11 min read
Estonia
Hire in Estonia with Confidence
Worksuite offers a whole range of professional services and compliance tools, making it easy to compliantly engage independent contractors in Estonia.
We work with the best legal partners in Estonia to create contract templates that are compliant with local laws to protect you and your contractors from fines and penalties.
Our bespoke onboarding workflows and screening questioners will help you determine the worker status in compliance with Estonian law, based on which you can decide to engage a worker as a contractor or full-time worker—all without needing to set up your business entity.
Contractor Classification in Estonia
Businesses hiring talent in Estonia should understand the legal distinction between independent contractors and employees. Misclassification of an employee as an independent contractor and vice versa may lead to fines or penalties imposed on businesses. It’s crucial to work with a partner like Worksuite when engaging workers abroad, in order to establish a compliant and legal hiring framework.
Estonian labor legislation does not include any specific laws that govern the relationship between a hiring organization and its employees (töötajad) or independent contractors (sõltumatud töövõtjad). A standard employment agreement indicates the traditional relationship between an employer and an employee/contractor. Under the Employment Contracts Act, if a person does work for another entity that, under the circumstances, can be expected to be done only for remuneration, it is presumed to be an employment contract.
Estonian labor laws follow the principles laid down in various international conventions and the country’s constitution. However, they are constantly subject to revision and policy changes. Worksuite can help employers automatically navigate rapid changes to ensure compliance.
Factors
Employee
Independent Contractor
Employment Laws
Employment contracts are regulated by Estonian labor legislation based on the Employment Contracts Act (Töölepingu seadus), as well as unique terms and conditions specified in employment contracts.
There are three types of employment contracts in Estonia:
- Permanent (Alaline tööleping)
- Fixed-term (Tähtajaline tööleping)
- Agency (Agentuuri tööleping
If the work duration exceeds 14 calendar days, or if it has a permanent character – employment contracts must be concluded in writing. This rule does not apply to agreements whose duration does not exceed 14 calendar days.
There is no requirement to draw up written contracts in Estonian.
No distinctive employment contract is required between an entity and a worker for the latter to be classified as an independent contractor. If an individual renders services to a third party for over 14 calendar days and gets paid for it based on an agreement, such an agreement is considered to be an employment contract. Hence, services rendered by independent contractors are still regulated by Estonian labor law.
Hiring Practice
Candidates are recruited externally through job boards and advertising. An applicant must submit their CV to the employer.
Applicants are entitled to get a net salary estimate (hinnanguline netopalk) and information on all deductions upfront during the hiring process.
Employers reserve the right to perform background checks during the hiring process.
Offer letters are not required, and they are not common in Estonia.
Once a decision has been made, the employer must notify the candidate and create an employment contract (tööleping). The following aspects must be collected and included:
- Full name
- ID number
- Residence information
- Employment start date
- Description of duties
- Job title
- Gross/net salary and contributions
- Employee benefits
- Work location
- Internal rules of the employer (if applicable)
Contractors are hired through professional employer organizations, an established digital private legal company, or directly. In Estonia, independent contractors are hired based on fixed-term employment contracts whose duration exceeds 14 days.
Contractors may be found via word-of-mouth, job boards, social networks, industry bodies, or other forums. Although hiring practices vary, the contractor may be asked to provide a CV, portfolio, and references, and possibly sign an NDA.
There is no limitation on the use of independent contractors.
Tax Documents
Employers are obliged to submit an income and social tax return (form TSD) online to the Estonian Tax and Customs Board (Maksu-ja Tolliamet) by the 10th day of each month. It must be followed by the remittance of withheld income tax, contributions to a mandatory funded pension, unemployment insurance payments, and social tax to the bank account of the Board on the same day as the return is filed.
Contractors file tax reports (maksuaruanded) online on their own by March 31 of each year.
Tax reports can also be submitted in person through a service bureau (Teenindusbürood).
Payer's Tax Withholding & Reporting Requirements
Employers must pay:
- A social tax of 33% of gross monthly salary for all employees, 20% of which is gross income tax (unless they are exempt from it) regardless of any pay rise, and 13% – health insurance
- An unemployment insurance tax of 1.6% of gross monthly salary for all employees
- Pension contribution of 2% of gross monthly salary for all employees born after 31 December 1982
Per diem allowances are not taxable if they are within a specific monetary limit. As of September 2022, a tax-free per diem rate for a business trip abroad is EUR 50 per day up to 15 days a month and EUR 32 for the rest of the month.
Companies registered in the Czech Republic are subject to 21% corporate value-added tax.
Remuneration paid to independent contractors is subject to a 20% monthly gross income tax.
Unless a contractor’s gross monthly income exceeds EUR 2,160, the contractors are exempt from paying and reporting a gross income tax. The same rule also applies to employees.
Residents with an annual income of EUR14,400 or less enjoy a basic personal
allowance of EUR6,000. Residents with an annual income above EUR14,400 are entitled to a deduction calculated as per the formula: 6000 – 6000 / 10,800 x (amount of income – 14,4000).
No taxes on commercial transactions apply.
Remuneration
There is no universal payroll rule and schedule in Estonia. Employers are generally expected to pay their staff once a month unless different contractual terms & conditions apply.
- Through invoices regularly issued to companies directly by contractors by the end of the month. It is encouraged, but not legally enforced, to provide consistent compensation in euros (EUR). Payments become due after the contractor issues an invoice.
- Through outsourced wage processing providers
The frequency of remuneration is to be agreed upon by an employer and a contractor.
Workers’ Rights
In Estonia, employees enjoy the following rights:
- Annual leave – 28 days
- Sick leave – 182 days, paid at 70% of an employee’s salary paid from the fourth until the eighth day of illness
- Maternity leave – 140 days
- Paid parental leave – up to 435 days
- Paternity leave – 10 days
- Education leave – 20 days
- Childcare leave – 6 days per month
- Adoption leave – duration negotiated
- Double pay in case of working on a public holiday
- Severance pay – an average of the previous 6 months’ salary for employees who have been employed for less than 5 years; a full monthly salary for those who have been employed for 5-10 years; two full monthly salaries for those who have been employed for over 10 years
- Overtime – additional time-off or payment at a rate of 150% of normal hourly pay
Independent contractors are legally entitled only to severance pay. In the event of early termination of the contract without notice, contractors are entitled to the wages that they would have received until the date of termination of the contract.
Benefits
All employees must have unemployment insurance, which the employer is required to pay for. Pension and health insurance contributions are deducted from employees’ salaries and are paid by employers. Employees may be granted additional internal benefits not otherwise governed by labor laws.
No benefits are granted to contractors. Third-party benefits granted by professional employer organizations may apply when an independent contractor is hired through such organizations (i.e., an umbrella company) and is considered their employee.
When Paid
Last business day of each month, unless otherwise determined by the employment contract.
Typical contractor invoices are issued monthly on net 30-day terms. Each invoice usually includes the following details:
- Invoice number and date
- The client’s name and address
- The contractor’s bank details
- Agreed payment terms and due date
Employee
Employment Laws
Employment contracts are regulated by Estonian labor legislation based on the Employment Contracts Act (Töölepingu seadus), as well as unique terms and conditions specified in employment contracts.
There are three types of employment contracts in Estonia:
- Permanent (Alaline tööleping)
- Fixed-term (Tähtajaline tööleping)
- Agency (Agentuuri tööleping
If the work duration exceeds 14 calendar days, or if it has a permanent character – employment contracts must be concluded in writing. This rule does not apply to agreements whose duration does not exceed 14 calendar days.
There is no requirement to draw up written contracts in Estonian.
Hiring Practice
Candidates are recruited externally through job boards and advertising. An applicant must submit their CV to the employer.
Applicants are entitled to get a net salary estimate (hinnanguline netopalk) and information on all deductions upfront during the hiring process.
Employers reserve the right to perform background checks during the hiring process.
Offer letters are not required, and they are not common in Estonia.
Once a decision has been made, the employer must notify the candidate and create an employment contract (tööleping). The following aspects must be collected and included:
- Full name
- ID number
- Residence information
- Employment start date
- Description of duties
- Job title
- Gross/net salary and contributions
- Employee benefits
- Work location
- Internal rules of the employer (if applicable)
Tax Documents
Employers are obliged to submit an income and social tax return (form TSD) online to the Estonian Tax and Customs Board (Maksu-ja Tolliamet) by the 10th day of each month. It must be followed by the remittance of withheld income tax, contributions to a mandatory funded pension, unemployment insurance payments, and social tax to the bank account of the Board on the same day as the return is filed.
Payer's Tax Withholding & Reporting Requirements
Employers must pay:
- A social tax of 33% of gross monthly salary for all employees, 20% of which is gross income tax (unless they are exempt from it) regardless of any pay rise, and 13% – health insurance
- An unemployment insurance tax of 1.6% of gross monthly salary for all employees
- Pension contribution of 2% of gross monthly salary for all employees born after 31 December 1982
Per diem allowances are not taxable if they are within a specific monetary limit. As of September 2022, a tax-free per diem rate for a business trip abroad is EUR 50 per day up to 15 days a month and EUR 32 for the rest of the month.
Companies registered in the Czech Republic are subject to 21% corporate value-added tax.
Remuneration
There is no universal payroll rule and schedule in Estonia. Employers are generally expected to pay their staff once a month unless different contractual terms & conditions apply.
Workers’ Rights
In Estonia, employees enjoy the following rights:
- Annual leave – 28 days
- Sick leave – 182 days, paid at 70% of an employee’s salary paid from the fourth until the eighth day of illness
- Maternity leave – 140 days
- Paid parental leave – up to 435 days
- Paternity leave – 10 days
- Education leave – 20 days
- Childcare leave – 6 days per month
- Adoption leave – duration negotiated
- Double pay in case of working on a public holiday
- Severance pay – an average of the previous 6 months’ salary for employees who have been employed for less than 5 years; a full monthly salary for those who have been employed for 5-10 years; two full monthly salaries for those who have been employed for over 10 years
- Overtime – additional time-off or payment at a rate of 150% of normal hourly pay
Benefits
All employees must have unemployment insurance, which the employer is required to pay for. Pension and health insurance contributions are deducted from employees’ salaries and are paid by employers. Employees may be granted additional internal benefits not otherwise governed by labor laws.
When Paid
Last business day of each month, unless otherwise determined by the employment contract.
Independent Contractor
Employment Laws
No distinctive employment contract is required between an entity and a worker for the latter to be classified as an independent contractor. If an individual renders services to a third party for over 14 calendar days and gets paid for it based on an agreement, such an agreement is considered to be an employment contract. Hence, services rendered by independent contractors are still regulated by Estonian labor law.
Hiring Practice
Contractors are hired through professional employer organizations, an established digital private legal company, or directly. In Estonia, independent contractors are hired based on fixed-term employment contracts whose duration exceeds 14 days.
Contractors may be found via word-of-mouth, job boards, social networks, industry bodies, or other forums. Although hiring practices vary, the contractor may be asked to provide a CV, portfolio, and references, and possibly sign an NDA.
There is no limitation on the use of independent contractors.
Tax Documents
Contractors file tax reports (maksuaruanded) online on their own by March 31 of each year.
Tax reports can also be submitted in person through a service bureau (Teenindusbürood).
Payer's Tax Withholding & Reporting Requirements
Remuneration paid to independent contractors is subject to a 20% monthly gross income tax.
Unless a contractor’s gross monthly income exceeds EUR 2,160, the contractors are exempt from paying and reporting a gross income tax. The same rule also applies to employees.
Residents with an annual income of EUR14,400 or less enjoy a basic personal
allowance of EUR6,000. Residents with an annual income above EUR14,400 are entitled to a deduction calculated as per the formula: 6000 – 6000 / 10,800 x (amount of income – 14,4000).
No taxes on commercial transactions apply.
Remuneration
- Through invoices regularly issued to companies directly by contractors by the end of the month. It is encouraged, but not legally enforced, to provide consistent compensation in euros (EUR). Payments become due after the contractor issues an invoice.
- Through outsourced wage processing providers
The frequency of remuneration is to be agreed upon by an employer and a contractor.
Workers’ Rights
Independent contractors are legally entitled only to severance pay. In the event of early termination of the contract without notice, contractors are entitled to the wages that they would have received until the date of termination of the contract.
Benefits
No benefits are granted to contractors. Third-party benefits granted by professional employer organizations may apply when an independent contractor is hired through such organizations (i.e., an umbrella company) and is considered their employee.
When Paid
Typical contractor invoices are issued monthly on net 30-day terms. Each invoice usually includes the following details:
- Invoice number and date
- The client’s name and address
- The contractor’s bank details
- Agreed payment terms and due date
Who classifies as an Independent Contractor in Estonia?
Self-employment as an independent contractor is a popular income model for many individuals. Estonia’s highly educated workforce, combined with the government’s support for innovation, has prompted many organizations to hire independent contractors from this country. Moreover, an increasing number of Estonian independent contractors, especially those involved in the IT sector, prefer working as contractors for tech giants around the world. The affordable cost of outsourcing and an absence of bureaucracy are the two aspects that satisfy both companies and contractors.
No independent contractor agreement as such exists in Estonia. Services rendered by independent contractors are based on fixed-term employment contracts that do not offer benefits enjoyed by full-time employees. As a result, disputes between independent contractors and employers are handled by Estonian labor courts.
- Who is an Independent Contractor?
According to Estonian labor legislation, if a worker continuously provides services to a single or multiple third parties for over 14 calendar days and gets paid for it based on an agreement that specifies the duration of the work, they are classified as independent contractors. Such an agreement is considered to be a fixed-term employment contract.
A fixed-term contract indicates a one-time engagement whereby a party agrees to provide a defined piece of work for a set amount of money for a specified period of time. In Estonia, such contracts can be concluded only when the temporary nature of the work to be carried out by the employee can be proven by the employer.
Contracting Models
Estonian labor legislation does not define different types of independent contractor agreements. The character of an agreement, terms, and duration of the work, as well as the presence or absence of benefits, determine whether or not a worker must be considered an independent contractor.
Below are the primary aspects, among others, that constitute labor relations in Estonia:
- An individual performing service(s) to another entity in a continuous and specified manner
- An entity organizing the provision of services (via official orders, rules, and guidelines)
Engagement Models
There are two primary engagement models for working with independent contractors in Estonia.
A. Direct engagement of the worker as self-employed. Under this model, the hiring company engages directly with the independent contractor and draws up an agreement for the provision of services. The hiring company then pays the independent contractor directly.
In Estonia, a legal entity can be established online, provided that a company has a registered address in Estonia (which can be obtained through a business service provider), and a CEO has a European Union ID or an Estonian e-residency. If a company establishes a legal entity in Estonia, it will be obliged to submit tax reports to the Estonian authorities.
B. Umbrella company. Firms operating under Employer of Record services in Estonia are often split into two categories but both are essentially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.
- Staffing agency: Some contractors may work under an umbrella company. In this case, the contractor is responsible for finding and performing their work, but they are an employee of the umbrella company, which manages payroll and applies an administration fee on the contractor’s earnings.
- Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and make payments to them.
Contractor Payments
Independent contractors typically get paid upon issuing an invoice on net 30-day terms to the employer at the end of each month. Payments are made through direct deposits to their bank accounts or any other preferred methods stipulated in a contractor agreement.
Alternatively, companies may partner with wage processing providers. They can process wage calculations, prepare tax statements, and make deposits and withdrawals for contractors.
Terms, conditions, and frequency of payments can be settled between a contractor and an employer. Currencies other than the euro are permitted but not widely accepted in Estonia, and they are subject to fluctuating exchange rates, which may have an impact on a contractor’s paycheck.
If you work with a hiring partner like Worksuite, it becomes significantly easier to streamline contractor payment processes. A dependable partner can help you hire your contractors legally and pay them quickly, accurately, in euros, and in a way that complies with Estonian regulations.
Contractor Taxes
Independent contractors in Estonia are responsible for reporting and paying gross income tax. They are not subject to mandatory health insurance, unemployment insurance, and pension contributions.
Gross Income Tax in Estonia
A flat-rate 20% tax on gross earnings that applies to self-employed people is the gross income tax. In Estonia, it is imposed on the gross monthly income that exceeds EUR 2,160. A basic personal tax allowance is the amount of income each individual is entitled to receive free of tax each year. In Estonia, it is EUR 6,000 for individuals whose gross annual income does not exceed EUR 14,400. In addition, both employees and contractors in Estonia, whose income exceeds EUR 14,400 may claim an annual tax deduction using the following formula:
6,000 – 6,000 / 10,800 x (sum of gross annual income – 14,400) = total tax deduction
In Estonia, independent contractors are obliged to submit their annual tax reports by March 31 of each year either online or through a tax service bureau. Tax reports must be completed only in Estonian.
Taxes on commercial transactions do not apply to payments made to independent contractors.
