Chile is a beautiful South American country between the Andes Mountains and the Pacific Ocean. This country is renowned for its attractive investment climate, stable political setup, and sizeable skilled workforce. Chile’s level of competitiveness compared to other Latin American countries is evident in the Global Competitiveness Index, which ranks it first in the region. According to Statista, there were 345 startups in Chile in 2022, with 142 involved in software and data while 46 are focused on FinTech. There are also about 70, 000 tech experts in various fields. Due to the abundance of these small enterprises and technical expertise, many US-based tech startups are eager to establish their operations here.  

Let’s say you’re interested in launching a business and hiring skilled employees in Chile. In that case, it’s crucial to learn the region’s legal intricacies and employment laws, especially those regarding employees and contractors. Chile’s labor code has clearly outlined steps to hire and sack employees. This law also describes the conditions under which employees may be relieved of their duty and whether or not they are worth compensating. 

Understanding Legal Grounds for Employee Termination in Chile

As mentioned earlier, the labor code contains details regarding the termination of employment in Chile. According to these regulations, an employment contract may only be terminated after a mutual agreement between employer and employee. However, there are other conditions that support termination of employment in Chile, such as the employee’s resignation, death of the employee, the expiry of a fixed-term contract, completion of the terms stipulated in the agreement, an act of God, or outright dismissal by the employer. Each of these types of employee termination has distinct procedures, which both parties must respect. Employees who wrongly terminate their employees are subject to pay a compensation hich may range from 30% – 100% depending on the cause of the dismissal, along with the cost of the employee’s attorney. If the employer is also guilty of owing social security contributions they may be obliged to pay another fine equal to 6 – 11 months of the affected employee’s salary. 

Chile’s labor code prevents employers from thoughtlessly dismissing their employees. Employers must provide a valid, company-related reason to justify termination. Local courts have become stricter in ensuring businesses have enough grounds to dismiss their employees. Now, let’s look at the conditions under which employers can terminate their workers’ contracts. 

Individual Dismissal 

Here’s a list of reasons why an employer can terminate the contract of their workers: 

  • Gross misconduct by the employee, such as a lack of strong moral principles, sexual harassment of other employees, immoral behavior affecting the reputation of the employer, physically assaulting other employees or the employer, and actions causing injury to the employer. 
  • Performing any activities that are strictly prohibited by the employment contract. 
  • Failure to appear at work for two consecutive days, two Mondays, or three days in the month without any justified reason. Also, any unjustified absence of an employee in charge of a machine, activity, or task whose abandonment would disrupt daily operations. 
  • Any abandonment or unjustified departure of the employee from work during working hours without seeking permission from the employer or anyone representing him. The refusal of an employee to perform a task as specified in the employment contract. 
  • Any recklessness or mindless omission compromises the safety of the organization and the safety of other employees or endangers their health. 
  • Intentionally causing damage to work tools, machinery, installations, products, or merchandise. 
  • Breach of contractual obligations agreed with the employer. 
  • When the employer has been subjected to a judicial resolution due to bankruptcy leading to a dissolution of assets. 
  • Written eviction for the employer 

Collective Dismissal

The local labor code currently has no procedure to regulate the collective dismissal of employees. 

Employees Protected From Dismissal

It’s crucial to note that certain employees are protected from dismissal. Employees who are currently away from work due to illness, pregnancy, or leave cannot be terminated will they fully resume work (unless they engage in gross misconduct leading to a termination with cause or if the company is reorganizing). Aside from the above mentioned categories, the president of the health and safety committee as well as Union directors enjoy this protection from dismissal. The employment contract of workers protected from dismissal can only be terminated with permission from a court. 

Adhering to Mandatory Termination Procedures

Upon termination of employment, employers must prepare a letter for the affected employees stating the reason for the dismissal and when they are expected to stop work. This letter may either be sent by mail to the employee’s home address or delivered in person within three days after the dismissal. Employees are also expected to acknowledge and sign their dismissal letter after it’s been delivered. 

An original copy of the dismissal letter must be sent to the Chilean Labor Ministry (Inspección de Trabajo) within three days after the dismissal. However, it’s also common for employees to get a dismissal notice on the final day of their employment, which will take effect immediately. 

After the labor ministry and the employee have been notified about the employment termination, the next thing to do is to prepare a severance agreement. This agreement will specify why the employee was dismissed and the total amount owed as severance. Severance payments after termination usually comprise notice periods (if dismissal is not immediate), accrued unused time off, and other contract clauses that protect employer intellectual property and confidential information. The severance agreement must be created and signed within ten days after the dismissal with a notary public or the Chilean Labour Ministry as witnesses. 

The notice period for employee termination in Chile is 30 days. It’s not uncommon to find employers who prefer to compensate their workers instead of having them wait or work for the entire notice period. As soon as the employee reaches the last day of their employment, employers must de-register them with the authorities and make severance payment within ten days.  

Calculating and Managing Severance Pay

If an employee has been terminated with cause (due to a severe breach in contract terms or gross misconduct), they aren’t entitled to any severance pay. However, employees can contest their right to severance pay in Labour Courts. If the court rules in their favor, employers are expected to pay any amount owed and a penalty of up to 100% of the initial severance compensation. 

If an employer dismisses a worker due to company/business needs such as harsh economic conditions and downsizing, they are entitled to severance compensation. In a scenario where these employees are also terminated at will after receiving permission from a court, affected workers are also to be paid a severance fee. Here’s a breakdown of the total amount of compensation owed to dismissed employees: 

  • Severance Payment Based on Years of Service: All eligible employees are entitled to severance pay worth one month’s salary for each year spent with the employer with a limit of 330 days worth of pay. When calculating severance pay, Chile’s labor laws stipulate that the basic monthly salary used must not exceed 90 UF. However, this limit may be waived based on agreement by both parties. 
  • If the dismissal notice is not issued 30 days in advance, the employee is entitled to a severance fee equal to a one-month basic salary with a limit of 90 UF. However, if the employer refuses to pay this fee, the amount owed may increase to 150%.

Article 152, paragraph of the Chilean Labor Code, states that if an employer has failed to settle the employee’s statutory benefits at the time of dismissal, the worker’s labor contract will not be terminated. While the employee will no longer work for the organization, the employer will be forced to settle all the remuneration stated in the employment contract till the statutory benefits are fully paid. 

Read more: Employee Benefits in Chile

Challenges in Employee Termination: Legal and Practical Considerations

The employee termination procedure in Chile is clearly stated in the labor code, but this doesn’t mean that the process will always occur without any bottlenecks. Common challenges that occur during employee termination include termination without a notice period, failure to adhere to laid-down procedures, refusal to pay termination benefits, withholding and deducting employee salaries, and failure to offer dismissal notice. When any of these happen, the affected party (usually the employee) may issue a complaint to the labor court. 

The following is a list of legal and practical considerations you must put in place to avoid falling on the wrong side of the law: 

  • Ensure you review the employment contract before dismissing your employee to identify any terms and conditions you may have missed. 
  • Ensure to regularly review employment laws to avoid missing out on crucial elements of the termination procedure. 
  • Ensure employees are informed as soon as they are dismissed. 
  • Ensure the termination letter is created and sent as when due

Further reading: Employer of Record in Chile

Contractor Termination: A Different Landscape

An employee is an individual who is bound by an employment contract to work for an organization by utilizing the work conditions and resources provided by the employer. On the other hand, independent contractors are tasked with completing tasks using their discretion and resources at their disposal. However, contractors are not bound by working-hour restrictions and are paid upon the completion of their service. 

If you’ve employed an independent contractor, you may terminate the contract at any time following a breach in the agreement or when your organization can no longer operate in such a capacity. When terminating independent contractors in Chile, you should note that they aren’t entitled to severance pay. However, most contractual agreements with independent contractors include terms and conditions to protect their interests in case of a dismissal. To avoid legal sanctions, employers must meet all termination expectations and terms before parting ways with the contractor. Hence, pay close attention to all the contract details when hiring an independent contractor. 

Further reading: Employee Leave Policies in Chile and Payroll Taxes & Expenses in Chile

FAQs

In Chile, termination policies require employers to provide written notice and justify the reason for termination. Acceptable reasons include mutual agreement, resignation, serious misconduct, and business needs. Severance pay and notice periods depend on the employee’s length of service and the reason for termination.

Employment termination in Chile must be justified by valid reasons, such as misconduct, company needs, or mutual agreement. Employers must provide written notice and, in most cases, severance pay. The specifics depend on the employee’s contract, length of service, and the reason for the termination.

Chilean redundancy law mandates severance pay for employees terminated due to economic needs or company restructuring. Severance is typically one month’s salary for each year of service, up to 11 years. Employers must provide written notice and justification for the redundancy.

The minimum notice period for termination in Chile is 30 days. Employers can opt to provide immediate termination by paying the employee one month’s salary in place of notice. This ensures that employees have time to transition or seek new employment opportunities.

Chilean labor law protects workers’ rights, covering contracts, working hours, wages, and termination. It mandates maximum working hours, overtime pay, and social security contributions. The law ensures fair treatment, safe working conditions, and benefits such as healthcare and pensions.

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Vit Koval
Co-founder at Globy
A top Global Hiring voice on LinkedIn, co-founder of Globy, and host of Default Global. Using deep expertise in global hiring, remote work, and global business expansion to help companies excel worldwide with innovative strategies.