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Hiring and Firing in Chile: Contracts Drive the Employee Roadmap

When international organizations look to South America for business opportunities, one of the most alluring countries to investigate further is Chile. It’s digital-first approach, coupled with the general political and economic continuity offers the level of safety that investors need, particularly in this post-pandemic age. But how does hiring of staff, and potential termination, compare against other major South American economies, and what are the key parts of each process that international companies must be aware of?

Nearshore Americas spoke to two labor lawyers to find out. 

Contracting Options

Even before hiring employees in the country, a company must have either an agency or legal representative that is authorized and registered in the country. Only then can a company legally hire workers. 

Leyla Hirmas, Partner at Vermehren Abogados

“In Chile, we have three main contracting types,” said Leyla Hirmas, labor law expert and Partner at Vermehren Abogados in the country’s capital, Santiago. “Indefinite (also the most common), fixed term, and by project, which is most commonly used in industries like construction.”

Companies within the Nearshore industry are most likely to be hiring under the indefinite contract model. Indefinite contracts are self explanatory: they have no end date. However, if a company chooses to hire under the fixed-term model (which has a maximum duration of one year), they must be aware of the implications.

“Employers on fixed-term contracts must be told that their contract is ending a minimum of one-day before the agreed-upon date of termination, or the contract becomes indefinite,” said Hirmas.

Though written contracts are not mandated by law in Chile, a written contract is required to be uploaded to tax and migration (should the employee be a foreign citizen) authorities. Therefore, companies are advised to go down the written contract route. 

“It’s highly recommended that a written contract is used. It can also serve as proof of the relationship should disputes emerge later. It must be provided to the employee within 15 days of the start of the labor relationship and must also be uploaded to the Labor Authority website within 15 days. Not doing this risks administrative fines,” explained María Jesús Pimentel, a labor and employment attorney at a Big Four account firm. 

María Jesús Pimentel, labor and employment attorney

The pandemic scenario and move to work from home caused a shift that has had many repercussions for labor law around the world. In Chile, there was no legal framework covering remote working prior to the pandemic. However, as of April 1, 2020, the Distance Working and Teleworking Law No. 21,220  is in force. This law makes a distinction between distance working and teleworking, and requires a written agreement signed between employee and employer. Employees cannot have their wages reduced due to the move to remote work. 

Chilean workers have the legal right to 15 days’ vacation each year after the completion of one year at the same employer. After completing 10 years in work, workers are given one vacation day extra for every three years they complete, known as feriado progresivo.

Taxes and Financial Obligations

As in many other Latin American countries, the payment of aguinaldo (sometimes referred to as the thirteenth salary) is offered. The most common days to pay aguinaldo are on the Fiestas Patrias (public holiday) dates of September 17 – 19, and at Christmas. 

“Aguinaldo is common practice and most companies offer it but it isn’t mandated in law,” explained Pimentel.

Aside from base salary, which cannot be below the national minimum wage (currently 350,000 Chilean pesos (approx. US$435) per month), employers are required to make a range of social security contributions. 

“Within social tax to be paid by companies, there is the employer retirement contribution – an amount defined by the AFP (Pension Fund Administrators) – which ranges between 10% and 14% depending on the company, as well as health care contributions, which is 7% of the employer’s salary,” explained Hirmas.

“Employers on fixed-term contracts must be told that their contract is ending a minimum of one-day before the agreed-upon date of termination, or the contract becomes indefinite and the employer must pay the required severance if they continue with the contract termination,” — Leyla Hirmas

Chilean employers must share profits with their employees. “Gratificación is a share of the company’s profits given to the workers (currently 30%). Usually it’s paid once per year, though it can also be paid in advance,” Hirmas added.

Additional payments that ease the financial burden of employees are also a regular aspect of the work relationship, said Hirmas.

“Generally, employers also pay asignaciones, which are not subject to tax, and include money for one meal per day, as well as the cost of transport to work. This isn’t obligatory by law, but is often offered.”

Contract Terminations in Chile

When a company wants to terminate the working relationship with an employee, there are several stages it must be seen to fulfill.

The first step employers must take is to inform the employee in writing of the date and cause of the termination. “The letter must establish the legally determined cause that the employer is invoking to terminate the contract. It must also outline the facts that justify the cause,” said Hirmas. 

Each cause of termination relates to one of the articles stated in the Labor Code.

There are causes outlined in Articles 159, 160 and 161 of the Labor Code. For example, Article 159, which outlines reasons for the end of a contract which may not be a firing, includes reasons such as the resignation of the worker, the death of the worker, reasons of force majeure, and the conclusion of the contract,” she added.

The cause for ending a contract must be authorized by a notary the lawyers note. This is legally fundamental. “Many employers do not know this and this can become problematic should disputes arise. The AFP must also be informed,” said Hirmas. 

Using the Clave Unica, employers and employees can access the Labor Department portal and inform sign the settlement, which must be done within 10 days of the termination.

“When an employee decides to resign, they must give 30 days’ warning, though this isn’t often followed,” she added.

Generally, the at will form on termination that is common in the US is not permitted in Chile. Gross negligence is grounds for dismissal, however. Force majeure is rarely ever used. 

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Severance pay is required to be paid to employers when a contract is ended. The exact amount is determined by the years of service the employee has rendered at the company, how many vacation days they have unused, and other aspects. 

One reason for terminating contracts is “company needs”, which relate to downturn in economic activities and associated risks like bankruptcy. “This isn’t recommended because employees are more likely to put in a claim through the courts,” said Pimentel.

Though many interactions with state authorities are digital, the pandemic has slowed processes like labor disputes down, and it is now common for a dispute to take up to 2.5 years to be resolved.

Chile is the final part in our series of hiring and firing around Latin America’s major Nearshore markets. We have previously covered Mexico, Colombia, Costa Rica and Argentina.

Peter Appleby

Peter is former Managing Editor of Nearshore Americas. Hailing from Liverpool, UK, he is now based in Mexico City. He has several years’ experience covering the business and energy markets in Mexico and the greater Latin American region. If you’d like to share any tips or story ideas, please reach out to him here.

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