To hire your first employee you have to do three things before their first working day: make a written employment contract with them, register their employment in the Tax and Customs Board's employment register, and get ready to withhold and declare taxes on their pay. Everything else — occupational safety, work rules, holiday planning — comes after these. The steps are below, in order.
First decide whether it is an employment contract
Before you get to the paperwork, be clear about which contract you actually need. If a person works under your direction, at a time and place you set, and is paid regularly for it, this is an employment relationship and it is governed by the Employment Contracts Act.
The title of the contract does not change its substance. If a contract is called a contract for work or a contract of mandate but is in fact an employment relationship, in a dispute it may be treated as an employment contract — with all the employer's obligations that follow from it.
A contract for work or a contract of mandate fits when a person does a specific job or provides a service independently and organises their own time. For example, building a website or a one-off repair. If you want someone to be at work every day at set times and follow your instructions, that is an employment contract.
1. Make a written employment contract
The Employment Contracts Act requires an employment contract to be in writing. A contract signed by hand on paper and one signed digitally are equivalent.
The contract must contain at least:
- the parties' details (the company's registry code, the employee's personal identification code and the addresses);
- the start date and whether the contract is open-ended or fixed-term;
- the position and duties;
- the place of work;
- the working hours;
- the pay, how it is paid and the payday;
- the length of the holiday;
- a reference to the notice periods for termination.
Keep one principle in mind: a term that puts the employee in a worse position than the law does is void, even if the employee has signed it. Annual holiday is at least 28 calendar days a year, and pay must be paid at least once a month. A contract cannot go below these.
Open-ended or fixed-term?
An employment contract is generally open-ended. A fixed-term contract may be made only when the temporary nature of the work justifies it — for example, seasonal work, a temporary increase in workload or replacing an absent employee. If the work is permanent, you cannot "try it out" with a fixed-term contract. That is what the probation period is for.
Full-time or part-time?
Full-time is 40 hours a week. If the employee works less, it is part-time work and the hours must be agreed in the contract. A part-time employee has the same rights as a full-time one: the same length of holiday and the same termination rules apply to them.
2. Agree on a probation period
The probation period can be up to four months. During it both parties can judge whether the cooperation works, and the contract is easier to end than later.
A probation period applies only if it has been agreed in the contract. If you want one, don't leave that point blank.
3. Register the employment before the first working day
The employment must be registered in the Tax and Customs Board's employment register before the employee starts work — not in the first week, and not when the first pay is paid. You can do this through e-MTA.
In the register you enter the employee's personal identification code, the start of the employment and the type of employment. When the employment ends, you enter the end date as well. Unregistered employment can lead to a fine and is one of the signs of envelope wages for the tax authority.
4. Get ready for the taxes
As an employer you must withhold income tax, the employee's unemployment insurance contribution and the funded pension contribution from the employee's gross pay. In addition you pay social tax and the employer's unemployment insurance contribution at your own expense.
The rates can change from year to year, and the funded pension contribution rate depends on the employee's own choice. Check the current rates on the Tax and Customs Board's website, not in an old table.
The taxes calculated on pay are declared on form TSD and paid by the 10th of the following month.
The basic exemption is deducted from pay only on the employee's written application. Ask for this application right at the start. Otherwise income tax is withheld on the whole amount and the employee only gets the difference back with their tax return.
5. Occupational safety and work organisation
The Occupational Health and Safety Act also applies to a company with one employee. In practice this means:
- drawing up a risk assessment of the working environment;
- instructing the employee before they start work;
- sending the employee for a health check if the risk assessment shows that the work may affect their health.
If you have work rules — for example, how to apply for holiday or how to report being ill — give them to the employee in writing and have them confirm that they have received them.
6. Think about the end at the start
An employer cannot simply end an employment contract by giving notice. They can do so only on the grounds named in the law, for example redundancy or when the employee materially breaches their obligations. An employee may terminate the contract by giving at least 30 calendar days' notice.
That is why it pays to use the probation period deliberately and to write the duties clearly into the contract. Then it is easier later to show what was expected of the employee.
Checklist
- Make sure it is an employment relationship.
- Draw up and sign a written employment contract.
- Agree on a probation period if you want one.
- Register the employment before the first working day.
- Ask the employee for the basic exemption application.
- Do the risk assessment and instruct the employee.
- Declare and pay the payroll taxes by the 10th of the following month.