Work Contracts in Chile

The most common risk to companies operating in Latin America is related to their employment laws and obligations.  Over the last 10 years, we have worked with companies of all sizes but even the most sophisticated tend to have issues at some point with Chilean labour laws. It is not hard to see why. Particularly for foreign companies who do not know the intricacies of local labour laws. For better or worse, most companies are focused on growing their business, taking care of customers, and managing a thousand little details that sometimes we find ourself in a situation where we have overlooked an employment detail that now poses a liability. 

This is the first part of our on-going series that will focus on Chilean employment laws. Since employment law is broad, we believe a good starting point is knowing the different ways to contract potential employees. We have a provided below a short overview to help companies understand what type of employment contract they should use. 

Employment Contract Terms.

In Chile, a work contract must be in writing and it must stipulate the nature of the services to be provided and the place where this will occur, the amount, form and date of payment of the agreed remuneration, the length and distribution of the working day and the duration of the contract. It must, in addition, indicate the additional benefits that the employer may provide such as housing, schooling, fuel and food if applicable.

The employer has a general duty to provide a safe and healthy workplace, social security, training, education and effective employment. In turn, employees have a duty to show diligence, care, loyalty and professional confidentiality.

Types of Work Contract.

There are different type of contracts that can be entered into with employees. Knowing which one to use and any specific drawbacks will help reduce future labour issues that could arise. 

• Indefinite contract:These contracts do not have an end date previously established by the parties and are the most common type of contract in Chile. They are signed for the useful life of the worker and may be terminated only for specific reasons established by the Labor Code.  
• Fixed-term contract:The duration of these contracts is set at the time of signing. They have a maximum duration of one year or, exceptionally, two years in the case of managers or persons with a professional or technical qualification from a higher education institution. Fixed-term contracts may be renewed only once, and, if renewed a second time, become indefinite. This is also the case if, with the knowledge of the employer, a worker continues to render services once a contract has expired. The drawback is that if the employer ends the contract before the date set in the contract then they are responsible to pay out the full contract. 
• Piecework contract: In this case, the employee is hired for a specific material or intellectual task whose duration is also that of the contract. We often see these type of contracts for employees that are only need for specific projects.
• Professional services contract: This is not regulated by labor law, but by civil or commercial law, depending on the case, since they do not comply with the assumptions of a labor relationship. In other words, there is no subordination and dependence. This last point is extremely important since if the labour office can establish that there is a labour relationship then the company could be responsible for making the social security and taxes payments that have accrued from the start of the relationship. 

Practical Tips – Probationary Periods

Unlike in other countries, there is no probationary period in Chile. Probationary periods are important to some companies since it gives them a chance to get a feel for the employee, to see if the person fits with the corporate culture, and whether they have the skills and knowledge to perform their duties. In countries where probationary periods exists, you can often terminate the working relationship within that period without having to state a reason. 

This means that companies need to be very secure about the employees they are hiring since terminating a working relationship needs to be follow specific guidelines and in most cases severance to the worker will need to be paid

In absence of a legally defined probationary period, a work around is to first hire a new employee under a fixed term work contract. Our advice is to keep the fixed term contract short since if the relationship is not working than the employer is responsible for paying out the full contract should they terminate it early.

Once the fixed term contract ends, if the relationship is going as expected then the the contract can move to an indefinite contract.

Conclusion

It is absolutely critical that companies choose the right type of employment contract that suits their business needs. Labour laws in Chile and Latin America are much more pro-worker than in other parts of the world. For this reason, it is important to start with the correct type of contract. 

If a company needs engineers because they won a specific project then a “piecework contract” may be better suited than an indefinite contract since there may not be a need for the worker once the project finishes. 

The same can be said for service contracts. Many companies are scared to enter into a formal labour relationship as they dont want to worry about social security and taxes but these type of contracts can come back to haunt companies should it be deemed an employer/employee relationship in the future. The consequence is that you will need to pay social security and taxes going back to when the employee was first contracted plus penalties and interest. It would have been cheaper just to hire the worker under an indefinite contract from the beginning. 

Employment contracts are only a small part of the overall labour relationship but they are important  consideration when starting a relationship.

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 to grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects are clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.

To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal