CEO's Thoughts

Termination Provisions Latin America

By August 25, 2014 January 18th, 2018 No Comments
Velocity Global

Termination Provisions Latin America

When contemplating entry into a new market, business leaders seldom stop to think about the impact of termination provisions in that country.  It’s no fault of the executives; you see a great opportunity to capture market share in a new land, you found the resource that will lead you to great success in country, and you’re busy contemplating the revenue potential juxtaposed with the cost of doing business there.  The problem is that many overlook a potentially material line item which is the cost to terminate your employee.  A recent PwC study shows that the average length of an overseas hire is 18 months.  There are a number of reasons why this figure is so low… but it certainly suggests that companies should know the ground rules and potential exposures relating to the day when employment comes to an end.

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We figured the first place to start when talking about termination provisions in Latin America.  Why?  Because most US executives we talk to are completely in the dark about the rules regarding terminations in that area of the world.  In this article, you will find a list of highlights for some of the more frequently traveled countries as well as some overall suggestions you may want to consider when hiring in Latin America.  If we haven’t covered a country and you’d like more details, shoot me a note and we can go through that country’s specifics.

Mexico

  • For all intents and purposes, just cause termination does not exist.  Plan to pay severance.
  • Pay close attention to the trial period, which is commonly 30 days.  This means you have 30 days to decide whether your employee is fit for the job.
  • If terminated after 30 days, the following applies 3 months of salary plus 20 days for every year of service.
  • The labor courts don’t look favorably upon companies that haven’t accrued for the termination, so your best bet is to accrue from day 1.  This will save you money and heartache in the long run, but it also increases your cost of employment by 33% in the first year.  Ouch.

Colombia

  • You can terminate with or without just cause but plan to pay up if you can’t prove just cause.  Likely costs include termination settlement, extralegal benefits, and full/timely payment into the severance fund.  If severance payments are not made in accordance to the timelines outlined by the Colombian Labor Board, you owe one day salary for every day delayed plus a 24% interest charge.
  • Just cause termination can include things like violence, material damage to the building/office, immoral acts, “grave violations” of the labor code, imprisonment (but only if greater than 30 days), contagious or chronic disease which prevents the employee from doing their job for 180 days or more, and others
  • Severance pay is most commonly 20 days for the first year of service and 15 days for each year thereafter.  Unless they have been an employee for over 10 years, then the numbers go to 45 and 40 days, respectively.

Brazil

  • The minimum notice period is 30 days and grows based on years of service
  • Final payment must include accrued vacation, 13th month salary, and a pro-rata of all bonus, benefits, and overtime pay
  • Art. 482 of the Labor Code (CLT) suggests employers can terminate with just cause in the following cases by the employee: deceit, misconduct, obscene acts, conducting personal business without employer’s permission if it implies in a conflict of interests or neglect of duty, conviction of a crime, habitual drunkenness or drunkeness while working , neglect of duty, gross insubordination, violation of trade secrets, performance of acts that damage the reputation of the employer or third parties.
  • If you are unable to show just cause, employer must pay to the employee a tax equal to 40% of the total contributions to the employee’s unemployment fund
  • Brazil recently reported they have 1.2 million active labor cases in the court system.  Try to stay out of this mess, it will cost plenty and could take years to get your case into court and resolved.

Argentina

  • Similar to Brazil, termination payments are one month of payroll for every year of service
  • The notice period equals one month if under 5 years of service and two months if over 5 years of service
  • If employees are in Buenos Aires, and additional 8.33% on top of severance must be paid if a senior position

In summary, know the rules coming in and seek knowledgeable advice when employing people in Latin America – it will be significantly different than what you are accustomed to and typically far more expensive.

-Ben Wright