Terminating labor engagements before the expiration of a contract is very difficult in Chile. Unlike in some other countries, termination – including simple firing – must be accompanied by a formal justification, as well as a severance payment, or indemnización. Moreover, it is very common for employees to sue employers for wrongful termination, which usually results in a judge’s ordering a greater indemnización.
The size of the indemnización depends on whether the employee is fired with cause (con causa) or without cause (sin causa).
There are three grounds for termination that the employer can use as a justification (each is treated in a separate article of the Código de Trabajo):
- Objective/necessary (Article 159): the termination was inevitable or outside the employer's and employee's control;
- Subjective/arbitrary (Article 160): the employer believes the employee has done something to warrant termination, such as offending the workplace environment or being delinquent
- Company necessity (Article 161): for example, when the company no longer has the budget to pay the employee.
When terminating employment, the employer must give one of these justifications, along with a severance payment. If the employee proceeds to sue, the penalty that the employer (most likely) will have to pay will be up to the judge's discretion, based on the justification the employer gave. The penalty will range between an extra 30% and 100% of the indemnizacion.
Calculating the Indemnización:
The severance payment for employees whose contracts are terminated for objective/necessary reasons, as well as the severance penalty for employees who are wrongfully fired, generally includes the following:
- One month’s salary for every year that the employee worked for the company;
- The proportional daily salary for all untaken vacation days (up to 2 years' worth), since her first day of employment (regardless of how many years she has worked for you).
- If the employer does not give a month’s notice, an extra month’s salary must be paid.
- All unpaid salary;
- All unpaid health insurance and pension fund contributions.
Employers may not terminate a labor contract with an employee until all of that employee's health insurance and pension fund contributions have been duly paid up to the present date. If they have not been paid, the employee in question will continue to be legally employed, and must be paid accordingly, until all contributions have been made.
Notice of Termination
The employer must give a notice (preaviso) of termination at least 1 month before the last day of work when terminating employment because of company necessity (article 161).
Partners vs. Employees
While employees are heavily favored by the justice system and labor law, partners (or socios) of companies are not. For this reason, it is not uncommon for offended socios of a business to claim that they are in fact employees in order to sue successfully. It is important to beware of this possibility.
Special Treatment for Union Representatives
Finally, one particular type of employee cannot be fired legally: the employee designated to be the representative of the union (should your employees be unionized). If that employee stops working in order to focus on union activities, he cannot be fired; though, under certain circumstances, the employer is not required to pay him. However, if he stops being active in the union and returns to work, the time he was still employed (although unpaid) while working for the union will count towards his tenure and benefits (such as the number of holidays and sick days).