International Newsletter

Modern Legislative Proposals for Chilean Employment Market

May 14, 2019

In January 2019, the president of Chile, Sebastián Piñera, announced the topics that will be contained in legislative reform aimed at modernizing the Labor Code. The main topics are (i) reducing the severance burden for employers; and (ii) social security protection for employees who render services for tech platforms.

Broadening unemployment insurance and reducing the severance burden. Termination without cause for permanent employees requires a company to pay one month’s salary for each year of service up to a maximum of 11 months’ pay. Fractions of a year amounting to over 6 months count as a full year’s service for these purposes. Each monthly salary is capped at US $3,620 per month approximately. This severance scheme follows the Latin American tradition of granting protection against unemployment through employer severance payments rather than state coverage or social unemployment funds.

This severance scheme has some drawbacks: (1) It creates a “two tier” workforce where only permanent employees benefit from severance payments, which do not apply to temporary workers. (2) It penalizes newer employees who companies can discharge more cheaply and who are, therefore, more vulnerable. (3) It lacks adequate mechanisms to ensure a company has the funds to make severances payments.

In response to these issues, Piñera’s proposals intend to create a system in which employees pay monthly contributions into a fund, which then pays out on termination. The new system will be voluntary—only applying to employees who opt into it. Employees who do not opt in will continue to be covered by the existing system. Those that opt in will lose payments from their employers upon termination but will get paid by the fund even upon voluntary resignation, which currently does not entitle employees to receive any severance. Therefore, on the one hand, employees will be benefitted by getting a guaranteed severance that applies when they resign or are terminated by the company, and on the other hand, the company will be relieved from paying severance at the moment of termination, eliminating the provision of those funds in their accounting.

Social security protection for employees who render services for tech platforms. The proposed new legislation will seek to add individuals who render services through tech platforms, who are currently not considered employees, to the social security system, making the income they earn subject to social security withholdings. Until now, regulations only required social security withholdings for nonemployees who render professional services (e.g. legal consulting services). This is a major innovation to Chilean legislation, and many commentators believe that individuals who pursue tech platform careers will be reluctant to withhold social security contributions, even when doing so would give them access to new benefits for their own protection.

Written by Ignacio García and Fernando Villalobos of Porzio Rios Garcia and Roger James of Ogletree Deakins

© 2019 Porzio Rios Garcia and Ogletree, Deakins, Nash, Smoak and Stewart, P.C.