Practical Tips – Hiring your First Chilean Employees

Hiring your first employees in Chile is an exciting time. It is a time of optimism as to what the future can bring. It is also when companies start seeing some of the key differences to how labor laws and practices work in Chile compared to other countries.

We have provided a quick fact sheet of the most common questions that arise during the hiring process –

Negotiating Salary – Chileans negotiate based on the Net and not the Gross Amount.

In most countries around the world, salaries are generally negotiated on the gross amount. Chile is a little different. It is common practice to negotiate with the worker based on the net amount that they will receive after taxes and social security deductions. This can create issues early on in the negotiating process if you are not aware of this. We have seen companies get to the point of signing the contract only to realize that there was a misunderstanding regarding whether it was the Net or Gross amount being discussed. Be clear with the candidate that you are negotiating in the gross amount.

Legal Gratification – Mandatory Annual Bonus

Chilean companies by law need to provide all employees with a statutory bonus in addition to the employee’s base salary. This is known as a “legal gratification”.

Foreign companies will often have questions regarding this specific point since there is a clause in all employment agreement that directly deals with Legal Gratification.

There are two methods available to pay this bonus as set out by the law –

1. 30% of the total net income of the company is divided out among all the employees, proportionate to their income; or
2. Pay the employee 25% of wages earned during the year, regardless of the total net income obtained by the company. This bonus is capped at 4.75 Minimum Monthly Income (IMM) which currently corresponds to a maximum bonus of CLP$87,500 per month (approximately US$170).

Please note that these amounts are approx as per time of writing the blog. The amounts will change over time depending on increases to the minimum salary.

In almost all cases, companies will choose the second option which is a fixed amount provided each month to the employee. Furthermore, companies will generally work it into the salary so that it has no effect on the salary amount negotiated. That is, if you agreed on a gross salary of USD$5000 then the USD$170 bonus is simply calculated within the gross salary amount so that you end up with the same amount.

Probationary Periods – Chilean Law does not allow for it.

It is common for clients to ask about probationary periods and whether they can be added to employment agreements. This is not possible in Chile since local labor laws only consider strict causes for terminating an employment contract. Not having a satisfactory performance during a probation period is not one of them.

The best way to proceed should you require a probationary period is to hire the person under a temporary fixed term contract and then move them to an indefinite contract. The downside to a temporary fixed term contact is that if it is terminated early then the company is required to pay the employee the remaining amount left in the contract.

Our recommendation is to keep the fixed term contract short enough that you can actually evaluate the employee without the concern of paying out substantial amounts should you need to terminate the contract early.

Commissions and Bonus Plans – Keep them as an Annex

In Chile, you cannot unilaterally change the contract without the worker’s written consent. Since bonus and commissions plans will often change year to year depending on a range of factors, it is better to add this as a separate annex to the main employment agreement under a 1-year term.

These annexes will be done yearly and lay out the KPI’s and bonus plans that the employee will have for that year. If changes are needed, then they can be introduced the following year in the new annex.

The risk is that if the bonus and commission plans are within the main agreement then there is always a chance that the employee may not sign off on changes. This could be particularly true if the commissions or bonuses have been reduced or the KPI’s have been increased. By having as a separate annex for a set amount of time, the company can introduce changes without disrupting the main employment terms.

Recent Changes – Registering work contracts with the Chilean Labor Office.

A new law in 2021 came into effect requiring employers to register the employment contracts on the website of the Labour Office within 15 days of signing. Likewise, the termination of the employment relationship must be registered in the same website within the timeframes established by the new law.

It is important for companies to speak with their legal representative and accounting to determine who will register the contracts. This is a new law which was not previously required so it is best to speak with your providers to ensure it is not missed, otherwise fines will apply.

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 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