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Termination of an Employment Agreement under the Finnish Law

posted 2 years ago

The Finnish employment law is based on the concept of contract employment, not at-will employment like, for example, in the United States. Henceforth, the parties of the employment contract cannot change the terms of the contract unilaterally, nor can the employer terminate the employment contract without valid grounds. The termination and cancellation of the employment contract are only possible in accordance with the Finnish Employment Contracts Act. If the employment contract is terminated without a valid reason under the Finnish Employment Contracts Act, the employee is entitled to claim compensation for the wrongful termination. The employee’s remedy is, however, limited to claiming compensation. Unlike in some jurisdictions like Sweden, in Finland, the employees cannot demand the reversal of the termination decision.

In this article, we examine the termination of employment agreement issues from the Employer viewpoint.

 

1. Termination by the employer and the difference between the fixed-term and indefinite employment contracts

In accordance with the Finnish Employment Contracts Act, there are four main options by which the employment contract can be ended by the employer:

  1. by cancelling the employment agreement during the trial period if the parties have expressly agreed on the use of the trial period;
  2. by terminating the employment agreement due to grounds related to the employee (‘individual grounds’);
  3. by terminating the employment agreement due to financial and production-related grounds (‘collective grounds‘); or
  4. by cancelling the employment agreement due to an extremely weighty cause.

In this regard, it is important to note that in Finland, employment contracts can be indefinite or fixed-term contracts. The main difference is that the fixed-term contracts come to an end without notice at the end of the fixed-term period in question. Fixed-term contracts cannot be terminated due to individual or financial grounds unless the parties have agreed expressly otherwise in the employment agreement. If no such agreement exists, the fixed-term agreement can only be cancelled if an extremely weighty cause exists.

As a quick note, it should also be addressed that the Finnish Employment Contracts Act also includes provisions on retirement age. Hence, the employer does not have to consider whether there exists valid ground for termination of the employee’s employment contract if the employee has reached the applicable pension age.

1.1Cancelling the employment agreement during the trial period

In Finland, the employer and employee may agree on a trial period of a maximum of six months starting from the beginning of the work. However, in a fixed-term employment relationship, the trial period may comprise no more than half of the duration of the employment contract, and in any event, may not exceed six months.

During the trial period, the employment contract may be cancelled by either party without any notice period. The employment contract may not, however, be cancelled on discriminatory or otherwise inappropriate grounds. Hence, the employer may not cancel the employment contract, for example, due to an employee’s pregnancy.

1.2Terminating an employment contract due to grounds related to the employee

An indefinitely valid employment contract may be terminated only if a proper and weighty reason exists. In Finland, a termination process must be planned carefully, since as a rule, a warning (amongst other requirements) must be given before employment is terminated on individual grounds. A warning – whether given or not – has an essential impact on the assessment as to the existence of legitimate grounds for termination.

Employees who have neglected or violated their obligations under the employment contract cannot be given the termination notice before the employer has given them a chance to correct their actions by cautioning them. Importantly, the employees must have a real opportunity to correct their behaviour as by giving the termination notice, the employer loses the right to terminate the employment only due to reasons referred in the warning.

Nonetheless, a warning is not always a prerequisite for terminating an employment contract. A situation where a warning is not needed may exist when the employee’s violation of the contract and his tasks is so severe that it would be unreasonable to require the employer to continue the employment. Similarly, case law provides that such exception may also apply in regards to employees holding managerial positions due to the high level of trust required from them. With this said, these situations are rather rare in Finland, and it is in most cases preferable to issue a warning at first.

When assessing the grounds for giving notice for reasons concerning the employee, the employer must find out whether it is possible to avoid terminating the employment contract by offering the employee other work. The obligation to offer other work does not, however, apply when the employee has violated his obligations so seriously that it cannot be considered reasonable for the employer to continue the employment relationship. However, if the reasons for termination are, for example, that the employee cannot perform his obligations anymore due to sickness, the employer definitely would have an obligation to offer other work if possible.

Even when the proper and weighty reason for termination exists, the employer must comply with the notice periods provided by the Finnish Employment Contracts Act, the employment contract in question or the Collective Agreement.

These notice periods vary from 14 days minimum to a maximum of 6 months. The employer has the obligation to provide payment from the notice period, even if the employee is released from his work obligation.

The prescribed periods of notice vary according to the uninterrupted duration of the employment relationship. The followings are the general notice periods that must be considered by employers:

Duration of employment

Notice Period

1 year or less

14 days

More than 1 year but no more that 4 years

1 month

More than 4 years but no more that 8 years

2 months

More than 8 years but no more that 12 years

4 months

More than 12 years

6 months

The notice periods remain the same regardless of whether the terminations are carried out due to production-related, financial, or employee-related grounds. The parties may agree on longer termination periods on the employment agreement. Some collective agreements extend the terminations periods as well.

1.3Terminating the employment agreement due to financial and production-related grounds

In accordance with the Finnish Employment Act, the employer may terminate the employment contract if the work to be offered has diminished substantially and permanently for financial or production-related reasons or reasons arising from the reorganization of the employer’s operations.

The financial or production-related grounds for termination do not generally exist if, before or soon after terminating an employment contract, the employer has hired a new employee for duties similar to those of the employee or employees to be dismissed. Similarly, the reorganisation of work does not in itself give rise to the termination right if the reorganisation has not led to a significant reduction in the work.

Before terminating the employment agreement due to financial and production-related grounds, the employer must examine whether there is equivalent work that could be offered to the employees to be dismissed. If no such work is available, employees shall be offered other work equivalent to their training, professional skill or experience. The employer does not have to take actions, for example, to change its business model for it to fulfil this obligation. However, the employer should examine whether it has equivalent work that it could offer. In general, the obligation to offer equivalent work has no territorial restrictions. However, it has been established in Finnish case law, in addition to being widely accepted in Finnish legal literature, that foreign subsidiaries do not have an obligation to offer equivalent or any other work in the parent company or other subsidiaries of the group to the employees to be dismissed.

1.4Cancelling the employment agreement

The employer is only upon an extremely weighty cause entitled to cancel an employment contract. Such a cause may be deemed to exist in case the employee commits a breach against or neglects duties based on the employment contract or the law. However, the breach must have an essential impact on the employment relationship in such a serious manner as to render it unreasonable to expect that the employer should continue the contractual relationship even for the duration of the notice period. The cancellation of an employment contract is effective immediately without a notice period.

The assessment of the right for cancelling the employment contract must always be done on a case-by-case basis. Nonetheless, generally, the employer has the right to cancel the employment contract, for example, if:

  1. the employee commits violent acts towards the employer or other employees;
  2. the employee discloses purposely employer’s trade secrets; or if
  3. the employee purposely or negligently fails to perform his duties even after receiving a warning on the issue.

Regards to the cancellation, the Finnish Employment Contracts Act explicitly states that the cancellation must be made within 14 days of the date on which the employer gained awareness of the existence of the grounds for termination.

 

2. Procedure for terminating the employment contracts in Finland

2.1The procedure to be adhered to if the employment contract is terminated due to individual grounds.

When the employer terminates the employment contract on grounds related to the employee, the employer must provide the employee with an opportunity to present his views concerning the grounds for termination before executing the termination.

The employer must issue the termination of the employment contract within a reasonable time after the employer has become aware of the existence of the grounds for termination. The reasonable time is addressed on a case-by-case basis, but generally, the reasonable time should not exceed few weeks. However, the Finnish Supreme Court has recently confirmed that the reasonable time can be even 3,5 months if the employee is trying to delay the termination by, for example, avoiding the scheduled meeting referred to in the previous paragraph.

The notice of termination of the employment contract must be given to the Employee in person. If this is not possible, the notice may be delivered by letter or electronically. Notice given by letter or electronically is deemed to have been received by the recipient at the latest on the seventh day after the date on which the notice was sent.

2.2Procedure to be adhered to if the employment contract is terminated due to production-related grounds.

When the employer considers termination due to production-related or financial grounds, the Act on Co-operation within Undertakings must be followed, if applicable. The said Act applies to companies that normally employ at least 20 employees, and the parties to co-operation are the employer and the personnel of the undertaking.

The co-operation procedure must be followed, and to commence such negotiations, the employer must issue a written proposal for co-operation negotiations at least 5 days beforehand. If the employer is considering serving notice of termination (similar obligations arise from lay-offs for over 90 days or the reduction of an employment contract to a part-time contract) for over ten employees, it must provide the employee representatives with any information available to it as follows:

  1. the grounds for the intended measures;
  2. the initial estimate of the number of terminations;
  3. a report on the principles applied to determine which employees must be served with a notice of termination; and
  4. a time estimate on the implementation of such terminations.

If the employer is considering serving notice of terminations for fewer than 10 employees, the employer may provide the aforesaid information to the employees concerned or to their representatives (if the employees have selected such representatives).

After having proposed negotiations concerning the intention to serve notice of termination to at least ten employees, the employer must provide the personnel group representatives with a report on a plan of action to promote employment. The employer must examine the available public employment services supporting employment together with the employment and economic development authorities. If the intended terminations affect under ten employees, the employer must present the principles of action according to which, the employer will support the employees’ independent efforts to apply for other work.

The co-operation negotiations must cover the grounds and effects, plans of action for promoting alternative employment, ways of limiting the number of people affected by the reductions, and alleviation of the consequences of the reductions on employees. The fulfilment time of the duty to negotiate varies from 14 days to 6 weeks depending on the number of notices of termination and the size of the employer. After the duty to negotiate has been fulfilled, the employer must provide a report on the decisions considered based on the co-operation negotiations. The report must state the employees whose contracts will be terminated and the estimated schedule of the planned reductions. As the procedure is highly regulated (for example, regarding the proper registering of the outcomes of the co-operation negotiations) and the employees are entitled to compensation merely based on the breach of procedural rules by the employer, the use of legal counselling is recommendable.

Where the Act on Co-operation within Undertakings does not apply (i.e., the employer normally employs fewer than 20 employees), the employer has no general obligation to negotiate with the employees before the termination of the employee agreements. However, the employer has a duty to explain when notice is given on production-related and financial grounds. The employer must, without delay, explain to the employee the grounds for and the alternatives to being given notice and the employment services available. The employer should inform the employees that it has considered all alternatives for the termination.

In the future, the employer may, in some cases, be obliged to offer work to a former employee. The employer’s re-employment obligation requires that:

  1. less than four months have passed since the termination of the employment relationship (However, if the employment relationship has lasted without interruption for at least 12 years prior to its termination, the re-employment period shall be six months.),
  2. the employer needs additional labour for similar tasks as those performed by the employee during the employment relationship, and
  3. the employee covered by the re-employment obligation still seeks work through the employment and economic development office.

 

3.Consequences of groundless termination of an employment contract

The amount of compensation is decided on the same basis regardless of whether the employment contract was terminated on inadequate individual or collective grounds, or the basis of a trial period, or general cancellation grounds.

The employer can be compelled to pay a lump sum compensation equivalent to 3–24 months’ salary in addition to the salary of the termination period. The maximum amount of compensation for shop stewards and elected representatives, however, can be the equivalent of up to a 30 months’ salary. The provision regarding minimum compensation cannot be applied to termination due exclusively to changes in the employer’s operating conditions (production-related or financial reasons, or termination in connection with a reorganizational procedure), or in cases where the employment contract has been cancelled based on the trial period or with inadequate cancellation grounds while nevertheless fulfilling the grounds for termination.

Various factors are considered when the court decides the amount of compensation, such as the Employee’s loss of income due to unemployment. The employer’s obligation to pay compensation remains the same even if the employee has received earnings related to unemployment allowance, basic daily allowance, or labour market support. However, in so far as the daily unemployment allowance or the labour market support can be deemed to have already compensated for the damage caused by the termination of the employment relationship, the employee is not entitled to receive compensation from the employer. A court may order the employer to pay a share of the compensation to an unemployment insurance fund or the Social Insurance Institution.

The amount of compensation is determined based on overall discretion, in which several factors are considered, which are not presented here. Usually, the amount is between 6–12 months’ salary plus legal costs of both parties, which in certain cases might exceed the amount of compensation to be paid to the employee.

 

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