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Labor and employment law challenges in business transformations

Chile

Workforce restructuring

The key practical issues in workforce restructuring include:

  • Legal justification
  • Works council and employee representatives’ process
  • Labor administration process
  • Costs and timing
  • Litigation risk

Applicable legislation

Chilean Labor Code, Art. 161 (1), stipulates that an employer can terminate an employment contract on the grounds relating to the economic situation of the company, establishment or service, which trigger the need to lay off one or more workers. However, the Chilean Labor Law does not have any specific regulation on collective redundancies.

There is no specific threshold triggering additional requirements when terminating employees for reasons related to the economic situation of the company, establishment or service. The same rules will apply for termination of a single employee or a significant number of employees.

Collective bargaining agreements sometimes provide for the payment of severance indemnities without legal caps, or for other legal grounds of termination without the right for severance indemnities.

Required legal justification

The employer may terminate any employment contract as may be required by “company´s needs” based on economic reasons of the company defined in the Labor Law, as the following:

  • Rationalization
  • Modernization
  • Low production
  • Changes in market
  • Changes in economic conditions or in the local or global economy
  • Any other reasonable business reason

These reasons need to be clearly stated in the dismissal letter and should be able to be proved in court if the employee files a claim.

Works council/unions or other employee consultation requirements

Consultation requirements with works council/unions

In Chile, there is no equivalent to the legal concept of works council. There is no legal obligation on the employer to consult or require prior or subsequent authorization to dismiss workers from the union of the company or other trade union organizations.

Consultation requirements with other employee representatives

In Chile, there is no legal obligation to consult with specific employee representatives.

Consultation requirements with employees

There is no legal obligation to consult with employees. However, the termination of the labor relationship must follow a formal procedure, respecting both legal norms and the dignity of the worker. In case a labor contract is terminated on economic reasons (“company needs”), the employer must follow the procedures as given below:

  • The employer must give a written formal dismissal letter to each impacted employee informing him or her of the termination including the legal grounds for the termination and the payment of legal indemnities. A copy of this written communication must also be sent to the labor authority (for more information, see “Approval/notification of the labor authorities and other government authorities”).
  • In Chile, it is a leading practice to provide termination settlement (Finiquito), which is a document stating the notice of termination, the conditions of the termination notice, the reasons for the termination, and the itemization of the social benefits to be received by the employee as part of the termination.

    Although not a mandatory document, the Finiquito is the only legally binding way for the employer to prove the termination of the employment and the conditions under which the contract was terminated. If the Finiquito is duly signed and ratified by both parties before a notary public or before the labor authority, it constitutes irrefutable evidence of the parties’ obligation, preventing subsequent claims before the labor courts for something different than that contained in the Finiquito.

Approval/notification of the labor authorities or other government authorities

Approval of the labor authority (Labor Directorate) or other government authorities is not required for collective redundancy. However, the employer must notify the termination to the labor authority by sending it a copy of the written dismissal letter sent to the employees.

Also, a Finiquito (document stating the notice of termination, the conditions of the termination notice, the reasons for the termination, and the itemization of the social benefits to be received by the employee as part of the termination) must be signed by the parties in front of:

  • The Public Notary (usual practice)
  • Labor authorities
  • The President of the union organization in the company (if any)

For more information, see “Consultation requirements with employees.”

Employee selection criteria

There are no special rules for employee selection criteria. The employer can carry out dismissal of certain positions or jobs (without discrimination or arbitrary distinctions), selecting impacted employees based on strictly economic (reduction of costs) considerations and not on personal considerations.

Labor law provides for a special procedure to protect employees against any kind of breach of fundamental rights granted by the Constitution and discriminatory conduct.

Further, the following employees are protected against dismissal:

  • Employees who are pregnant
  • Some labor union members
  • Members of the Health and Safety Parity Committee

These employees may be dismissed only by the labor court order based on specific enumerated legal grounds.

Actions required to limit the negative impact and social plan

The employer has no obligation to undertake actions to limit the negative impact of the collective redundancy.

Internal alternative employment/redeployment
In Chile, the employer has no mandatory obligation to seek alternative positions to offer to an impacted employee.

Other measures
Employers may, however, on a voluntary basis, provide certain measures as social plan, which may vary depending on the size of the company, the means of the company and its group, previous social plans and the employer’s potential to provide for a large range of measures to limit the negative impact of the redundancies, including outplacement.

Estimated timeline

The time required to fully implement a large-scale redundancy depends on the number of redundancies contemplated. It can usually take around two weeks excluding the notice period, due to the term that labor law stipulates that the parties must sign the termination settlement (Finiquito) in front of a faith minister, which is within 10 business days from the termination of the labor contract or dismissal.

Estimated costs

Mandatory costs

The key components of mandatory HR legal costs are as follows:

  • Notice or an indemnity in lieu of the notice if the employee is released from working during the notice period: Generally 30 days’ notice (or 30 days’ pay in lieu of notice thereof), in addition to any indemnity. However, payment in lieu of notice is limited to an amount equal to UF90. The UF, or Unidad de Fomento (Development Unit), is a monetary unit indexed daily to inflation by the Chilean Government.
  • Severance indemnity for impacted employees with at least one year of service: One month’s salary (capped to UF90 unless otherwise agreed contractually), for each year of service (or fraction over six months) with a cap of 11 years of service.
  • Payment of vacation days.
  • Unpaid salaries.

Customary additional costs

The measures of a social plan (if any) may vary depending on the size of the company, the means of the company and its group, previous social plans and the employer’s potential to provide for a large range of measures to limit the negative impact of the redundancies, including outplacement, which is one of the main customary additional HR costs.

Hiring restrictions post-redundancy

There are no rules regarding hiring restrictions post-collective redundancy. On the contrary, the employer may hire another employee to replace the dismissed employee if all of the following conditions are met:

  • The termination settlement (Finiquito) must be signed by both parties in compliance with all legal requirements and without reservation of claims by the dismissed employee
  • The new replacement employee is less costly than the dismissed employee

It must be noted that Finiquito is the only legally binding way for the employer to prove the termination of the employment and the conditions under which the contract was terminated. If the Finiquito is duly signed and ratified by both parties before a notary public or before the labor authority, without any employee’s reservation, it constitutes an irrefutable evidence of the parties’ obligation, preventing subsequent claims before the labor courts for something different than that contained in the Finiquito.

Litigation risk

Interested parties

If the justification invoked by the employer in the formal letter of dismissal as cause of termination is considered unfair or inapplicable by the employee, the impacted employee has 60 business days to file a suit against his or her employer in the labor court.

In such cases, as a first step, the employee is entitled to claim before the labor authorities who can summon both parties in order to reach an agreement. If no agreement is reached, the abovementioned term to claim is extendable to up to 90 business days.

Damages and other remedies

Claims could lead to damages for unfair dismissal, fines for violation of the employees’ fundamental constitutional rights and reinstatement.

Damages for unfair dismissal
The amount of the damages are linked to the severance amount granted to the employee which varies depending on the employees’ years of service and salary. For example:

  • If the court rules in favor of the employee on his or her claim for unfair dismissal, the severance payment can be increased by 30%.
  • If the court deems that the dismissal has violated the employee’s fundamental constitutional rights, the employer might be obliged to pay an additional fine equivalent to 6–11 monthly salaries.

There are no punitive damages in Chile.

Reinstatement
Certain employees enjoy immunity from dismissal. If such employees are dismissed, they are entitled by law to choose between being reinstated within the company — which the employer cannot refuse — or the payment of legal indemnities as described above.

These employees may be dismissed only by the labor court order based on specific enumerated legal grounds. The following are the protected categories of employees:

  • Employees who are pregnant
  • Some labor union members
  • Members of the Health and Safety Parity Committee

Criminal sanctions
In Chile, there is no criminal sanction regarding collective redundancy process.

Country-specific issues

There are no other issues specific to Chile.

Contact

Primary Contact for Chile Labor and Employment Law

Nancy A Ibaceta Muñoz
Ernst & Young Ltda.
+56 2 676 1567

Global Labor and Employment Law Guide
Workforce restructuring
2016-07-01
Chile
CL

Contacts