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Termination of Employment Contracts in Finland

1. Grounds for Termination

Pursuant to the general provision of the Employment Contracts Act in relation to terminating employment relationships, the termination of employment contracts always requires proper and weighty reasons. In addition to termination based on reasons arising from the employee, employment contracts may be terminated by the employer due to substantial and permanent reduction in the work to be offered either for financial or production-related reasons, or for reasons arising from reorganisation of the employer’s operations.

2. Collective Dismissals

Under the Finnish Employment Contracts Act, the employment may be terminated by the employer due to substantial and permanent reduction in the work to be offered either for (financial or production-related reasons or reasons arising from re-organisation of the employer’s operations.

However, an employment contract may not be terminated if the employee can be placed in, or trained for, other duties. This obligation to offer work covers all the employer’s operations, departments and offices and is extended to subsidiaries and other entities, if the employer exercises effective control over personnel matters in such entities.

If the employer regularly employs at least 20 employees in Finland, the Act on Co-operation within Undertakings is applicable. Pursuant to the Act, the employer is required to enter into co-operation negotiations with its employees or their representatives when planning measures that may lead to redundancies and prior to making any decisions.

If the employer has failed to comply with the obligations under the Co-operation Act, each employee who has been made redundant, laid-off or whose employment has been reduced to part-time may be entitled to an indemnity amounting to a maximum of EUR 34,140 depending on the level of the employer’s negligence to follow the correct procedure, the general circumstances of the employer, the length of the employment and the measures taken.

3. Individual Dismissals

An employment relationship may be terminated with notice for reasons attributable to the employee such as serious breach or neglect of obligations arising from the employment contract or law and having essential impact on the employment relationship as well as such essential changes in the conditions necessary for working related to the employee’s person rendering the employee no more able to cope with his or her work duties. The employer’s and the employee’s overall circumstances must be taken into account when assessing the proper and weighty nature of the reason.

Termination of the employment relationship with grounds attributable to the employee requires a prior written warning, unless the reason for termination is such a serious breach of the employee’s obligations that it would be unreasonable to require that the employer continue the employment relationship.

The employment relationship may be terminated by the employer with immediate effect only due to an extremely serious breach of the employee’s obligations.

Prior to terminating the employment on individual grounds, the employee shall be given an opportunity to be heard regarding the grounds for termination.

a. Is severance pay required?

Severance pay or other compensation to be paid in connection with a termination is not required by law, provided that lawful reasons for termination exist. However, the employer shall pay the employee his or her salary for the notice period and compensation for accrued but unused holidays as well as any unpaid commission or bonus.

4. Separation Agreements

The employer and the employee may mutually terminate the employment through a separation agreement. In general, a separation agreement includes some additional compensation for the employee in return for the employee waiving all claims based on the employment relationship or the termination of the employment relationship against the employer. The terms of the agreement are subject to the negotiations between the parties.

a. Is a Separation Agreement required or considered best practice?

Separation agreement is neither required nor regulated by law. Separation agreements may, however, be considered useful means for the parties to an employment relationship- especially for the employer in order to avoid any subsequent claims or disputes.

b. What are the standard provisions of a Separation Agreement?

The parties to the employment relationship and the background of the agreement are usually mentioned at the beginning of the agreement. The section on background usually includes a summary of the parties’ intentions and basic information regarding the employment relationship (e.g. the commence date of the employment and a description of the work duties of the employee).

The termination date of the employment relationship and the employee’s obligation to work should be stated precisely. Usually the employment relationship ends after a period of notice, but it can also be agreed that it ends immediately. The agreement usually includes provision on whether and to what extent salary for the period of notice, compensation for accrued but unused holidays as well as any unpaid commission or bonus is paid. The parties may additionally agree on a severance payment to be paid to the employee. Severance payment is not, however, required by law.

For avoidance of any disputes, the contents and the terms of the compensation to be paid to the employee (e.g. the amount and the payment date) should be clearly stated in the separation agreement. If deemed necessary, a provision on non-disclosure could also be included in the agreement.

c. Does the age of the employee make a difference?

An employer who terminates an employee, who has at the time of the termination reached the age of 56, may face indirect payment liabilities, as the employer may under certain circumstances be required to compensate a part of the employee’s unemployment benefits to the Finnish Unemployment Insurance Fund. The amount depends on the size of the employer and the employee’s future unemployment benefits. This indirect payment obligation (referred to as the “employer’s liability component”) may also arise also in a separation agreement whereby the employer can be considered to have contributed to the termination of the employment relationship. The employer’s liability component applies to the employers with a payroll exceeding an annually specified minimum level. The minimum level in 2016 is EUR 2,044,500.

d. Are there additional provisions to consider?

A separation agreement will prevent the employee from receiving unemployment benefits for a period of 90 days calculated from the termination date of the employment, as the employee will be deemed to have caused the termination.

5. Remedies for employee seeking to challenge wrongful termination

If the termination is deemed unlawful by a competent court, the employer will be ordered to pay compensation to the employee. The amount of this compensation could be up to 24 months total salary of the employee (also bonus and stock options may be regarded as a part of the monthly salary) depending on an overall assessment of the circumstances (employer’s situation and reasons for dismissal, duration of employment, duration of unemployment, age of the dismissed employee, chances to find employment and other comparable circumstances). The maximum compensation is 30 months salary for employee representatives enjoying special protection against dismissal.

For more information, please contact L&E Global.
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