The 2026 Amendments to the ECA: Lower Termination Threshold and Wider Contractual Impact

The 2026 amendments to the Employment Contracts Act lower the threshold for termination on personal grounds from a “proper and weighty reason” to a “proper reason”, potentially broadening employers’ discretion in borderline cases relating to performance or conduct. While the reform is aimed at employment relationships, its impact may extend to certain other agreements that reference the act, raising interpretative questions and potential unintended consequences for existing contractual frameworks.

Changes to the ECA

The provisions of the Employment Contracts Act (the “ECA”) concerning termination of employment on personal grounds were amended as of 1 January 2026 to allow an employer to dismiss an employee based only on a “proper reason”, replacing the previous, stricter requirement of a “proper and weighty reason”. In addition, the ECA now defines more precisely than before how the existence of grounds for termination is to be assessed. The changes reflect the objective set out in Prime Minister Petteri Orpo’s Government Programme to remove barriers to employment and strengthen the operating conditions of small and medium-sized companies.

Previously, the existence of a “proper and weighty reason” as grounds for termination was assessed as a whole; in other words, no distinction was made between what constituted a “proper” reason and what constituted a “weighty” reason. As a result, the practical implications of removing the requirement of a weighty reason remain somewhat ambiguous. Abandoning the requirement of a weighty reason is likely, in certain cases, to make it possible to terminate an employment relationship in circumstances where this was not permitted before.

Unlike the previous version, the amended ECA now includes a non-exhaustive list of examples of grounds sufficient for termination. The amended ECA provides that a “proper reason” exists at a minimum in cases involving the employee’s breach of or failure to fulfil their employment obligations, such as non-compliance with the employer’s instructions, failure to perform work, unjustified absence, inappropriate behaviour, or negligence at work; as well as in cases involving a material change in circumstances related to the employee’s person that prevents them from performing their work.

Not every instance of reproachable behaviour or inadequate performance would, however, constitute sufficient grounds for dismissal. The existence of a proper reason would be assessed in relation to whether the employee’s conduct was such that termination of the employment can be considered a reasonable and proportionate consequence of the employee’s conduct or of the deterioration of the employee’s capacity to perform work. The reasonableness would be assessed from two perspectives; the reasonableness related to the nature of the reason and that related to the degree of seriousness of the reason.

The existence of grounds for termination shall therefore be determined through an overall assessment that considers, among other things, the employee’s position and the nature of their duties; any other conduct by the employee in breach of their employment obligations; the employer’s actions in fulfilling its own obligations, such as providing adequate instructions and taking other appropriate measures; the number of employees employed by the employer; and the overall circumstances of both the employee and the employer. The list is not exhaustive.

An employee cannot, however, be dismissed without first being given a warning and the opportunity to correct their conduct. Exceptions apply in cases of serious misconduct where the employer could not reasonably be expected to continue the employment relationship. These include cases where the employee should have understood the reproachable nature of their conduct even without a warning. This is also the previous practice.

The ECA also includes a list of prohibited grounds for termination which have, to a large extent, remained unchanged. Prohibited grounds for termination include the employee’s illness, disability, or accident, unless their capacity for work has been materially and permanently reduced to such an extent that the employer cannot reasonably be expected to continue the employment; participation in industrial action; political, religious, or other opinions, or involvement in societal or association activities; acting as an employee representative; and the employee’s exercise of legal remedies.

The practical impact of this change is likely to become visible particularly in borderline situations where the employee’s conduct or performance has previously been considered insufficiently serious to justify termination. The amendment may therefore provide employers with greater flexibility in addressing repeated or persistent shortcomings in performance or conduct. Ultimately, however, the significance of the reform will depend on how the courts interpret and apply the amended provisions in future case law.

Wider Contractual Implications

Although the amendments directly affect employment relationships, certain other contractual arrangements may also, perhaps unexpectedly, be brought under close examination. Agreements such as shareholders’ agreements, earn-out arrangements and managing director agreements often contain provisions linked to the termination grounds under the ECA – for instance, to define conduct triggering redemption rights or the loss of earn-out or severance pay entitlements.

Shareholders’ Agreements

Many shareholders’ agreements include so-called good leaver and bad leaver provisions, which determine the redemption price of a shareholder’s shares upon their departure from the company. In the case of a good leaver, the redemption price is typically based on the fair market value of the shares, whereas for a bad leaver it is usually significantly lower – for example, 50% of the fair value or the original subscription price. The specific mechanisms vary between agreements.

It is common for a bad leaver event to be linked not only to a material breach of contract but also to conduct that would entitle the employer to terminate the shareholder’s employment on personal grounds under the ECA. The intention has been to ensure that a reduced redemption price applies only in cases of serious misconduct, and aligning the shareholder-employee’s conduct with the ECA termination threshold has been a practical solution. However, as the recent amendments have lowered that threshold, questions arise as to how existing bad leaver provisions should now be interpreted. Should bad leaver status be assessed under the version of the ECA in force at the time the shareholders’ agreement was executed, or under the amended legislation? If the latter, a shareholder could be deemed a bad leaver on more flexible terms than originally intended, potentially resulting to significantly more severe consequences than originally intended. The assessment will depend on several factors, including the wording of the relevant clause (e.g. whether it refers to the ECA as in force at the time of execution or as amended from time to time), the timing of the agreement in light of the legislative process as well as the original intention and understanding of the parties.

Earn-Out Arrangements

As with bad leaver provisions, some earn-out arrangements in M&A transactions may likewise include references to the ECA. By way of example, it may be crucial for the buyer of a company that the seller remains actively involved in the business, particularly where the seller’s contribution is central to the company’s success. In such case, the seller may agree to continue working for the company after closing, and an earn-out mechanism is introduced to incentivise performance – granting the seller an additional purchase price if the target achieves specific financial milestones within a defined period. Consequently, the earn-out entitlement is often linked to the seller’s continued employment or service relationship, and it may be agreed – in line with bad leaver provisions in shareholders’ agreements – that the seller forfeits the earn-out if their employment or service relationship is terminated on grounds that would entitle an employer to terminate employment under the ECA; in other words, by a serious misconduct by the seller.

If the amended ECA clauses were applied in such a case, the parties would once again face a situation where the earn-out could be lost based on lower thresholds than originally intended.

Managing Director Agreements

Managing directors are not considered employees under Finnish law, as they are regarded as corporate organs whose duties and responsibilities are defined in the Companies Act. Their agreements are often more complex than ordinary employment contracts, since the relationship is governed not by employment legislation but by contractual freedom. It is common for such agreements to include provisions on, inter alia, severance pay, which may be forfeited if the company terminates the agreement for reasons attributable to the managing director and comparable to the justified grounds for termination set out in the ECA. This raises a situation similar to those described above: the managing director may face stricter consequences and risk losing their severance pay on grounds that are broader than originally intended by the parties if the amended provisions are applied.

Conclusions

The purpose of the amendment to the ECA’s termination provisions is to enhance companies’ competitiveness by enabling more effective management of their workforce. In practice, some companies have found it difficult to terminate the employment of underperforming employees, which can be detrimental to the business. However, the reform was not intended to extend to managing directors, as they are not considered employees under Finnish law, or to certain other contractual arrangements (such as shareholders’ agreements or earn-out arrangements) that might contain references to the ECA. The government bill did not address such situations, suggesting that the legislator’s focus was limited to employment relationships governed by the ECA. Accordingly, applying the amended provisions to the situations described above could extend the effects of the reform beyond the legislator’s intent and should therefore be approached with caution.

References to the ECA in agreements executed before the legislative amendments may, depending on the circumstances, be interpreted in light of the parties’ intentions at the time of signing. By contrast, similar references in agreements entered into after the amendments took effect (i.e. after 1 January 2026) are unlikely to be assessed in the same manner. As standard templates may continue to be used despite the recent amendments, particular attention should be paid to reviewing and, where necessary, adjusting such provisions to ensure they remain appropriate under the amended legislation. In other words, provisions that have previously worked as intended may produce materially different outcomes when used under the amended legislation.

At the same time, it remains uncertain how the new provisions will be interpreted in practice and in which specific circumstances termination of employment will be considered justified. As discussed above, the amendments may have implications extending beyond employment relationships, and entrepreneurs, investors, buyers, sellers, and other stakeholders should take these potential effects into account going forward.

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Merilampi’s lawyers are happy to assist with any questions regarding the amendments to the ECA and their potential implications for existing or future contractual arrangements.

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