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Practical Advice: Using Subcontractors in Chile.

Subcontractor agreements are a fundamental part of projects but there are some unique risks that foreign companies may not be aware of. Understanding how agreements are governed in Chile is critical to minimise risk. Here is a guide for foreign investors who are entering into subcontractor agreements while complying with Chilean Labour Law:

What is Subcontracting?

In simple terms, subcontracting is a business practice where a main contractor hires an additional company/companies called subcontractor/s who perform works or services with their own employees, for a third-party owner of the core project or task, called the main company.

To summarize, the parties involved in this scheme are the following:

  1. Main Company: Company who hires the main contractor, the owner of the core project.
  2. Main Contractor and its employees: Company hired to execute the externalized tasks or works.
  3. Subcontractor and its employees: Company hired by the main contractor to execute a certain task or service on behalf of the main contractor.

Subcontracting in Chile: What you need to know!

Under Chilean Law, all companies can enter into subcontracting agreements. There is very little that is restricted. Hence, the main liability for companies involved is subcontracting is ensuring the payment of labour obligations/social security and having measures in place to protect the health and security of the employees. 

Be warned – if you do not properly oversee your subcontractors and make sure that they are paying their workers and social security benefits, then you could find yourself liable for everything that is owed to the subcontractors employees.

For this reason, it is best to be proactive at an early stage with your subcontractors. There are many stories of companies taking a significant financial hit because they did not have the systems and processes in place to monitor their subcontractors.

Measures to Take: Systems and Procedures

  • Information Rights: This right allows the main company and/or the main contractor to request reports from the hired contractors and/or subcontractors concerning the payment of labour and social security obligations of their respected employees. 
  • Recommendation: Companies must have strict controls in place over the 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: This right allows the main company and/or main contractor to retain the respective payment for the services if the main contractor or subcontractor is not able to prove the fulfilment of the labour and social security obligations.
  • Recommendation: Should the subcontractor be found to have not paid, 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 subcontractors. 

It is important to have proper procedures and processes in place for not only reviewing the labour obligations of subcontractors but also to withhold payments for the corresponding amount should the subcontractor not meet them.

Health and Security Measures:

The principal company and/or principal contractor has the obligation to carry out all necessary measures to effectively protect the life and health of all the employees working at the project/site, regardless of who is the direct employer. 

For these purpose, the principal company and/or principal contractor must ensure that the project site, contractors and subcontractors are obeying hygiene and safety standards (usually recorded within a Textbook called “Order, Hygiene and Safety Rules”).

Therefore, 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. Chilean Health Authority has a Ruling concerning “Special Regulations for Contractor and Subcontractor Companies” which comprehends the standards and measures to comply.

Subcontracting Tips

  • 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.

Is there anything else to consider?

  • The services/outsourcing/subcontracting agreement between companies, is ruled by private law.
  • The worker shall be entitled to join unions and carry out collective bargains, but always internally within its direct employer.
  • Chilean government and its branches can execute subcontracting agreements. 
  • Companies must ensure the subcontractors and their employees have written employment agreements.

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 19 years, we have been supporting foreign companies with their growth in Australia and 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