Hiring and Firing in Costa Rica: Bring Reams of Paper

Costa Rica has long been spearheading Latin America’s tech service outsourcing. With a population of just over 5 million, it punches well above its weight in the Nearshore, with IBM, Accenture, Hewlett Packard and Intel Corporation just a couple of the bigger global names that have enjoyed a productive time in the country. 

It’s an attractive location, and there are plenty of reasons for organizations to want to have a footprint there.

Nearshore Americas spoke with local employment attorneys to find out the details of hiring talent and, if needed, firing that talent, when based in Costa Rica. 

Employment-Related Costs

Companies that are focused on labor arbitrage over all else aren’t likely to flourish in Costa Rica, a country that has a robust system of taxation in place, as well as contributions for social security-related ends.

“Costa Rica is considered an expensive country for an employer by Latin American standards, mainly because of the social security contributions required,” Katherina Zamora, Labor and Employment Attorney at Arias Law, a firm focused on Central America. 

Social security contributions, which are administered by the Social Security Administration, provide financing for workers’ pensions, sick leave, medical attention and maternity leave. The cost of that coverage is financed both by the employees and employer. 

“The employer must pay 27.5% of the salary that the employer reports on payroll every month, and the employer then contributes 10.5% of that salary in tax,” explained Zamora. “This is one of the most important aspects of labor taxation that international companies must understand before arriving to Costa Rica.”

However, it isn’t only the base salary that employers must consider when filing payroll. Any form of additional bonus, whether delivered for personal performance or an annual bonus based on the utilities earned abroad by the company, must be considered within the 27.5% that the employer is obliged to pay. For companies entering Costa Rica for the first time, this can be confusing and generally requires the aid of local firms.

“If an employer terminates an employee’s contract without cause, the employee is entitled to receive the corresponding proportional amount of vacation and Christmas bonus (Aguinaldo) regardless of the type of termination” — Silvia Hernández-Carranza.

Companies must be registered with several public institutions in order to legally process these payments. Employee tax Among them is the National Insurance Institute that is in charge of issuing the workers’ compensation insurance policies that must cover each employee at an organization. 

“There’s no legal provision that establishes the maximum number of foreign citizens that a company in Costa Rica can hire,” said Silvia Hernández-Carranza, Senior Associate in Labor and Employment at Dentons Costa Rica. “But Costa Rican employees have preference.”

The Aguinaldo

A source of surprise for non-Latin American companies is often the “Aguinaldo” payment, given at Christmas, which is equal to up to a month’s salary depending on the length of time that an employee has been at the company.

“An employee that has reached 12 months of working at the company will receive a full month of salary, to be paid December 20th. Those who haven’t been there 12 months will receive a portion of the month depending on how many months they’ve worked there so far,” said Hernández-Carranza.

The Aguinaldo payment – which works out as 8.33% of annual pay – is paid to all employers regardless of performance. Companies generally reserve this amount throughout the year ahead of the payment.

Vacations must also be considered by employers. Though vacations are not as generous in Costa Rica as they are in parts of Europe, they are still larger than those in other Latin American nations.

“An employee is eligible for two weeks of vacation after every 50 weeks of continuous work for the same employer,” said Hernández-Carranza. 

“What those two weeks means in days is often a point of discussion, because this changes depending on how many days the employee would work in a week. As a law firm, we explain that the statutory two-week holiday should be considered to be 12 business days, but if an employer only works three days each week, the vacation is reduced in kind.”

Contract Terminations: The Ins and Outs in Costa Rica

With such a strong North American presence in Costa Rica, both lawyers say that they are commonly asked about at-will contracting. Though the at-will contract does not exist in Costa Rica, employers do have the legal right to terminate an employment contract without cause, as long as an employee is not being discriminated against in any way. But payments will always be required by law for the protection of the employee.

“If an employer chooses to terminate an employee’s contract without cause, the employee is entitled to receive not only the corresponding proportional amount of vacation and Christmas bonus (Aguinaldo), required rights for employees regardless of the type of termination,” said Hernández-Carranza. 

“Paperwork here is over the top. We have cases that are 20 years old.” — Katherine Zamora

“Additionally, employees must receive compensation for notice – up to one month’s salary depending on the employee’s seniority – as well as cesantía, or a severance package. This will range from between 19.5 and 22 days per year worked for each year depending on seniority, and is capped at eight years in the private sector,” she added.

“These are all completely non-negotiable,” Zamora said. “But even when terminating contracts without a justified course, the employer must have an objective reason to demonstrate in case a legal case arises.”

Documenting each and every step in the move towards termination is suggested. The burden of proof, if a legal case against dismissal is made by an employer, is on the employing company. 

When Employee’s Launch Legal Proceedings

Both lawyers say that legal action over dismissal is common in Costa Rica, and that when one case is made, others often follow. 

Legal proceedings can be slow.

“They take at least, a bare minimum, of two years,” said Hernández-Carranza.

Though in 2017 amendments were made to the Labor Code that will see the process made more efficient, those changes are still a couple of years away from coming into force. Covid-19 has, as in every other facet of life, lengthened these proceedings. And two years may well be toward the conservative range of estimates. 

“The paperwork here is over the top,” said Zamora. “We have cases that are 20 years old.”

Work From Home Considerations

Workers who are working from home must receive support from their employer for the electricity bill. This came in around two months before covid.

“But there is not an amount specified in law. So what usually happens is that the employer and employee come to an agreement and it is added into the employee’s monthly salary,” said Zamora.

“Discussions around this are still around these payments. If the system is changed and the electricity reimbursement requires an invoice, then this could be difficult for large companies because it adds an additional cost of collecting and processing invoices for hundreds or thousands of workers,” she added.