Tips for using Subcontractors in Chile
Companies use subcontractors for a variety of reasons. Mining suppliers may use a local subcontractor for their installations at a mine site or to provide specialty services that are part of a larger contract but outside the suppliers’ core capabilities. The issue is that foreign companies can find themselves in trouble if they do not understand the risks that are particular to Chile and how to manage them. These risks if not managed properly from the beginning can lead to substantial costs while also doing harm to the company’s reputation.
We have provided a practical guide for companies who are entering into subcontractor agreements –
Overview of Subcontracting
Subcontracting is when the principal to the contract hires an external company/companies who then provide works or services as part of the larger contract.
We have provided a brief description of the parties involved in this type of agreement –
- Main Company: This is the owner of the core project who hires the main contractor.
- Main Contractor and its Employees: This is the company hired by the main company to execute the tasks or works.
- Subcontractor and its Employees: This is the company hired by the main contractor to execute specific tasks or services on behalf of the main contractor.
How does Subcontracting in Chile work?
According to Chilean Law, all companies can enter into subcontracting agreements. There is very little that is restricted with this practice under Chilean law but there are very strong protections for workers and their rights. The result is that the main contractor liability is mostly related to ensuring that the subcontractor adheres to all labour obligations, makes payment of all social security, and has measures in place to protect the health and security of the employees.
Companies get themselves into trouble when they do not properly oversee the subcontractor ensuring that they are fulfilling their obligations to the workers. This means the main contractors need to ensure that their subcontractors are paying their workers and social security benefits. When this does not happen, the main contractor will be liable for everything that is owed to the subcontractors’ employees. It even goes further than this as the liability extends up to the main company who would be responsible to make payment if the main contractor does not. This is where a suppliers reputation with the end client can really take a hit.
Fulfilling these labour obligations on behalf of a subcontractor can be extremely expensive. You do not have to look far to find real-world examples of where this has happened, particulary with smaller providers. This is why we work with our clients ensuring they understand their responsibilities and putting in place the correct processes to verify the subcontractor is complying.
Best Practices for Subcontractor Agreements – Systems and Procedures
Information Rights: Contracts should always include information rights which allow the main company and/or the main contractor to verify that the hired contractors and/or subcontractors are making payments of all labour and social security obligations for their respected employees.
Ax Legal Recommendation: Companies must have strict controls in place for their main contractor and/or subcontractor regarding all labour matters. This means ensuring that there is a process in place for them to report monthly regarding their obligations. Labour and social security obligations can be easily proven with certificates issued by the Labour Authority (costs approximately USD $4) and Social Security Authorities (free).
Retention Rights: Contracts should always include retention rights which allow the main company and/or main contractor to retain funds from scheduled payments should the main contractor or subcontractor not be able to prove they fulfilled their labour and social security obligations.
Ax Legal Recommendation: Should the subcontractor be found to have not fulfilled its labour and social obligations then a process needs to be put in place to immediately withhold these amounts from their invoices and if needed, to make the payment of the employment benefits on behalf of their subcontractor.
There is two parts to making this work. The first and most basic step is having the clauses in your contract. The second is to have proper procedures and processes in place for reviewing the labour obligations of subcontractors and then withholding payments for the corresponding amounts should you need to.
Health and Security Measures: It is important is ensuring that contractors and subcontractors are obeying hygiene and safety standards (usually recorded within an employee handbook called “Order, Hygiene and Safety Rules”).
This is because if an employee suffers an accident, the principal company may be deemed as directly responsible if it is demonstrated that it did not carry out health and security measures within the project site. The Chilean Health Authority has a ruling concerning “Special Regulations for Contractor and Subcontractor Companies” which outlines the standards and measures that companies to comply with.
Mining companies will take this very seriously so it is important that your subcontractors are adhering to these standards as they will be watched and sanctioned if found not to be complying.
- Always put in place a subcontracting agreement.
- Request every month the subcontractor provide proof of payment for salary and social security.
- Always make use of the sanctions imposed by the subcontracting agreement if employment obligations are not met.
- The services/outsourcing/subcontracting agreement between companies, is ruled by private law.
- Companies must ensure the subcontractors and their employees have written employment agreements.
Ax Legal is an 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 our 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 firstname.lastname@example.org