Procedures For Terminating the Agreement
The Chilean Labour Code provides several regulations regarding termination of employment contracts. Terminations must be based on any of the grounds provided in the Labour Code.
However, there are some specific cases where termination of employment contracts occurs automatically, for example (e.g. in case of employee’s death, conclusion of work and expiration of the fixed-term contract).
Upon the termination of an employment contract, the employer must give notice to the employee, explaining the reasons for the dismissal within the 3 working days following the termination. A copy of that notice (i.e. letter provided to the employee) has to be sent to Labour Authority for their records within the same term.
Furthermore, the Labour Code, establishes a 10 working-day term (counted from the date the former employee ceases to render services for the company), within which the employer shall make available to the employee a termination and release agreement along with any outstanding amounts owed due to the termination of the employment contract. For these purposes, the employer shall pay the employee any amounts owed arising from the termination of the employment relationship and must execute the termination and release agreement before a Notary Public.
As a general rule, employers can instantly dismiss employees in certain cases; (i) on the grounds of “needs of the company”, by giving a 30-day prior notice or paying a severance in lieu of notice; (ii) in case of gross misbehaviour or dishonesty; or (iii) in case employees breaches the employment contract, among others.
Nevertheless, the employer will need to obtain the Labour Court’s approval before being able to dismiss certain employees. This will be the case of employees who are on a collective bargaining process, pregnant women, employees on maternity leave, maternity period of protection, members of labour unions and other few cases provided in the Labour Code.
The employment contract can be terminated by the employee’s written resignation. This resignation must be signed before a Notary Public or Labour Bureau Inspector, among other authorities.
Termination On Notice
To terminate the employment contract by the grounds of the “needs of the company”, the employer must give the employee a 30-day notice before dismissal, unless the employer agrees to pay the employee compensation equivalent to 30 days of work in lieu of notice in addition to any other severance payment that is due to the employee. The remuneration considered for these purposes is capped by the Law at UF 90 (approximately USD $3,700).
If termination is due to gross misbehaviour or breach of contract by the employee, no such previous notice is requested.
Termination By Reason Of The Employee's Age
In Chile, dismissal by reason of an employee’s age is not permitted. In case of any claim, Labour Courts could deem such dismissal as illegal and discriminatory.
Automatic Termination In Cases Of Force Majeure
In cases of force majeure, provided that the effects of the latter are permanent, termination of the employment contract is justified without severance payment.
Our Labour legislation does not regulate this matter.
Termination By Parties’ Agreement
The parties can terminate the employment relationship by mutual agreement. This agreement must be signed before a Notary Public or other persons specifically authorized, such as a labour union’s director, labour inspectors, etc.
Directors Or Other Senior Officers
Minor differences aside, the Chilean Labour Code provides the same treatment than any other employee to directors and other senior officers who work in a relation of subordination and dependence with the employer.
A specific ground for termination (i.e. desahucio) is established for senior officers, provided that other specific legal requirements are met.
Special Rules For Categories Of Employee
There are no special categories of employees in the Chilean Labour Law.
Labour Code regulates whistleblower only for sexual harassment claims, providing that the Internal Rules of Order, Hygiene and Safety should include the procedure that will apply to such claims. For other claims, in general, anybody can address them before the Labor Directorate.
Specific Rules For Companies in Financial Difficulties
In case of bankruptcy, severance payments to employees have certain priority over other company debts. The Chilean law establishes that employment contracts will end in case of bankruptcy. For all legal purposes, the company’s bankruptcy declaration will serve as the termination date of employment contracts.
The bankruptcy administrator will be appointed by the relevant institution. Said administrator shall (i) communicate the termination of the employment contracts by providing the relevant notice within a 6-day term following the bankruptcy’s declaration; (ii) pay the relevant severance payments to employees (i.e. severance in lieu of notice and years of service, if applicable) and (iii) make available to the employees their release agreements.
No judicial authorization will be required in order to dismiss employees with immunity from dismissal in these cases. In case of pregnant female employees the bankruptcy administrator shall also pay an additional severance equivalent to the term of the pending maternity leave.
Special Rules For Garden Leave
This figure is not contemplated under Chilean labour law except for cases of sexual harassment. In such cases, once the complaint has been received by the employer, he must adopt the necessary protective measures for those involved, such as the separation of physical spaces or the redistribution of working hours, considering the seriousness of the alleged facts and the possibilities arising from the working conditions.
Restricting Future Activities
Parties may agree to restrict employee’s future activities. With regard to these restrictions, there are two important moments or stages to consider. The first is while the employee is employed and the second is after the employment relationship is terminated. If an employee breaches a non-compete covenant included in the contract while still in employment, the employer can terminate the contract without having to pay severance. After an employment relationship ends, the enforcement of a non-compete covenant may be difficult given the absence of specific statutory rules and, more importantly, because the Chilean Constitution guarantees all individuals the freedom to work, to be hired freely and to select their work. Labour Courts tend to protect these rights.
Moreover, pursuant to the Labour Code, the freedom to work is recognised as a “fundamental labour right” of employees. Therefore, it is possible that these types of restrictions may be declared invalid in case of claims filed before Labour Courts.
If the employment is terminated by the employer on the grounds of the needs of the company (such as those required for the rationalisation or modernisation of systems, a fall in productivity or changes in market conditions or the national economy that make the loss of one or more employees necessary) or desahucio, unless a higher severance payment is agreed by the parties, the employee will be entitled to a legal severance for an amount equal to 1 month salary for each year worked or a fraction thereof if there is a remainder of more than 6 months, with the following limitations: the severance is capped at 11 months (i.e., 11 years of service); and the remuneration considered for these purposes is capped at UF 90 (approximately USD $3,700) per month. In addition, the employer must give the employee a 30-day notice before dismissal, unless the employer agrees to pay the employee compensation equivalent to 30 days of work in lieu of notice with the same cap.
If an employee is dismissed without any cause or if he or she considers that the dismissal is not sufficiently justified, the employee is entitled to file a labour lawsuit before Labour Courts and could claim compensations in lieu of notice and years of service (as stated above) and, additionally, severance payment for wrongful termination which range from 30 percent to 100 percent of the legal severance established for the years of service. This percentage may vary depending on the grounds invoked by the employer upon the termination of the contract.
In the case of specific task contracts, if the employment is terminated by the employer on the grounds of the completion of the work or service, the employer may terminate it in a justified manner as long as it pays to the worker, at the time of its termination, a compensation equivalent to: (i) For the contracts executed between January/01/2019 and June/30/2020: 1 day of remuneration for each month worked or a fraction thereof if there is a remainder of more than 15 days; (ii) For the contracts executed between July/01/2020 and June/30/2021: 1,5 days of remuneration for each month worked or a fraction thereof if there is a remainder of more than 15 days: (iii) For the contracts executed between July/01/2021 and December/31/2021: 2 days of remuneration for each month worked or a fraction thereof if there is a remainder of more than 15 days; and, (iv) For the contracts executed from January 01/01/2022 onwards: 2.5 days of remuneration for each month worked or a fraction thereof if there is a remainder of more than 15 days. The remuneration considered for these purposes is capped at UF 90 (approximately USD $3,700).
Special Tax Provisions And Severance Payments
The employee’s monthly salary will be subject to the Second Category Tax, which is progressive and is based on the employee’s gross income. The tax rate ranges from 0 to 40 percent depending on the taxable basis. Normally severance payments will be tax free, provided they do not exceed the rule of one-month salary per year of work.
Allowances Payable To Employees After Termination
Upon termination of the employment contract, the employer must pay any pending labour benefit to the employee (e.g. holidays, overtime, remunerations, social security contributions and severance payments, if any). Therefore, there are no other allowances payable to employees after the termination of the employment contract.
Time Limits For Claims Following Termination
Employees have 90 working days, from the date of dismissal, to make a claim for improper dismissal. Employees have six months to claim other labour benefits and five years to claim social security contributions and indemnities where the employee has suffered an accident or professional illness at work.