Labour laws and costs of hiring people in Finland might be very different from what you are used to. This article will give a quick overview on what you should know when thinking of employing people in Finland. Also check out our earlier article about starting a business in Finland.
Perhaps you already have an expanding business and you need more helping hands. Or you might be entertaining the idea of opening a brand new business, and you would need employees to make it work.
Moving from a one-man business into having employees can surely feel like a big leap in terms of responsibility and need to plan ahead. It is a very good idea to get a firm picture on the implications and costs of hiring workers, before actually doing so.
Hiring people is easy. Hiring the right people is a different matter.
Ways to employ people
There are 3 main ways of buying labour in Finland. Listed in order of flexibility, from lightest to heaviest:
1. Buying services or outsourcing
You probably didn’t hire a lawyer, janitor or deliveryman; you paid a company to provide you services. The same idea can be (within certain limits) expanded to your core business.
Say you are a programmer, and your services have more demand than you can provide alone. Perhaps you could get in touch with a smaller or part-time entrepreneur, to whom you could outsource a part of your work?
This option gives you a tremendous amount of flexibility. You have far-reaching freedom in your contracts, and you have next to zero employer duties.
The minus is that you will likely be paying a premium per actual hour of work. You also risk losing know-how if your subcontractor leaves your service.
The only thing you need to check when buying services from a business is if they are in the prepayment register (FIN: Ennakkoperintärekisteri). If they are, you can pay their invoices normally. If not, you need to withhold a part of the payment after VAT and declare the payment to the Incomes Register. In practice almost all companies are in the register.
Be aware that if the actual conditions of work are too much like normal employment, there is a chance that the Tax Administration could retroactively deem there to exist a normal employment relationship. In practice this is quite rare, but subcontracting cannot be used to circumvent labour laws. Having an “entrepreneur” doing 40 hours of waiter work at your restaurant could backfire.
2. Labour hire
Labour hire means that people are de jure workers at a labour hire agency, and the agency is their employer. You buy labour services from the agency, and the workers work as you direct them to. There is no limit to how much workers can work at your place.
The good side is that you don’t have to worry about implementing most labour laws (related to vacations, pay etc.). Of course worker safety and the like are still your responsibility, at least in part.
It might be very easy to increase or decrease the amount of labour you purchase, depending on your needs due to. e.g. seasonal shifts.
Of course due to the agency shouldering administrative duties and certain other burdens, you will be paying more per hour than you would if you employed someone directly.
3. Hiring directly
When hiring someone directly as a worker you will form an employer / employee relationship. As an employer you will have many duties, including keeping work time records, properly paying and declaring salaries, arranging legally mandated insurances and health care etc.
Whether you are hiring someone permanently or for a fixed term, part-time or full-time has almost no bearing on your duties. There is no threshold below which you could evade most duties.
Since the other 2 options above are quite simply, let’s look at direct employment in more details.
What laws apply
Employment and its different facets are governed by many laws, which we’ll shortly go through below.
First it is important to know that a collective agreement system (FIN: Työehtosopimus or TES) is in force in Finland. This means that employer unions and employee unions in different fields can negotiate far-reaching agreements on employment conditions and salaries, often superseding specific law. In cases where the work agreement is deemed to represent over half of the workers within a field, the work agreement is legally binding also towards employers who are not members of the negotiating union.
This means that in many case, you will not have a choice on whether you wish to follow a work agreement. Check carefully if a work agreement would be applicable in your field!
Working time act (FIN: Työaikalaki)
The working time act deals with different work hour systems, maximum work times, overtime, extra work and the need to keep records.
To summarise for usual cases:
- Maximum hours are 40 hours per week and 8 hours per day.
- Overtime can never be forced on the employee.
- Overtime is compensated at 50% higher for the first 2 hours each day, and 100% extra above 2 hours.
- There is an alternative work time regimen (period-based working time) for certain fields of work, where instead of a normal daily or weekly maximum for work hours, there is a biweekly or triweekly maximum (80 hours or 120 hours, respectively).
- Sunday work and work on certain public holidays is compensated at 100% higher.
- Work days of over 6 hours should contain a break of 30 minutes.
Employment contracts act (FIN: Työsopimuslaki)
This act deals with how employment contracts are formed, trial periods, paying salaries, sick leave and other social leaves, employee loyalty issues and how to end an employment contract.
To summarise for usual cases:
- The employee is considered the weaker party to be protected, and disagreements will often be resolved in their favour.
- An employment contract can be written or oral, but we cannot discourage against oral contracts enough. Always have a written contract.
- A trial period of max. 6 months (or half the length of the contract if shorter than 1 year) can be agreed on, during which getting rid of an ill-fitting employee is far easier.
- Fixed-term work requires a reason for not being permanent. Chaining fixed-term contracts may lead to them being deemed as a permanent contract. Most time-dependant bonuses are not reset if there is only a short interval between fixed-term contracts.
- Part-time work is considered an exception. Employees generally need to offer more work hours to their part timers first, before hiring new people.
- Employees need to be treated equally, with no regards to creed, sex, appearance etc. If 2 people perform the same job with the same seniority, they should be paid the same.
- Workers receive what they would normally receive for at least the first 10 days of any sick leave.
- Salaries need to be paid at least 2 times a month (if based on time worked and the time to be counted is shorter than a week) and once a month for monthly salaries. Certain special items, like bonuses, can be paid once a year.
- There is an extensive system of maternal and paternal leave, and requirement to take back employees after their leave is over. The system is too complicated to be detailed here.
- A permanent employment contract can be terminated by either party, with an applicable notice-period. The employer needs to have a valid reason for terminating employment. It is advisable to be very careful when deciding to fire people. In practice getting rid of an underperforming employee can be quite difficult.
Annual holidays act (FIN: Vuosilomalaki)
This act deals with holidays and vacation payments, and how salary for those is decided.
To summarise for usual cases:
- Practically all employees earn paid vacation. Even workers who don’t earn vacation days earn vacation payments.
- The vacation year is from 01.04 to 31.3 next year. Employees earn 2 vacation days per month if they have worked at the current place less than a year by 31.03, and 2,5 days if over a year. This translates to 24 or 30 days of vacation per year.
- Vacation earned during the previous vacation year is used during the next vacation year. 24 days should be given during the summer season (2.5 — 30.9). Saturdays usually use up vacation days, even if Saturdays are not normally work days.
- Workers with monthly salaries earn what they usually would during vacation. For other payment systems, the details vary, but having 9% or 11,5% of their earnings during the previous year as vacation payment is a good rule of thumb.
- Many collective work agreements mandate a 50% vacation bonus (FIN: lomaraha) to be paid on top of vacation salaries.
- Sickness during vacation may replace vacation days with sick leave days, and the worker gets to keep their vacations later.
- If employment is terminated with unused vacation days, they are converted into money and paid with the last pay roll.
In addition to these 3 laws there are many other laws relating to certain insurances required for employees or the declaration of salaries. We will go through those without referencing specific laws.
While it might sometimes feel expedient, Finland is very far from a country where day labourers are paid in crumpled bank notes from the till after their shift.
Based on work hours and the contract governing pay, pay slips are prepared at agreed-upon intervals. For example, you could have a system where monthly salaries are paid by the 10th of the next month. Salaries are practically always paid by bank transfers, cash payments are very discouraged and have strict additional regulations. The money needs to be in the receiver’s account by the pay day, so mind bank holidays!
A pay slip for each payment needs to be made, and provided to the receiver. It details gross pay, any deductions made, and the net pay he or she will receive. There is also a host of other information, which the pay roll software will take care of.
Usual deductions made from the gross salary are the employee’s part of TyEL and unemployment insurance (see below), and a withholding for their income taxes.
Each employee needs to provide you their tax card, which contains percentages according to which a certain part of their salaries is held back by their employer, which they then pay to the Tax Administration.
Salaries need to be declared to the Incomes Register within 5 days of payment, and a separate sum-up filed each month. In practice these are sent simultaneously as pay slips are made by most software.
In addition to gross salaries, employers pay certain side costs. Most information for side costs is automatically pulled from the Incomes Register.
Obligatory side costs for workers (in almost all cases, these do not apply to entrepreneurs) are:
TyEL (statutory pension cover)
Employers need to take a TyEL insurance from one of the 4 companies offering it (the insurance is the same between all 4). It is meant to provide for future worker pensions. One TyEL is enough per company or employer.
The price of TyEL is c. 24% of the gross salaries, with the employer paying c. 17% on top of the gross salary, and the worker c. 7% which is deducted from their gross.
This provides for unemployment benefits. You don’t need to make a contract for it, the Employment Fund will bill you. It is c. 0,5% for the employer on top of gross salaries, and a 1,5% deduction from gross salaries for workers.
Employer’s health insurance contribution
This is a 1,53% fee paid to the Tax Administration on top of gross salaries.
Worker’s compensation insurance & Group life insurance
These are taken from an applicable insurance company, and terms may slightly differ. They are based on gross salaries, and the compensation insurance depends on the type of work (low for office work, high for construction), since it is meant to cover work-related accidents.
The average combined cost for these 2 is 0,77% on top of gross salaries.
Worker health care
This is not directly related to gross salaries paid. Employers have to arrange for worker health care. This can range from a rather cursory system only covering acute cases, to a comprehensive plan including hospital- and dental care.
Health care plans are drafted with health service providers. Since sick days can be a large expense, investing in quality health care can have very positive effects for your bottom line.
What this all sums up to
Including vacation salaries and a vacation bonus and all side costs, be prepared to pay about 27% more than a simple monthly salary * 12 month calculation would give.
Since employees are likely to be sick part of the year, there are certain paid public holidays, and vacation time isn’t productive, the actual cost of an hour of productive employment is at least 50% higher than a gross hourly wage, in practice closer to 70%.
This means that if you are planning on paying someone 10€ per hour, they would need to provide at least 17€ of value for each hour they are actually at work to produce a plus for you.
These calculations are based on a Finnish-language article on our site.
Hiring your first employee can feel like a big step. It IS a big step, and a very positive sign of the growth of your company.
Don’t be discouraged by all the information you just read. Many things will soon feel like second nature. If you choose to stay with standard contracts and usual work terms, you eliminate many potential sources of headache.
We hope you learned something useful by reading through this article, and if you are still unsure whether to hire or not, don’t hesitate to contact us for advice.
Accounting Agency Mesiperä Ltd offers a wide range of accounting-, pay roll- and financial administration services. Check out what we could offer you.