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Work Contracts in Chile

It is not uncommon to see many questions arise when drafting the first employment contracts for a newly established entity in Chile. This is because common law countries tend to have work contracts that include many clauses making the document quite long. Going from a 30-page contract down to a 4 – pager can be worrisome for those unsure of labour laws in Chile.

Similar to other countries, a general employment contract in Chile will include:

  • place and date of the contract;
  • parties involved, indicating nationality, birth date and the date the worker begins employment;
  • nature of services to be provided and place or city where they are to be rendered. The contract may indicate two or more specific services that may be alternate or complementary;
  • amount, form and payment period of the remuneration agreed to;
  • duration and distribution of work schedule;
  • term of the contract.

Written or Verbal:In Chile, the employment contract must be in writing and be executed within 15 days of the initiation of services. The Labour Code states that if the labor contract is not put in writing within the aforementioned 15-day period, the terms and conditions shall be those indicated by the employee. Additionally, the employer shall bear the burden of proof of the real conditions and terms agreed on. In short, it is important to have a written contract because the labor courts will rely on the employee. It is common knowledge in Chile that employees win over 90% of labor cases so it is best to have all your ducks in order.

Probationary Period:The Chilean Labour Code does not consider a probationary period. Chilean companies usually use fixed-term agreements as a de facto probationary period (first employment contract term is set for a couple of months), and if the employee fits in the position the labor agreement is renewed or the employee can sign an indefinite (permanent) contract, otherwise the employee is dismissed at the initial term’s completion.

Social security: In the case of foreign workers who are considered professionals or technicians, they have the possibility of exempting themselves from contributing to the national pension system, provided that the worker is affiliated to a social security and welfare system outside of Chile, which provides coverage in case of disability, old age, and death. In order to have this benefit, the employment contract needs to express the willingness to maintain the employees’ affiliation to the foreign regime as a separate clause.

Work shift: The law sets standards for hours of work and safety and occupational health. The ordinary workday was reduced from a maximum of 48 to 45 hours per week since 2005, which will be distributed in no more than 6 or less than 5 days a week. The maximum ordinary workday is 10 hours per day.

There are workers who are exempt from working hours due to the position they occupy within the company (Ex. Management); that work without immediate superior control and in general those who do not exercise functions within the premises of the employer’s establishment such as business development or sales roles.

Gratification / Share of profit: All companies must share annual profits derived from their businesses with their employees. Companies can comply with this obligation by choosing between two different methods of participation in profits, both described in the law which includes actually calculating based on profits of the company or choosing the fixed monthly amount set by law. The company can change from one method to another from year to year if desired. We generally recommend going with the fixed amount set by law which is roughly around CLP$95,396 (Approx. USD$136.000) This payment is mandatory and cannot be eliminated.

Many companies will start with a lower salary then add the ¨gratification¨to the Employees salary, thus adding up to the original negotiated amount (i.e. If the Employee is to receive a salary of $5000 USD, the monthly salary indicated in the employment contract will be $4858.00 USD, which, in addition to the annual bonus, will add up to a total of $5000 USD.).

Income tax: The remunerations of workers are taxed with income tax. The specific tax is called Second Category and constitutes a variable percentage that is applied according to the total amount of remunerations, whose rate ranges from 0% to 40%.

Foreign workers:  All work contracts with a foreign workers needs to include 4 mandatory clauses which refer to a) income tax, b) social security, c) payment of fares to home country and d) the need to have authorisation to work in Chile prior to commencing work in Chile.

Restraint of trade clauses: They can be included in work contracts but they are extremely difficult to enforce once the employment relationship has been terminated. This is because heavy-handed restraints tend to conflict with constitutional rights guaranteed in the Chilean Constitution.

Bonus Tip: Unlike in North America or Australia, Chileans tends to negotiate their salaries based on the NET amount. This can sometimes hamper the onboarding process as the foreign company will think they are negotiating a salary with a potential employee based on the gross amount only to find out at the time of signing that the employee was thinking it was the NET amount.

Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Peru, Bolivia, Ecuador, Brazil, and Argentina. Over the last 18 years, we have been supporting foreign companies with their growth in Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets.

To better understand how we can support your management team in the Region, please contact Cody Mcfarlane at cmm@hgomezgroup.com