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Hiring Staff in Chile

Hiring Staff in Chile.

Hiring staff in Chile can be a bit of a headache if you are not familiar with local practices. The most advisable course is to set up a local entity in Chile to act as the employer. If that is not possible, we can suggest some alternative solutions.

If you have decided to hire in Chile, the first thing you need to know is that the local tax and social security system puts the entire burden of calculation and payment in the hands of the employer. This means your candidate will most likely not be familiar with all of the details related to tax or social security matters, leaving all of that to you.

As a result, salaries in Chile are typically negotiated in net terms (after taxes and social security withholdings), making it your responsibility to calculate employment tax, social security contributions, and unemployment and health insurance.

Let’s say your candidate wants to take home CLP 1,000,000 a month net. To get there, you will need to factor in:

  • A 7% contribution to health insurance.
  • A 10% contribution to pension, plus the pension fund manager’s commission (e.g. an additional 1.45%).
  • A 0.6% contribution by the employee to unemployment insurance (in the case of an indefinite contract).
  • Employment tax ranging from 0% to 40%. In this example, a salary of up to CLP 2,000,000 would put your candidate in the 4% marginal tax bracket.
  • A mandatory taxable bonus (“legal gratification”), paid based on company profits, though most employers opt for a capped version that applies in any case.

While this may sound daunting, deductions are subject to capped income: the calculation base is roughly CLP 3,457,834 (about 87.8 UF) for health and pension contributions, and CLP 5,194,627 (about 131.9 UF) for unemployment insurance.

In addition, as an employer you must also pay “employer contributions”, which add another 6.21% on top. These include:

  • Employer’s share of unemployment insurance: 2.4% (rising to 3.0% for fixed-term contracts).
  • Disability insurance: 1.88% (this rate changes from time to time).
  • Work accident insurance: 0.93% (this can be higher depending on the company’s line of business).
  • Employer’s individual contribution: 0.1%, paid into the worker’s pension.
  • Social security contribution: 0.9%.

So where does this leave us? To deliver the CLP 1,000,000 net your candidate wants, you will end up facing a cost of about CLP 1,316,050. Don’t worry, we will help you with this.

On top of that, if you are recruiting a high-profile executive, she or he may ask for a car or housing. That is possible, since those kinds of perks are considered part of taxable compensation.

For most employees, however, the usual expectation is a modest allowance for commuting and lunch (or remote work expenses). These are tax-free as long as they are reasonable (having lunch at the Ritz every day does not count).

And as you may already know, Chileans are big fans of vacations and long weekends. For that reason, your hard-working employees will expect to receive a taxable bonus (“aguinaldo”) twice a year, at least: one for the September 18th National Holidays, and one for Christmas and New Year. These don’t need to be large sums – just enough to fire up the grill and gather friends and family.

Finally, keep in mind that the work week in Chile is being reduced from 44 to 40 hours, unless the employee agrees to waive that limit, which is common among professionals.

Now let’s talk about the not-so-pleasant part: ending the employment relationship.

Letting someone go is not only an emotionally tough process, but also one with a number of legal consequences:

  • As a general rule, you may dismiss an employee at any time based on the needs of the company (e.g. restructuring). This will require compensating your former employee for the time worked.
  • Chilean labor law also allows other causes for dismissal without severance pay. These are serious and strict causes, such as theft, and always carry a significant burden of proof.
  • If the employee is entitled to severance, she or he will receive one month of gross salary (capped at about CLP 3,544,476, or 90 UF) per year of service (up to 11) or fraction over 6 months.
  • The employee is also entitled to one month’s prior notice. If this is waived, then an additional month of capped gross compensation must be paid.
  • Finally, accrued vacation must always be paid in full, with no cap.

If your employee resigns, then a good handshake and payment of accrued vacation will suffice.