Practical Guide on Peruvian Labour Law
Peru has become an attractive emerging market for foreign investors. Particularly for foreign companies providing technology or services to the mining or industrial sectors. It is important for companies to understand the local labour laws when hiring workers in Peru as there are some key differences to other countries.
Types of Work Contracts in Peru
Indefinite Term Labour Contract: An indefinite contract is an employment agreement between a worker and a company with no expiration date. In order to terminate the agreement, companies need to follow a strict legal framework.
Fixed Term Labour Contract: A fixed-term contract is an agreement between the worker and the company that establishes a start and end date.
The main modalities, for which staff can be recruited under fixed-term or determined term contracts, are the following:
- Due to beginning or increase of activities, as result of a new business activity. The maximum term is three years.
- Due to needs of the market, to attend temporary increases caused by the substantial variations in demand. Its maximum duration is five years.
- Corporate Restructuring, before the replacement, expansion or modification of the activities in the company, or before any technological change. Its maximum term is two years.
- Substitution, for the replacement of a stable company worker whose employment relationship is suspended by any justified cause set in the labour law.- To cover a specific piece of work or service. A specific term will be necessary.
- To meet business needs of permanent but discontinuous nature.
- Each term-based labour contract has a maximum period determined by the type. However, none may exceed five years.
- In general, all labour contracts must be entered into in writing and the Labour Authority must be notified for the corresponding registration.
Ax Legal Practical Advice: When a person enters a job for the first time, and according to an analysis of the specific case, the company can enter into a fixed term contract agreement which can act as what is known in other countries as a probation period. In both cases, please note out that although, the contract is for a fixed time, some rules and benefits (i.e. health care insurance, etc) apply when hiring a worker. Also, as there is no legal obligation to renew modal contracts, this is a common practice when hiring someone and in special sectors, i.e. non-traditional exports, construction.
What regulations / rules and benefits apply when hiring an employee?
When hiring an employee, a company has to take into consideration some rules and benefits that the employment law in Peru apply. In this sense, here is a list of the most important ones:
- Vacation Period: As a standard rule, an employee has the right to 30 calendar days of paid vacation per year. The wage is equivalent to a monthly salary.
- Weekly Day Off: Workers are entitled to a 24-hour weekly rest period. This day of rest should preferably be taken on Sunday. However, depending on the nature of the company activities, it may be taken on another day.
- Legal bonus: An employee gets two bonuses per year, one on Independence Day of Peru (1st of July) and the second on Christmas. Each of these bonuses is equivalent to a monthly salary.
- Seniority Pay Severance: This law is a social benefit to protect the employee after the termination of employment. In this sense, all workers are entitled to seniority pay (CTS), as long as they work a minimum of 4 hours a day. The amount of each deposit is equal to one-twelfth of the computed monthly pay for the months worked and is deposited semi-annually in the banking or financial institution of the worker’s choice.
- Healthcare insurance: Employees and their family members have to be affiliated to the public health service system in Peru (ESSALUD). In this sense, the employer pays a contribution of 9% of the monthly wage of the employee to the public health system. However, companies also choose to have also a supplemented health plans and programs through private healthcare providers (Entidades Prestadoras de Salud, or EPS), which in certain circumstances act in the place of ESSALUD.
- Profit Sharing: Legislative Decrees 677 and 892 establish a system of profit sharing for personnel at private companies. The workers’ share is not based on employer earnings, but rather on annual income calculated in accordance with income tax regulations. The percentage, which must be distributed by the employer to his workers, depends on the employer’s activity, and varies from 5% to 10% of taxable profits. It is important to note that profit shares for employees represent a deductible tax expense and is only for companies with more than 20 employees.
- Maternity Leave: In total, the length to leave for maternity is 98 days, 49 days for prenatal leave and 49 days of postnatal leave. The prenatal leave can be accumulated with the postnatal, at worker’s choice. An exception is given when an additional child is born or if the new child has a disability. Similarly, at the end of the postnatal period, the mother is entitled to a daily one-hour nursing leave until the child is one year old.
Ax Legal Practical Advice: Please note out that each case must be examine and studied individually, as each rule and benefit will apply differently according to the type of contract agreed or the area or activity to be performed by said worker, and that these rules and benefits are regulated because protecting the local employee’s rights is a major concern for the Peruvian government.
What are the Reasons for Dismissal?
According to the Peruvian Constitution, employees are protected against unfair dismissal, as they may not be dismissed without fair reasons only determined by law. This protection is for all class of workers, and may include those who work at least four hours a day and have exceeded the probationary period.
Normally the process of dismissal can be individual or collective. As for individual cases, a worker can be dismissed for a serious breach of contract following legal procedure. However sometimes, and hopefully not always, a worker may be dismissed without cause or for a banned reason.
In the first scenario, if dismissal of worker is for breach of contract, and employer follows the procedure established by law, the worker is not entitled to any severance pay whatsoever.
Nevertheless, in the other scenarios, if the employer dismisses a permanent worker without cause, he is entitled to one and a half months’ pay for every full year of service, with a cap of twelve months’ pay as severance pay or he can demand to be reinstated. On the other hand, if the employer dismisses a worker because of a banned reason, such as being a union member, pregnancy, or discrimination, the worker can demand to be reinstated and to be compensated for the pay he stopped receiving as a result of the dismissal or he can choose to receive the severance pay described above and not be reinstated.
As for collective dismissals, there are four (4) possible scenarios in which an employer may dismiss workers collectively: i) Reduction of personnel; ii) Dissolution and liquidation of the employer; iii) Insolvency of the company; iv) if company faces force majeure, if it lingers for at least three (3) months.
As for the procedure, in general, the employer is required by law to send a letter of notice of dismissal to the employee, imputing the grounds for dismissal and giving the employee a period of six days (in the case of behavior causes) or 30 days (in the case of capacity causes) to submit his or her disclaimer. In this sense, if the employee does not dispute the imputed cause, the employer can send the final dismissal letter.
Ax Legal Practical Advice: Please note that labour courts in Peru are mostly pro – worker, so dismissals and termination procedures must be handled carefully in each case. In this scenario, it is important to dismiss workers when the contract finishes if it is fixed term and to calculate benefits in a correct manner. It is important to have contracts up to date, because we have had many cases that a fixed term labour contract has “become” indefinite due to continuing with work tasks after the contract has ended.
Special Regulations for Hiring Foreign Employees in Peru
When opening a business in Peru, it is important to remember that the general rule for hiring foreign personnel is that they shouldn’t exceed 20% of the whole workforce, and their total shouldn’t exceed 30% of the total company payroll, although exceptions regarding a higher salary can be made in the case of technical employees or management positions.
Also, the working contract for foreign employees has a maximum term of 3 years but can be extended for a similar period of time and must be approved by the Labour Authority. Once a foreign employer is hired, they have the same rights and benefits as local employees.
Ax Legal Practical Advice: Peru and Chile are in the Asuncion Treaty (also known as “Mercosur” Treaty) with give some benefits for hiring foreign employers in said countries as for applying to work permits and visas (e.g. shorter time for procedures). It is important to note out that when you hire an employee for a temporary job you can use a fixed term contract and apply to a visa under Mercosur Treaty.
Ax Legal is a legal and business advisory firm that works with foreign companies in Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies with their operations in Latin America.
To better understand how we can support you in the Region, please contact Cody Mcfarlane at email@example.com