termination judgment, less any wages received in new employment while the litigation was ongoing. In addition, compensation may even be awarded for unpaid wages after the lawful expiry of the employment contract and for non-financial loss (i.e., anxiety and/or stress).
Furthermore, the Supreme Court has said that the Courts are obliged to explain to the employees their right to seek full compensation of loss. The Supreme Court has also found that upon the request of the employee the Court may terminate the employment contract with the condition that it ends only upon payment of the compensation awarded to the employee.
These recent decisions of the Supreme Court have clarified that the previous customary compensation amount of three months’ wages awarded by the courts is not in most cases the adequate level of compensation for the unlawful dismissal. Consequently, employers should be aware that unlawful dismissal entitles the employees to seek full compensation of loss, including the wages not received during the litigation. The litigation may, however, last for a year or more. Therefore, it is wise to consult a lawyer and measure twice, cut once, before dismissing any employee.
