Disputes concerning the termination of an employment relationship and reconciliation in accordance with the Employment Contracts Act

An employer who has terminated an employee’s employment relationship in violation of the provisions of the Employment Contracts Act is liable to pay compensation to the employee. We work as experts in reconciliation situations, and we receive a certain deduction from the payable compensation.

In reconciliation under the Employment Contracts Act:

  • the employment relationship has ended without grounds or the employee has been laid off without grounds and
    • a court rules that compensation must be paid or
    • the parties agree on an amount of compensation in settlement.
  • The compensation that the employer must pay to the employee is generally up to 24 months of salary. A sum corresponding to 75% of the earnings-related unemployment benefits paid to the employee since the end of the employment relationship is deducted from the compensation. The employer pays the deduction to the Employment Fund.

The deduction is also made if the employee has received a basic unemployment allowance or labour market subsidy rather instead of earnings-related unemployment benefit. In such cases, the employer pays the deduction to Kela.
See chapter 12, sections 1, 2 and 3 of the Employment Contracts Act for more information.

The court rules on compensation

  • The court is obliged to examine whether the unemployment benefits that have already been paid will affect the compensation
  • In certain cases, the court may make a smaller deduction from the compensation than provided for by law or decide not to make a deduction altogether (Employment Contracts Act, chapter 12, section 3, subsection 2). The Employment Fund considers that the adjustment of a deduction should always be based on the facts of the matter, and the grounds for adjustment should be included in the decision.
  • A court handling a reconciliation matter must provide the Employment Fund and the unemployment fund that paid the benefit with an opportunity to be heard (Employment Contracts Act, chapter 12, section 3, subsection 3).
  • The court must order the employer to pay the amount deducted from the compensation to the Employment Fund and inform it of the legally valid ruling or decision in the matter (Employment Contracts Act, chapter 12, section 3, subsection 3).
  • Reconciliation also takes place in the case of compensation imposed for groundless lay-offs (Employment Contracts Act, chapter 12, section 3, subsection 5).

Request for a statement

The court must request the Employment Fund’s opinion on the deduction in accordance with chapter 12, section 3 of the Employment Contracts Act. The response period should be at least 21 days (three weeks). In addition to the request for a statement, we need the application for a summons, the defendant’s response, or alternatively, a summary prepared by a district court. We also need to know which fund has paid benefits. We will examine the following facts in the documents, among others:

  • When the employment relationship ended
  • How many months of pay the compensation demanded by the claimant corresponds to
  • Whether part of the compensation has been requested to be considered compensation for non-material damage
  • Whether the claimant has demanded an adjustment, or the reduction of the deduction paid to the Employment Fund

Settlement agreed by the employer and employee

The employer and employee can also make an agreement on the liability to pay compensation. Such agreements must specify the total amount of compensation agreed. The compensation must itemise the sum of lost emoluments due to unemployment that arose before the agreement was made. A deduction must be made from the compensation as provided for in chapter 12, section 3, subsections 1 and 2 of the Employment Contracts Act.

The following must be taken into consideration in the settlement:

  • The parties are jointly responsible for agreeing on the reconciliation of compensation paid for the groundless termination of an employment relationship and earnings-related unemployment allowance.
  • The employer is obliged to provide the Employment Fund with a copy of the signed settlement agreement and pay the deduction made from the compensation.
  • The Employment Fund will comment on draft agreements at the request of the parties and will commit to the comments provided.

Requesting comments on an agreement

The law does not require the Employment Fund to be asked for a comment on the agreement. In practice, however, the comment procedure reduces the need to make amendments to signed agreements, so we recommend that a comment be requested whenever an employment termination dispute is settled. We handle all agreement comment requests confidentially.

Send the draft agreement email to: tsl@tyollisyysrahasto.fi

Use the encrypted email service at https://secure.tyollisuusrahasto.fi.

Agreement template

The agreement or a separate attached clarification should include at least:

  • The parties to the agreement
  • The background and purpose of the agreement
    • The end date of the employment relationship
  • The terms and conditions of the agreement
    • The amount in euros of the total compensation and a clarification of how many months’ pay the total compensation corresponds to
    • The sum of lost emoluments included in the total compensation
  • Payment details for unemployment allowance and the unemployment fund that paid it
  • The period for which the unemployment allowance was paid and the accumulated data for this period
  •  Payment of the compensation
    • The proportion paid to the employee
    • The proportion paid to the Employment Fund, or the deduction pursuant to the Employment Contracts Act
    • If the deduction paid to the Employment Fund is smaller than stipulated by law or if no deduction is made, sufficient clarification on the grounds for adjusting or waiving the deduction
    • The order regarding the employer’s obligation to pay the deduction to the Employment Fund and to send a copy of the agreement to the Employment Fund
    • The due date for the payment to the Employment Fund
    • Penalty interest

Paying the deduction

We will send the employer an invoice when we have received the agreement or notice of the final judgment. In practice, we will send the invoice approximately two weeks after the agreement or judgment is delivered. The invoice is primarily sent to the employer’s e-invoicing address and secondarily to the postal address registered on the Business Information System.

If you would like to pay the proportion due to the Employment Fund before the invoice arrives or if you have any other questions about invoicing, call our service number.

Taxes and other statutory deductions

The deduction payable to the Employment Fund is a gross sum, and no unemployment insurance contributions are paid from the compensation payable to the employee. We recommend that issues related to the taxation of compensation paid to the employee and other statutory deductions should always be verified with the Tax Administration or other payment collector (such as a pension insurance company).

Instructions for reconciliation

Review period

The review period is the period for which the earnings-related unemployment benefits paid are taken into account in the calculation of the reconciliation of payments. The review period is relevant for the reconciliation of payments, as the unemployment benefits received by the employee are only taken into account for the review period. If the employee has not received benefits at all or has received benefits after the review period, no reconciliation is required.

As a rule, the review period begins on the day after the employment relationship has ended. The review period corresponds to the length of time for which the employee is paid compensation for the loss of emoluments due to groundless termination of the employment relationship.

If compensation is paid to the employee for non-observance of the notice period, the compensation postpones the review period for the duration of the notice period for which compensation is paid. The review period is also postponed if the employee has not lost emoluments due to the termination of the employment relationship, such as during a period of sick leave (Supreme Court 2016:70).

Example of the determination of the review period

Employer Oy terminated Eddie Employee’s employment relationship on 20 April 2017. Eddie contests the termination of the employment, and the court ordered the employer to pay Eddie

  • compensation equivalent to two months’ pay and
  • compensation equivalent to eight months’ pay for the loss of emoluments due to groundless termination of the employment relationship.

In this case, the calculated notice period is determined as the period from 21 April to 20 June 2017, and the review period is 21 June 2017 to 20 February 2018.

Reconciled unemployment benefits

When calculating the deduction paid to the Employment Fund, the benefits paid by an unemployment fund to the employee during the review period are taken into account. If the employee has received benefits from Kela instead of an unemployment fund, the deduction is paid to Kela.

The normal earnings-related allowance and also increased earnings-related components paid after 1 January 2014 are always counted as benefits to be reconciled. Expense allowance (EUR 9 or EUR 18 per day) payable for periods of employment promoting services  or mobility assistance is not taken into consideration when calculating the reconciliation. Daily allowances paid in or before 2013 may include other increased components that are not taken into account in the reconciliation.

Adjustment of deductions in court

A court may, if warranted by the amount of compensation, the employee’s financial and social circumstances, and the insult suffered by the employee, reduce the amount deductible from the compensation under the main rule or waive the deduction entirely.

Amount of compensation

A small or fairly small sum of compensation may be one of the factors taken into consideration when the court assesses the prerequisites for adjusting the deduction. The amount of compensation also affects the assessment of financial circumstances. If the employee receives a large sum in compensation, their financial situation will improve despite the statutory deduction.

Financial and social circumstances

As a rule, the financial and social circumstances of the employee must be so difficult as to make the reduction of the unemployment benefit according to the main rule unreasonable for the employee. The assessment of the employee’s financial and social circumstances may include evaluating the prolongation of unemployment, the number of mandatory obligations and the position of people living in the same household.

Insult

The termination of an employment relationship is almost always an insult towards the employee. The adjustment provision is not automatically applied, even if the termination of the employment relationship was insulting to the employee.

The insult suffered by the employee primarily affects the total amount of compensation and how it is distributed. If a proportion of the total compensation payable to the employee is compensation for non-material damage, it is our view that the adjustment of the Fund’s proportion cannot be justified by the insult experienced by the claimant.

Adjustment in a settlement agreement

Also when compensation is agreed upon between the parties in a settlement agreement, the deduction from the compensation can be smaller than stipulated in the Employment Contracts Act or, in some cases, no deduction is made at all. However, this depends on the prerequisites for the adjustment of the deduction in accordance with the law. If the deduction payable to the Employment Fund is smaller than stipulated by law or if no deduction is made, sufficient clarification on the grounds for adjusting or waiving the deduction must be recorded in the agreement or in a separate appendix to the agreement.

Obligation to specify the total compensation in the case of an agreement

The agreement must specifically state the total amount of compensation agreed, as well as the emoluments that the employee lost and that had arisen before the agreement was made. In other words, the agreement must specify the amount of material damage and any non-material damage subject to compensation so that the statutory deduction can be allocated to the correct compensation component.

The parties to the agreement must specify the components of the compensation in accordance with the actual circumstances. If the amount of non-material damage agreed on in the agreement is obviously disproportionate to what a court would rule in similar circumstances, this may be a circumvention of the law.

Material or non-material damage

When the amount of compensation is determined, the starting point is the amount of material damage suffered by the employee due to groundless termination of the employment contract. In the event of an insulting termination of the employment relationship, the insult should primarily be taken into consideration as a factor increasing the total amount of compensation.

Terminating an employment relationship can be considered an insulting action towards the employee. The parties to the agreement must be able to identify the matters that support compensation for non-material damage and communicate these to the Employment Fund. The amount of non-material damage is assessed on the grounds of how severely the groundless termination of the employment contract was targeted at the employee as a person and in what respect the employer has demonstrated a callous disregard of its obligations.

The most important factor affecting the compensation for non-material damage is the grounds for terminating the employment contract. If the employment relationship ended for any grounds other than financial and production-related grounds, compensation for non-material damage may be justified.

Page updated: 2/1/2019