How to Hire Your First Employee in Estonia: Contract, Employment Register and First Payroll

Until now your company has probably paid only one person: you, as a member of the management board. The first employee changes that. Paying yourself a board fee needs little more than a shareholders’ resolution. A salary brings in labour law: a written contract, a minimum wage, paid holiday and an employment register that must know about the person before their first hour of work. None of it is hard, and all of it is done online; what matters is the order. This guide walks through hiring your first employee in Estonia step by step, for a founder who has never been an employer here. It covers an employee who works in Estonia.

Who Counts as an Employee

The rules below apply to a person who works for your company under its direction, at set times and with its tools. That is an employee, whatever the contract is called. A specialist who delivers a defined result in their own way and at their own risk is a contractor under a contract for services. A contractor has no minimum wage or paid holiday, although the company still pays payroll taxes on the fee if the contractor is a private individual. A person who manages the company is a board member, paid under a board member agreement rather than an employment contract.

Two mistakes come up again and again. The first is paying a de facto employee on invoices, or through their own company, to save social tax; the Tax and Customs Board reclassifies such arrangements, and our guide to hidden employment relations explains the tests the courts apply. The second is putting the founder’s own pay on an employment contract. Only work clearly separate from management, say as a developer on the company’s product, can go on an employment contract alongside the board role.

Hiring an Employee in Estonia Step by Step

Estonia has no separate employer registration. Your company becomes an employer the moment it makes its first entry in the employment register and files its first payroll return. The steps below are in the order you need them.

1. Collect the employee’s data. You need their full name, Estonian personal identification code (isikukood, the 11-digit number every resident has), home address and bank account. A foreigner without a personal code applies for one at the Police and Border Guard Board or a local government office.
2. Sign the written employment contract. The Employment Contracts Act requires a written contract; the only exception is a job lasting no more than two weeks. It can be signed digitally or on paper, in any language the two of you understand, and the company keeps it for ten years after it ends. What it must contain is listed in the next section.
3. Register the employee in the employment register before they start. This is the step founders most often get wrong, and the one with a fine attached. The entry is made in e-MTA, the self-service portal of the Tax and Customs Board, and the register has its own section below.
4. Take the tax-free income application. The employer may deduct the €700 monthly basic exemption before withholding income tax only if the employee has handed in a written application. Without it, income tax is withheld on the whole salary.
5. Put the safety paperwork in order. Every employer with at least one employee must have a risk assessment of the working environment entered in the Labour Inspectorate’s self-service system and must instruct the employee on safety before they start. Where the assessment shows risk factors, and regular screen work counts, the employee also goes for a medical examination within four months of the start date. For an office job this is a short exercise.
6. Run the first payroll. Pay the salary at least once a month on the day named in the contract, withholding income tax, unemployment insurance and, if the employee has joined the funded pension, their pension contribution. By the 10th of the following month the company files the TSD, the monthly return that covers all payroll taxes, and pays them to the Tax and Customs Board.

What the Employment Contract Must Say

The Employment Contracts Act (töölepingu seadus, TLS) lists the data every written employment contract must contain. It names the parties, the start date, the job and its title, and the place of work. It states the gross salary with the pay day and method of payment, the working time, the length of annual holiday and of the probationary period, and the notice periods for ending the contract.

A few defaults are worth knowing before you fill those fields in. Full-time work is 40 hours a week, and the annual holiday is at least 28 calendar days. The law presumes a probationary period of four months unless you agree a shorter one or none at all, and during probation either side may end the contract with 15 calendar days’ notice. The salary is agreed gross and cannot be below the national minimum wage for full-time work, which the government sets by regulation and which stands at €946 a month.

Registering the Employee in the Employment Register (TÖR)

The employment register (töötamise register, TÖR) is a database kept by the Tax and Customs Board in which every employer records who works for it, on what basis and from which date. The entry is what the state uses to decide the employee’s health insurance, unemployment insurance and pension rights. That is why the law wants it in place before the work starts rather than after the first pay day. Under the Taxation Act, employment must be registered no later than the moment the employee begins work. A company that fails to do so, or does it late, risks a fine of up to €3,200.

For an employment contract the register asks for six things: the employee’s personal code, the type of employment, the start date, the job title, the address where the work is done and the rate of working time (1.0 for full-time, 0.5 for a half post and so on). A board member logs in to e-MTA with an Estonian ID card, e-Residency card, Mobile-ID or Smart-ID and either enters the data or grants an accountant the right to do it; our accountants make the entries for clients as part of payroll. The portal has an English interface, the entry takes a few minutes, and it can be made in advance with a future start date. If nobody can get into the portal in time, a simplified registration by phone or text message is allowed, to be completed in e-MTA within seven days.

The entry also starts the employee’s public health insurance. For someone not already insured, cover begins when a 14-day waiting period from the start date in the register has passed, and it continues for two months after the end date entered on termination.

What Your First Employee Costs

The salary in the contract is neither what the employee receives nor what the company pays. On top of the gross salary the company pays 33% social tax and 0.8% unemployment insurance, so the employer’s cost is the gross salary multiplied by 1.338. From the gross it withholds 22% income tax after the €700 basic exemption, 1.6% unemployment insurance and the employee’s funded pension contribution of 2%, 4% or 6%.

One rule catches part-time hires. Social tax is charged on at least a state-set monthly base of €886, so the company pays a minimum of €292.38 a month in social tax for each employee even when the salary is lower. Pensioners, students and a few other groups are exempt from this floor. The full calculation and the monthly TSD cycle are in our guide to payroll taxes in Estonia.

Hiring a Foreign Employee in Estonia

Estonian labour law applies to a foreign employee working in Estonia exactly as it does to an Estonian one, so the contract, the employment register and the taxes are the same. What differs is the right to work, and that depends on the employee’s citizenship.

Short-term employment can be registered for up to 365 days in a 455-day period; anything longer needs a residence permit, for which the employer usually first obtains the consent of the Unemployment Insurance Fund. The Police and Border Guard Board publishes the conditions of both procedures. An employee who works for your company from another country is a different case. Their salary is taxed where the work is done, and our guide to paying remote workers abroad explains what that means for the company.

Hiring Your First Employee With Eesti Firma

The first hire is where many founders stop doing their own bookkeeping: payroll adds a monthly deadline and a register that must be right before day one. Our accountants register the employee in the employment register, set up the deductions, calculate the net salary and employer’s cost each month and file the TSD. Our legal team drafts the employment contract, in English and Estonian where needed, and handles the short-term employment registration for a non-EU hire.

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