The recent judicial decision demonstrates that conclusion of an agreement on compensation for damages, caused by an employee, involves risks because the employee may subsequently be released from this commitment. A more secure way of getting compensation for damages is to submit a respective claim to the labour dispute committee or a court of law.

Rando Maisvee, Partner of Eversheds Sutherland Ots&Co, admits that according to the recent decision of the Supreme Court (3‑2‑1‑178‑16) an agreement on compensating for damages caused by an employee entails certain limits. Rando Maisvee specifies: “One can conclude from decision that under the effective Employment Contracts Act employers cannot agree with employees on paying for damages caused by the employee or on setting up a payment schedule while the employment contract is still effective. An agreement on compensation for damages may only be entered into after the employment contract has terminated; regrettably the reality shows that reaching such an agreement with the employee is extremely complicated.”

In the dispute in question the employee explained that they had released a product to an acquaintance without having received payment for it. After that the employment contract was terminated by an agreement of the parties, the parties signed an acknowledgement of the obligation, an agreement on paying the amount owed in instalments, and the employee gave their consent to withholding the amount owed from the final settlement. However, during the court proceedings the employee alleged that on the day when these agreements were signed, four members of the management board came to their office, informed them of the deficit, and, under a threat of initiating criminal proceedings, demanded that these agreements be signed. Maisvee added that in the court’s opinion the acknowledgement of the obligation was null and void, because it contained terms and conditions that were inferior to those set out in the Employment Contracts Act.

In the opinion of Rando Maisvee the recent decision of the Supreme Court is yet another example of how the currently effective Employment Contracts Act affords employees better protection than the previous more formal Act. Thus for instance, the judgment of the Supreme Court passed on 30.11.2010 based on the previous Act leads to conclude that an agreement entered into upon the termination of the employment contract does not constitute a part of the employment contract, and that the limitations stemming from the Employment Contracts Act do not apply to such agreement; essentially this means that under the previous Act it was possible to agree on compensation for damages, while the new Act does not provide this option.

Employers should take into consideration that

  • The possibility to claim compensation for damages under an agreement is limited.
  • Damages can be compensated under an agreement if the agreement is signed after the employment contract has terminated; however in real life it is very difficult to conclude such agreement with the employee.
  • Damages can be compensated under an agreement if before the damage was caused the parties have signed a proprietary liability agreement, which includes, inter alia, the obligation to pay the employee a compensation.
  • An employee may be charged interest on arrears only at the rate set forth by law, which currently stands at 8% per annum.
  • In the opinion of the Supreme Court, the Employment Contract does not give the employer a possibility to claim compensation for collection costs, and therefore the employers are in a disadvantaged situation in this respect as well.

More information about the decision: