Hire and pay employees in Estonia

Complying with labor and employment laws in Estonia

The backbone of Estonia’s workplace regulations is the Employment Contracts Act, which sets out the mutual rights and obligations of employers and employees. As part of the European Union, Estonia also integrates EU labor directives into its national framework, shaping rules around working time, equal treatment, and workplace safety.

For companies new to the Estonian market, the legal framework can feel complex—especially when you add in requirements around contracts, data privacy, collective agreements, and employee protections. You can simplify compliance by partnering with Rippling EOR, which offers expert HR support on Estonia’s labor laws and ensures your business follows both local regulations and EU directives.

Employment contracts in Estonia

An employment contract in Estonia is a legally binding agreement between an employer and an employee that sets out the terms of their working relationship. Under the Employment Contracts Act, these agreements must be in writing and include key details such as:

• The names, personal identification codes (or registry codes), and addresses of both the employer and employee
• The date the contract is signed and the employee’s start date
• A description of the employee’s duties and, if relevant, the official job title
• Salary details, including how pay is calculated, payment intervals, pay dates, and any taxes or withholdings
• Any other agreed benefits
• Working time arrangements
• The place where work will be performed
• Annual holiday entitlement
• Terms for advance notice of termination
• A reference to the employer’s work organization rules
• A reference to any applicable collective agreement

Employment contracts can be indefinite or fixed-term, with fixed-term agreements generally limited to five years. If you make any changes to contract details, you must provide them in writing within one month, and you must keep the contract for 10 years after it ends.

Labor unions in Estonia

Trade union influence in Estonia is relatively low, compared to other EU countries—about 7% of employees belong to a union. 

Estonia’s labor landscape is structured around industry, with most trade unions representing specific sectors, such as transportation or healthcare. Two major union confederations dominate the scene:

• Estonian Trade Union Confederation (EAKL): The largest confederation, representing primarily manual workers
• TALO: The smaller of the two, representing mostly non-manual workers

While union membership may be low, collective bargaining reaches about one-third of Estonia’s workforce, often extending benefits to non-union members through workplace agreements.

Employers should understand the potential for union influence in their sector, especially where collective agreements are more prevalent, and remain open to consultation when needed.

Mitigating permanent establishment risk in Estonia

A permanent establishment (PE) refers to a fixed place of business through which a foreign company carries out its operations in Estonia. Establishing a PE—such as through an office, branch, or dependent agent authorized to conclude contracts—can trigger Estonian corporate tax obligations. 

Estonia follows the OECD model when defining a permanent establishment. Under these guidelines, common PE triggers include operating from an office where core business is conducted or having someone who regularly concludes contracts on behalf of the company. Independent agents acting in their ordinary course of business typically do not create a PE.

If a PE is created, it’s taxed according to Estonia’s rules, with profits determined under the arm’s-length principle. Estonia avoids double taxation by exempting profits of PEs located in the EEA or Switzerland, and offering foreign tax credits for PEs in other countries. However, profits from a non-taxed foreign PE may be taxed in Estonia when distributed as dividends.

Practical ways to mitigate PE risk in Estonia include:

• Avoiding establishing a fixed place of business unless you intend to create a taxable presence
• Making sure individuals in a country do not habitually conclude contracts on the company’s behalf
• Documenting where key decisions and activities occur and limiting in-country work to preparatory or auxiliary functions
• Consulting with a local tax advisor to assess the risk of forming a PE inadvertently

Probationary period in Estonia

In Estonia, an employer and employee can agree to include a probationary period in the employment contract. This trial period allows both parties to assess the suitability of the role and the working relationship.

Under Estonian labor law, the probationary period:

• Cannot exceed four months from the employee’s start date
• Must be agreed upon in writing in the employment contract (it does not apply automatically)
• Allows either party to terminate the employment contract with 15 calendar days’ notice

The probationary period is counted as part of the overall length of service, meaning employees still accrue statutory rights such as paid leave during this time. Employers should use the trial period to provide clear feedback, training, and performance expectations, ensuring any decision to end the contract is well-documented and compliant with local labor rules.

Local laws in Estonia

In addition to the Employment Contracts Act, employers in Estonia must follow several core rules that shape day-to-day compliance—from data protection to equal treatment and pay. Knowing the full landscape helps you build trust with employees and avoid surprises as you scale.

Below are some Estonian laws that foreign employers should know:

• Data protection: Estonia applies the GDPR, supplemented by its Personal Data Protection Act (PDPA). Employers must process employee data lawfully, transparently, and securely, provide clear privacy notices, and respect employee rights such as access, correction, and deletion.
• Equal treatment and non-discrimination: Employers must prevent discrimination and promote equality under the Employment Contracts Act, the Equal Treatment Act, and the Gender Equality Act—covering direct and indirect discrimination and protecting employees who raise concerns.
• Workplace safety and health: Employment relationships are also governed by the Occupational Health and Safety Act. It covers workplace hazard prevention, employee safety obligations, and mechanisms for resolving employment disputes.

Worker classification and misclassification in Estonia: Contractors vs. employees

When you hire in Estonia, one of the first decisions you’ll make is whether to engage someone as a full-time employee or as an independent contractor. This choice impacts not only working arrangements but also tax obligations, benefits, and legal protections.

Getting the classification wrong can lead to significant compliance issues, from back payments of taxes and social contributions to legal disputes and penalties. Below, we outline the key differences between the two—and what’s at stake if you misclassify a worker.

Worker classification in Estonia: Key differences between contractors and employees

Consequences of misclassification in Estonia

Misclassifying workers in Estonia—labeling someone as an independent contractor when they should be classified as an employee—can expose your business to serious repercussions:

• Retroactive payments: Employers found guilty of misclassification may have to pay back taxes, missed social security contributions, pension contributions, and unemployment insurance.
• Legal claims and penalties: Misclassification also exposes employers to potential legal action, including claims before labor courts or committees. Consequences may include administrative penalties and damages of up to €3,200 for failing to register a worker as an employee, and up to €32,000 if misclassification involves a foreign employee.

To avoid these risks, carefully evaluate each working relationship using Estonia’s classification criteria, keep clear documentation, and consult local legal or HR experts when needed.

Wages and payroll in Estonia

Managing payroll is one of the most important—and complex—parts of expanding into a new country. Employers need to do more than simply calculate salaries and bonuses: They must also learn standard pay cycles, understand statutory withholdings, and comply with local employment laws in Estonia.

Here’s a breakdown of what employers should know about wages and payroll in Estonia.

Minimum wage in Estonia

As of January 1, 2025, Estonia’s statutory gross minimum wage for full-time work is €886 per month, or €5.31 per hour—an 8% increase from the previous year following collective negotiations.

Establishing wages above this baseline is common and recommended, especially in higher-cost regions like Tallinn or for senior roles. Many employers, therefore, offer rates significantly above the minimum to remain competitive.

Payroll frequency in Estonia

In Estonia, employers must pay employees at least once a month, typically by the last working day of the month. While cash payments are permitted, they are uncommon—most employers pay via bank transfer. They must also issue payslips after every payroll run, either in paper or electronic form, detailing gross earnings, deductions (such as taxes and social contributions), and net pay.

13th month pay in Estonia

Estonian labor law does not require employers to provide a 13th month salary or annual bonus. However, some companies choose to offer performance-based or discretionary bonuses as part of their compensation strategy, particularly in competitive sectors like IT, finance, and engineering. When such bonuses are agreed upon—either in the employment contract or in company policy—they become legally binding and must be paid according to the agreed terms.

Run payroll compliantly in Estonia

Running payroll in Estonia requires adherence to local tax, employment, and reporting obligations. Employers must calculate and withhold income tax, social tax, and unemployment insurance contributions, then remit these to the Estonian Tax and Customs Board by the due dates.

In addition to payroll processing, employers must keep accurate records, submit required tax filings, and ensure all wage payments comply with the Employment Contracts Act and relevant collective agreements. Because payroll compliance in Estonia can be complex—especially for companies hiring a global team—many businesses partner with an employer of record (EOR) like Rippling, which can manage payroll, benefits, and local compliance, freeing you to focus on scaling your operations.

Employer and employee taxes in Estonia

Understanding Estonia’s tax system is a critical step for any company looking to expand or hire there. Estonia follows a framework that combines domestic legislation with EU-level directives, overseen by the Estonian Tax and Customs Board (Maksu- ja Tolliamet). Employers are responsible for calculating and withholding the appropriate contributions from employee salaries, covering income tax, social security, and other statutory charges.

Estonia’s e-Residency program is often used by foreign entrepreneurs to set up and manage Estonian companies online. While e-Residency simplifies corporate administration—such as establishing a legal entity and accessing Estonia’s digital business environment—it does not exempt employers from their tax obligations. Businesses that hire employees in Estonia must still comply with local withholding, reporting, and payment requirements.

Here’s what employers need to know about handling taxes in Estonia.

Employer taxes in Estonia

Here are the mandatory employer payroll taxes in Estonia:

There is typically a minimum obligation to pay 270.60 euros per month for the social tax, even if there are no salary payments to the employee.

Employee taxes in Estonia

The following contributions must be deducted from employees’ paychecks as a percentage of their income: 

Estonian employees are also subject to a flat income tax rate of 22%. They can earn up to €654 per month tax-free, but this allowance decreases as income rises. Once an individual’s gross income surpasses €25,200 annually (€2,100 per month), the exemption no longer applies.

Penalties for not paying taxes in Estonia

Failing to comply with tax obligations in Estonia can lead to financial penalties and fines. The Estonian Tax and Customs Board may impose a non-compliance levy, which is capped at €1,300 for the first offense, €2,000 for the second, and up to €3,300 for repeated violations. In addition, if a company fails to submit required information on reportable cross-border arrangements, fines of up to €1,200 for natural persons (300 fine units at €4 each) or €3,200 for legal persons may be imposed.

To avoid these consequences, employers should ensure timely and accurate reporting of all payroll and tax information. Partnering with an EOR or local accounting firm can help companies stay compliant with Estonia’s detailed reporting requirements while reducing the risk of penalties.

Employee benefits in Estonia

In Estonia, employee benefits are a mix of legally mandated protections and competitive perks that employers often provide to stay attractive in the job market. From pensions and healthcare to voluntary add-ons like gym memberships or remote work options, understanding the full scope of benefits is key for compliance and talent retention.

Here’s a breakdown of both mandatory and optional employee benefits in Estonia.

Mandatory benefits in Estonia

Mandatory benefits ensure Estonian employees are supported with essential protections. In addition to paid leaves (covered in the next section), the following benefits are required:

• Pension:  Estonia’s pension framework consists of three pillars. The first pillar is the state pension, funded by the employer’s social tax, which guarantees basic retirement income and also covers incapacity and survivor benefits. The second pillar is a mandatory funded pension for those born in or after 1983, requiring employees to contribute 2% of their gross salary while the state adds 4% from the social tax; these funds are managed privately and paid out at retirement. The third pillar is voluntary, allowing individuals to make additional contributions to supplement their future income.
• Unemployment insurance: Both employers and employees contribute to unemployment protection. Employees contribute 1.6% of their gross salary, while employers add 0.8% of payroll. Benefits are available to those who have contributed for at least 12 of the previous 36 months, with the allowance providing up to 270 days if conditions are met.
• Healthcare: Public healthcare is provided through the Estonian Health Insurance Fund (EHIF) and is also financed by the employer’s social tax. Coverage is based on the solidarity principle, meaning contributions from employers ensure employees have equal access to medical care across the country. Employers or employees may also supplement this coverage with private health insurance.

Optional benefits in Estonia

To remain competitive in Estonia’s growing job market, many employers go beyond statutory requirements and offer additional perks. These benefits can help attract top candidates and improve retention, particularly in industries like technology where competition for talent is high.

Common optional benefits in Estonia include:

• Voluntary healthcare coverage: In addition to the public system, employees can access private healthcare or voluntary contracts with the Estonian Health Insurance Fund for extended coverage and dependents.
• Gym memberships and wellness perks: Employers often subsidize gym memberships, sponsor athletic events, or provide healthy in-office perks to encourage employee well-being.
• Workplace canteens: Larger employers, especially in tech, may offer catered lunches or discounted cafeteria options to support employees during the workday.
• Company cars and mileage reimbursement: Senior staff and sales roles may be provided with company cars, or employees may be reimbursed for private car use—up to €0.40/km, capped at €550 per month tax-free.
• Remote work flexibility: Telecommuting is increasingly popular, with many employers allowing employees to work from home if their role primarily requires a laptop and phone.

While not mandatory, these optional benefits play an important role in enhancing the overall employee experience in Estonia.

Working hours, overtime, and leave in Estonia

Managing working hours, overtime rules, and leave entitlements is one of the trickiest parts of global employment compliance. Each country has its own framework, and even minor mistakes can expose employers to costly risks. Estonia’s labor regulations are built around the Employment Contracts Act and EU directives, with a clear focus on protecting employee health, safety, and work-life balance.

Whether you’re hiring talent in Tallinn’s fast-growing tech sector or in smaller regional hubs, understanding Estonia’s approach to standard hours, overtime pay, rest periods, and leave is essential for staying compliant. Here’s an overview of the rules employers need to keep in mind.

Standard working hours in Estonia

In Estonia, the standard full-time workweek is eight hours a day and 40 hours per week, usually spread across five days. By law, the maximum standard working time over a seven-day period is capped at 48 hours on average. However, with the employee’s consent—and provided the agreement is fair—working hours can extend to an average of 52 hours per week.

Overtime laws in Estonia

In Estonia, overtime is defined as any work performed beyond the hours agreed in the employment contract. Overtime must generally be agreed upon by both employer and employee on a case-by-case basis, except in emergencies where the employer may require extra work to prevent damage to company assets. Importantly, certain groups—such as minors, pregnant employees, or those entitled to maternity leave—cannot be required to work overtime.

Compensation for overtime must be provided either through paid time off or at a rate of at least 1.5 times the employee’s regular wages. For employees on summarized working time arrangements, overtime is calculated at the end of the agreed calculation period.

Rest period and break laws in Estonia

Employees in Estonia are entitled to at least a 30-minute break during the workday after six hours of work, though employers may grant this earlier. This break is generally not counted as working time unless the nature of the job makes it impossible to stop work, in which case rest and meal breaks must be allowed during working hours.

Workers must also receive at least 11 consecutive hours of rest per day and a minimum of 48 consecutive hours of weekly rest (or 36 hours in cases of summarized working time).

Leave laws in Estonia

• Annual leave: Estonian employees are entitled to 28 calendar days of paid vacation leave per year. The leave accrues at 2.33 days each month, though the definite number can vary based on the role or the CBA (if one applies).
• Sick leave: The sick leave entitlement is up to 182 consecutive days per illness per year, paid at a rate of 70% of the previous year’s salary. Depending on the exact reason for the leave, the employer may have to pay sickness benefits from days four to eight before Health Insurance Fund payments kick in. In some cases, the Health Insurance Fund pays the benefit from the first or second day.
• Maternity leave: A pregnant employee is entitled to at least 20 weeks (140 days) of fully paid leave, covered by the Health Insurance Fund. Leave can be taken up to 70 days before the expected delivery date.
• Paternity leave: Fathers are entitled to 30 days of fully paid paternity leave (capped at three times the average gross monthly salary). They can take the leave in one part or several parts until the child turns three.
• Parental leave: Following maternity leave and paternity leave, parents can share up to 435 additional days of paid leave until the child turns three. While both parents are entitled to this leave, only one can be on leave at a time.
• Childcare leave: Each parent can take up to 10 days of paid child leave for each child ages 14 and under. The more children a family has, the more days of leave the parent can take.
• Adoption leave: Adoptive parents can take up to 70 days of paid leave within six months of the court ruling approving the adoption. 
• Study leave: Employees who are also students can take up to 30 days off per year. Only 20 of those days are fully paid; the remaining 10 are unpaid.
• Public holidays: Estonia celebrates 12 national holidays:
• New Year’s Day
• Independence Day
• Good Friday
• Easter Sunday
• Spring Day
• Pentecost
• Victory Day
• Midsummer Day
• Day of Restoration of Independence
• Christmas Eve
• Christmas Day
• Boxing Day

Work permits in Estonia

When hiring international talent in Estonia, it’s essential to understand the country’s visa and residence requirements. As the employer, you’re responsible for ensuring your candidates have the legal right to live and work in Estonia before they begin employment.

Since Estonia is part of the European Union, citizens of EU/EEA member states and Switzerland enjoy free movement and can work in Estonia with only registration requirements. Non-EU nationals, however, must apply for the appropriate work visa or residence permit. Failing to follow the correct legal steps can expose both employers and employees to penalties, delays, or even deportation.

Here’s what you need to know about Estonia’s work permit system.

Who needs a work visa in Estonia?

Citizens of the EU, EEA, and Switzerland can live and work in Estonia without a work visa. They only need to register as residents in the Estonian Population Register within the first three months of their stay and apply for an Estonian ID card within the first month.

For non-EU/EEA/Swiss citizens, a work visa is required to take up employment in Estonia. These visas are typically valid for up to one year. If the employee plans to stay longer, they must apply for a temporary residence permit, which extends their legal right to live and work in the country.

How long does it take to get a work visa in Estonia?

The processing time for an Estonian work visa is usually around 30 days, but this can be extended depending on factors like case complexity, political circumstances, or seasonal application surges (such as summer or holiday periods). Incomplete applications or requests for additional documentation can also cause delays.

If the employee plans to stay in Estonia for longer than a year, they will also need to apply for a temporary residence permit, which typically takes an additional two months to process after arrival.

Types of work visas in Estonia

Estonia offers several work visas and residence permits depending on the duration and type of employment. The most common ones for foreign employees include:

• D-visa: A long-stay visa that allows non-EU citizens to live and work in Estonia for up to one year. Employers must also register the employee with the Estonian Police and Border Guard Board.
• Temporary residence permit: Required for employment lasting longer than one year. These permits are valid for up to five years and can be renewed.
• Long-term residence permit: Available to individuals who have held a temporary residence permit for at least five years. Applications must be submitted at least two months before the temporary permit expires.
• EU Blue Card: For highly qualified non-EU workers with specialized skills. It grants residence and work rights in Estonia and provides easier mobility within the EU, as well as a faster route to long-term residence.

Termination and redundancy in Estonia

When building a team in Estonia, termination procedures may not be top of mind at the start—but overlooking them can cause major compliance risks later. Employment relationships in Estonia are regulated by the Employment Contracts Act, which sets clear rules around notice, severance, and valid grounds for dismissal. Employers must follow these rules carefully, as employees have the right to contest terminations if the process is not handled properly.

Here’s what you need to know about termination and redundancy in Estonia.

Does at-will employment exist in Estonia?

The concept of at-will employment—where either party can end the employment relationship at any time, for any reason, without notice—is common in the United States, but does not exist in Estonia. Employment relationships are strictly regulated under the Employment Contracts Act, which requires that terminations be based on legally valid grounds.

Employers may only dismiss employees for justified reasons, such as redundancy, incapacity, or misconduct, and they must provide written notice that explains the grounds for termination. Employees also retain the right to challenge dismissals in court if they believe the termination was unlawful.

Notice periods in Estonia

A notice period is the minimum time that an employer or employee must provide before ending an employment relationship. This ensures both sides have time to prepare for the transition—employees can look for a new job, and employers can plan for a replacement.

In Estonia, notice periods vary depending on who initiates the termination and the employee’s length of service. For employer terminations due to economic reasons or redundancies, the notice periods are as follows:

If an employee resigns, they must give at least 30 days’ notice to the employer.

Severance pay in Estonia

Severance pay is a form of compensation granted to employees when their role is terminated for reasons beyond their control, such as redundancy. In Estonia, employees who are made redundant are entitled to one month’s average salary, paid by the employer.

In addition, the Unemployment Insurance Fund may offer an additional payment equal to one or two months’ average salary, depending on the length of service. Severance payments are calculated based on the employee’s average earnings over the past six months, ensuring a fair reflection of recent income.

How to terminate employees compliantly in Estonia

Ending an employment relationship in Estonia requires careful adherence to the Employment Contracts Act. Employers must have a legal basis for dismissal, such as redundancy, the employee’s inability to perform duties, or misconduct. The termination must be provided in writing, include the reason for dismissal, and respect the statutory notice period, which varies based on the employee’s length of service.

Mishandling termination can expose employers to disputes, fines, or legal claims, so proper documentation and compliance are essential. For companies managing international teams, consulting with legal professionals can help navigate employment termination effectively. Alternatively, partnering with an employer of record in Estonia can simplify the process by ensuring every step meets Estonian labor laws and EU requirements—so you remain compliant from onboarding to offboarding.

FAQs about hiring in Estonia

Do I need a legal entity to hire employees in Estonia?

No, you can hire employees in Estonia without creating a local subsidiary by working with an employer of record (EOR). An Estonia EOR becomes the legal employer on your behalf, taking care of employment contracts, payroll, benefits, and tax compliance, while you continue to manage the employees’ day-to-day responsibilities. This approach helps you stay compliant with Estonian labor laws without the time and expense of setting up a local entity.

Partnering with an EOR like Rippling makes it easier to quickly access Estonia’s skilled talent pool, scale your global workforce, and minimize both compliance risks and administrative overhead.

How do I onboard employees in Estonia?

Successfully hiring in Estonia begins with a structured onboarding process that starts well before a new employee’s first day. Employers should begin by handling administrative requirements early, including background checks where relevant, and preparing a written employment contract that meets the standards of the Employment Contracts Act.

From there, the employee must be registered with the Estonian Tax and Customs Board for tax withholdings and social contributions, and enrollment with the Estonian Health Insurance Fund (EHIF) ensures access to healthcare. Finally, introducing employees to company policies, workplace procedures, and their team helps create a supportive and compliant work environment.

What is the difference between an independent contractor and an employee in Estonia?

In Estonia, the key distinction lies in the level of control and dependency within the working relationship. Employees work under the employer’s direction, typically have fixed working hours, receive a salary, and are entitled to statutory benefits such as paid leave, healthcare coverage, and pension contributions. Independent contractors, on the other hand, operate with greater autonomy: They set their own schedules, are paid per project or service, and handle their own taxes and social contributions.

Because Estonia places strong emphasis on correctly classifying workers, misclassifying an employee as a contractor can result in retroactive benefit entitlements, tax liabilities, and potential legal disputes.

How much does it cost to hire an employee in Estonia?

Beyond salary and recruitment expenses, employment costs in Estonia consist of mandatory social contributions. These include a 33% social tax (which covers pensions and health insurance) and contributions to unemployment insurance—0.8% paid by the employer and 1.6% withheld from the employee’s salary.

What is the annual leave entitlement in Estonia?

Employees in Estonia are entitled to a minimum of 28 calendar days of paid annual leave each year. Employers and employees can agree on additional leave in individual contracts or collective agreements, but the statutory minimum must always be honored.

What is always required when an employer terminates an employee in Estonia?

Termination of employment in Estonia must follow strict procedures set out in the Employment Contracts Act. Employers must:

1. Have a valid reason. Termination is only lawful if based on grounds such as redundancy, incapacity, or misconduct.
2. Provide written notice. The length of the notice period depends on the employee’s years of service, ranging from 15 to 90 calendar days.
3. Pay severance, if applicable. In cases of redundancy, employers must pay at least one month’s average salary.

Failure to comply with these requirements can expose employers to legal disputes, penalties, and compensation claims.

How does a US company pay employees in Estonia?

There are generally three ways a US company can pay an employee based in Estonia:

• Form a local entity and open a local bank account. This allows you to run payroll in Estonia directly, ensuring compliance with tax withholdings and social contributions.
• Partner with an employer of record (EOR). An EOR becomes the legal employer on your behalf and manages payroll, benefits, and tax compliance, while you handle the employee’s day-to-day role.
• Use a global payroll service. These platforms integrate payroll across multiple countries.

Disclaimer: Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.