METS Advice – Using Subcontractors in Chile

Companies use subcontractors for a variety of reasons. Mining suppliers may use a local subcontractor to install equipment 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 how Chilean Subcontracting Laws work from both a legal and practical perspective. This can lead to substantial costs while also doing harm to the company’s reputation with clients. 

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 contractors 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 since 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 supplier’s reputation with the end client can really take a hit as labour lawsuits from the unpaid employees will name everyone including the principal client. 

Fulfilling these labour obligations on behalf of a subcontractor can be extremely expensive. It is very common for subcontractors to have financial difficulties. 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 with all of its obligations.

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 that they have complied with their labour obligations before making payment of invoices. 

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”). 

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 subcontractors are adhering to these standards as they will be watched and sanctioned if found not to be complying. As their contractor, you are responsible for their activities. 

Conclusion

It is common for companies to use subcontractors when providing services to mining companies. it is important that companies understand how to manage the risk that is associated with using them. If not, the consequences can be expensive while doing  harm to the companies reputation. 

Below we have provided some basic tips that companies should be aware of – 

• Always put in place a subcontracting agreement.
• The services/outsourcing/subcontracting agreement between companies, is ruled by private law so they are flexible. 
• The subcontractor should provide proof of payment for salary and social security each month.
• Always make use of the sanctions imposed by the subcontracting agreement if employment obligations are not met.
• Companies must ensure that the subcontractors and their employees working on the project 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 cmm@ax.legal