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. A deduction from the compensation must be paid to the Employment Fund if the unemployment fund has paid the employee earnings-related daily unemployment allowance after the termination of employment. The deduction is also made from compensation paid for groundless lay-offs.
We work as experts in the reconciliation of the compensation paid in disputes concerning termination of employment and the unemployment allowances received by the employee.
Reconciliation under the Employment Contracts Act is carried out when a court rules that compensation for a groundless termination of an employment contract must be paid or when the parties to a dispute agree on an amount of compensation in settlement. As a rule, the compensation paid by the employer to the employee is no more than the amount corresponding to the employee's 24-month salary. A sum corresponding to 75% of the earnings-related daily unemployment allowances 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 basic unemployment allowance or labour market subsidy instead of earnings-related unemployment allowance. 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 employer and employee can also make an agreement on the liability to pay compensation for groundless termination of the employment contract. Such agreements must specify the total amount of compensation agreed. The compensation must specify the amount of the lost emoluments that arose prior to the conclusion of the agreement. 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 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.
Requesting comments on an agreement
The law does not require the Employment Fund to be asked for a comment on the agreement, but the Employment Fund comments on the draft agreements at the request of the contracting parties and commits itself to the agreement comments it has issued. 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.
Draft agreements, requests for comments and powers of attorney can be sent by email to: firstname.lastname@example.org. We recommend using the encrypted email service at https://secure.tyollisyysrahasto.fi.
Information required for agreement commenting
The Employment Fund needs the following information to deal with the matter. The information may appear either in the agreement or in a separate clarification:
The parties to the agreement
The employee's date of birth and the employer's Business ID
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
The nature of the compensation and the grounds for its payment
The unemployment fund that paid the unemployment allowance
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 court is obliged to examine whether the unemployment allowances that have already been paid will affect the compensation.
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).
Hearing of the Employment Fund
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, i.e. three weeks. In addition to the request for a statement, we need the application for a summons, the respondent’s response, or alternatively, a summary prepared by a court. The documents should include at least the following information:
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 claimed to be considered as compensation for immaterial damage
Whether the claimant has demanded an adjustment, or the reduction of the deduction paid to the Employment Fund
The unemployment fund that has paid unemployment allowance
Reconciliation according to the Employment Contracts Act is also carried out when compensation for groundless termination of employment is paid on the basis of an arbitration ruling. The arbitrator shall provide the Employment Fund and the unemployment fund that paid the unemployment allowance with an opportunity to be heard and request the Employment Fund's opinion on the deduction in accordance with chapter 12, section 3 of the Employment Contracts Act. The court must order the employer to pay the amount deducted from the compensation to the Employment Fund. In addition, the arbitrator must inform the Employment Fund of the legally valid arbitration ruling of the compensation for the groundless termination of the employment contract. The arbitration ruling must be delivered even if no deduction to the Employment Fund is made.
The above also applies to compensation for groundless lay-offs.
The reconciliation is also carried out on compensation for groundless lay-offs under chapter 12, section 1 of the Employment Contracts Act. Earnings-related unemployment allowances during groundless lay-offs are taken into account when calculating the proportion to be paid to the Employment Fund. The Fund's interpretation is that compensation paid during groundless lay-offs is, as a rule, compensation for the lost emoluments, unless the case contains special features.
Provisions on the termination of the employment relationship of an official of a municipality, a joint municipal authority, a wellbeing services county, or a social and health care group are laid down in the Municipal Officeholders Act (Officeholders Act). The Officeholders Act also contains provisions on the reconciliation of unemployment allowance and earnings not received.
Under section 45, subsection 1 of the Officeholders Act, the employer must pay the officeholder any earnings for regular working hours not received resulting from the unlawful termination of the officeholder’s employment relationship, from which, among other things, unemployment allowances paid to the officeholder are deducted. The employer must pay the Employment Fund 75 per cent and the unemployment fund that paid the benefit 25 per cent of the unemployment allowance paid to the officeholder.
The reconciliation provisions of the Officeholders Act will also apply when a dispute is settled by means of an agreement reinstating the municipal officeholder. In addition, the reconciliation provisions will be applied when paying the earnings of regular working hours not received as a result of unlawful lay-offs.
The State Officials Act does not provide for the reconciliation of unemployment allowance and earnings not received. Therefore, the unemployment allowance paid will not be deducted from the regular working hours paid retroactively by the employer, and no deduction will be paid to the Employment Fund or the unemployment fund.
The Act of the Officeholders of the Evangelical Lutheran Church contains provisions on a coordination procedure similar to that laid down in the Officeholders Act.
The Municipal Officeholders Act, sections 44 and 45 (in Finnish, not available in English)
The State Officials Act, section 55(3) and section 55 a (in Finnish, not available in English)
The Act of the Officeholders of the Evangelical Lutheran Church, Chapter 8, section 59 and 60 (in Finnish, not available in English)
We will send the employer an invoice when we have received the agreement or notice of the final judgement. 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 have any other questions about invoicing, you can contact the unemployment insurance contribution service number (see contact information here).
Taxation 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).
The review period is the period for which the earnings-related unemployment allowances paid are taken into account in the calculation of the reconciliation of payments in accordance with the Employment Contracts Act. The review period is relevant for the reconciliation of payments, as the unemployment allowances received by the employee are only taken into account for the review period.
As a rule, the review period begins on the day after the end of the employment relationship. 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 contract, i.e. material damage. In lay-off situations, earnings-related daily allowances are taken into account for the period of groundless lay-off.
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). The same applies, for example, to receiving parental allowance.
Example of the determination of the review period:
Employer Oy terminated Eddie Employee’s employment relationship on 20 April 2021. Eddie contests the termination of the employment, and the court ordered the employer to pay Eddie
compensation equivalent to two months’ pay for the notice period 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 2021 (2 months), and the review period is 21 June 2021 to 20 February 2022 (8 months).
When calculating the deduction payable to the Employment Fund, the unemployment allowances 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. However, the expense allowance (EUR 9 or EUR 18 per day) payable for periods of labour market measures, transition security allowance or commuting and relocation allowance is not taken into consideration when calculating the reconciliation.
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.
Also when compensation is agreed upon between the parties in a settlement agreement, the deduction from the compensation can be adjusted. However, this depends on the prerequisites for the adjustment of the deduction in accordance with the law. As a general rule, all prerequisites must be met in order to qualify the compensation to be adjusted. If the deduction payable to the Employment Fund is adjusted, 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.
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 allowance 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.
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. According to the preparatory work of the Employment Contracts Act, adjustment may be applied to termination of employment on financial or production-related grounds and to an individual dismissal, but it is emphasised in individual dismissals.
The insult suffered by the employee primarily affects the total amount of compensation and how it is distributed between compensation for material and immaterial damage. If a proportion of the total compensation payable to the employee is compensation for immaterial damage, it is our view that the adjustment of the Fund’s proportion cannot be justified by the insult experienced by the claimant.
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 immaterial 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 immaterial damage agreed on in the agreement is obviously disproportionate, this may be a circumvention of the law.
Material or immaterial 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 and it does not in itself constitute grounds for immaterial damage compensation. The parties to the agreement must be able to identify the matters that support compensation for immaterial damage and communicate these to the Employment Fund. The amount of immaterial 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 immaterial damage is the grounds for terminating the employment contract, and the small amount of compensation, for example, does not solely justify the compensation of immaterial damage.
When agreeing on compensation under chapter 12, article 2 of the Employment Contracts Act, the parties should clearly state in the text of the agreement the grounds on which the compensation to be paid to the employee is based. This is important because the unemployment fund will interpret the agreement independently from the point of view of the provisions on unemployment cover. If the nature of the compensation is unclear or contradictory, the unemployment fund may take accrual and recovery measures for the unemployment allowance received by the employee regardless of the interpretation made by the Employment Fund in the matter.
Contact information for the Employment Fund can be found on the Contact informationpage.