As one of South America’s most prosperous nations, Chile is a highly sought-after destination for remote talent. When hiring employees, organizations need to have a legal entity in the country or use an Employment of Record platform. Hiring independent contractors, though, is a straightforward route to working with Chilean talent.
Regardless of what route organizations choose to take, they need to be diligent and understand the difference between an independent contractor and an employee. If the distinction is not made, organizations may be at risk of misclassification and lofty financial penalties.
Here’s a comprehensive guide on the difference between independent contractors and employees in Chile.
Independent Contractors in Chile
Hiring independent contractors in Chile is a fantastic way for organizations to recruit global talent. It's a faster, more efficient route than hiring employees and establishing an Employer of Record (EOR).
Chile defines an independent contractor as individuals who satisfy the following criteria:
- Provides a service rather than someone who is hired to work as a subordinate.
- Provides their own equipment.
- Free to work their own hours from any location.
- Has the ability to refuse a task.
- Is not listed on the company’s payroll.
Contracts
Independent contractors operate under three main categories:
- Empresa Individual de Responsabilidad (EIRL): A distinct legal entity that enables independent contractors to function as sole proprietors
- Sociedad de Responsabilidad Limitada (SRL): An LLC that requires a minimum of two shareholders and one director
- Sociedad Anónima (SA): A public or private corporation with a board of directors and a minimum of two shareholders
- Joint Stock Company (SpA): Comparable to a corporate, but only required to have one shareholder
The EIRL, or the Individual Limited Liability Company, is the most common route for people looking to work as self-contractors. When independent contractors in Chile are entering a new working relationship, written contracts are not legally required, but are recommended.
Subordination
Contractors are officially self-employed, which means they are not required to work under the control or direction of an employer. They do not have to adhere to standard working hours and consequently have the flexibility to determine their own schedule. Legally speaking, independent contractors are their own entity that provides a service to organizations rather than becoming subordinate to an employer.
Salary
Independent contractors can come to an agreement with the hiring party regarding their compensation and wage. In addition to remuneration, independent contractors are paid according to their own schedule that has been predetermined in the contract. Unlike employees, independent contractors are not on a company’s payroll and in order to be paid, they must send an invoice. When the invoice is submitted, payment is generally required within 28 days of the submission, unless specified otherwise in the contract.
Benefits
While employees have benefits and are protected under Chilean labor law, independent contractors are not. They’re not entitled to benefits, such as paid time off, sick leave, bereavement leave, or overtime pay.
Taxes
Independent contractors operate on a self-employed basis, so they are in charge of their own taxes and deductions, which can amount to 40%. Independent contractors are required to file their taxes with the Servicio de Impuestos Internos (SII) by the 15th of each month. The majority of independent contractors also must pay social security contributions through the Pension Fund Administrator (AFP).
Independent contractors are required to pay taxes on commercial transactions, such as gross income tax, withholdings of income tax, and Value Added Tax (VAT), which is at a rate of 19%. If an independent contractor's annual gross income exceeds the equivalent of five minimum monthly incomes, they are required to make a social security contribution equal to 10% of their gross annual income.
Link to: International Contractors & Taxes – What You Need to Know
Termination and Severance
Contracts can be terminated at any point unless specified otherwise in the written agreement. Independent contractors are not entitled to severance pay.
Employees in Chile
Hiring employees in Chile is a more tedious process than hiring independent contractors. To hire employees, an organization must have a legal business entity in the country or an Employer of Record (EOR) in place. Unlike independent contractors, employees are protected by Chilean labor law and are entitled to protection and benefits.
Chile defines employees as individuals that satisfy the following criteria:
- On the company’s payroll.
- Works standard hours under someone’s direct supervision and direction.
- Integrated into the company structure and organization.
Contracts
Chile has three main types of employment contracts: an indefinite contract, a fixed-term contract, or a project contract.
- Indefinite Contract: The most common type of contract in Chile, and can only be terminated upon mutual agreement by the employer and employee.
- Fixed-Term Contract: Can last for days, weeks, or months, but must not exceed a year. In certain circumstances, though, fixed-term contracts can last for up to two years.
- Project Contract: Also referred to as an undetermined contract; this type of contract doesn’t specify the end date. With this type of contract, both parties need to comprehend the completion of the project and all rules should be clearly written in the contract to eliminate any miscommunications or ambiguities.
Working Hours
In Chile, the typical working week is 45 hours, but the employer does have the right to extend the day by two hours each day or ten hours over the week.
Employees in Chile are entitled to a minimum of 11 hours between work days and they are not required to work on Sundays. Although, the Sunday working rule depends on the industry, such as those who work in retail.
Overtime
If an employee works more than 45 hours, the employee is entitled to overtime pay, which is 150% of their regular pay.
Salary
Employees in Chile are paid on a monthly basis in Chilean pesos. As of January 2023, the Chilean minimum wage for those 18 and over is CLP 410,000 per month. For those under 18 and over 65, the minimum wage is CLP 305,851 per month.
A percentage of an employer's annual profits must be shared with employees. They can choose between the following ways to distribute profits to employees, or determine an alternative approach:
- Share 30% of the company's net taxable profits, proportionate to an employee's income
- Pay employees 25% of their annual salary, regardless of the company’s annual profits, capped at 4.75 minimum salaries per employee.
In addition to their regular pay and profit sharing, Chilean employees receive the 13th month's salary or an Aguinaldo. Aguinaldos are bonuses that employees receive twice a year; one payment during Chile’s Independence Day, September 18th, and the other payment at the end of the year, around Christmas. The amount of the 13th-month salary is dependent on the level and salary of the employee.
Aguinaldos are not required in Chile, but it is customary. However, employers that declare in writing that they will provide an Aguinaldo are required to provide.
Benefits
Unlike independent contractors, employees in Chile are entitled to benefits and statutory protections, such as:
- Vacation
- Maternity and paternity leave, Bereavement leave
- Sick leave
- Unemployment insurance
- Disability insurance
- Health insurance
- Protection against discrimination and harassment
Vacation and Holidays
After 12 months of consecutive employment for the same employer, employees are entitled to take 15 days of paid vacation. Vacation days can be accumulated for up to two years, so an employee has the ability to have up to 30 days of paid time off. Employees cannot gather vacation days for more than the standard two years. If the employee does decide to accrue two periods of paid time off allowance, the employer is required to instruct the employee to take a minimum of 15 days off. Aside from the standard vacation days, Chile has 14 public holidays in which employees are not required to work.
Maternity and Paternity Leave
Employment law in Chile states that women are entitled to take 18 weeks of paid maternity leave — six weeks before the expected due date and 12 weeks after. Fathers are allowed to take five days of paid paternity leave. In the instance that the mother does not use all of her maternity leave, the remaining can be transferred to the father following the seventh week after the birth. Both maternity and paternity leave is paid for by the government or the employer's health insurance provider.
Bereavement Leave
Chilean employees are entitled to seven days of paid bereavement if a spouse, partner, or child were to pass away. If an employee’s parent passes away, they are entitled to three days of paid bereavement.
Sick Leave
In contrast to independent contractors, employees are entitled to paid leave due to illness. If an employee’s sick leave lasts less than 11 days, they only receive compensation for eight of those days. If their leave exceeds 11 consecutive days, they are entitled to full compensation. Much like maternity and paternity leave, all sick days are paid by the employer’s health insurance provider.
Taxes
Employers pay 27% for corporate taxes, 2.4% toward unemployment insurance, and 0.95% for occupational risk and incidents. Employees in Chile may pay up to 40% in personal income tax, ultimately depending on their salary and other variables. Chilean employees also contribute 10% to pension, 0.6% to unemployment insurance, and 7% to health insurance.
Termination and Severance
Employees in Chile are protected when it comes to termination. If an employee is to be terminated, employers must give them one month’s notice. It is common, though, for employers to waive the month's notice and compensate the employee with a month’s salary instead.
Employers cannot terminate or dismiss an employee due to illness, pregnancy, or personal leave. However, there are various valid reasons for termination; such as breach of contract, or company reorganization, which is the most common. Company reorganization is often seen as dismissal without a cause, and consequently, requires a written letter from the company, the official cause, and the effective date of termination. In order for this to be valid, the employee must sign the letter in person.
If terminated, employees who have worked for a minimum of 12 months are entitled to receive severance pay. Their severance pay is equivalent to a monthly salary for every year of employment, but this is capped at 11 years. In the case that an employee has only worked a part of a year, like six months, their severance pay is rounded up to a year’s worth of severance. There are two primary reasons why employees would not be eligible for severance: if they resigned, or if they were terminated due to gross misconduct.
The Risk of Misclassification
Understanding the differences between independent contractors and employees in Chile is vital when hiring. According to the Chilean Labor Code, employers found guilty of misclassifying an employee in Chile, run the risk of fines ranging from CLP 4,227,360 to CLP 26,421,000. On top of these fines, employers are charged CLP 1,585,260 for each misclassified employee.
Choose Borderless
When employers are hiring talent from Chile, it’s important to consider the key differences between independent contractors and employees. Rather than risk misclassification for new employees, let Borderless help. Borderless is a platform and Employer of Record that helps employers compliantly hire employees and independent contractors all across the globe.
To make hiring Chilean talent seamless, book a demo today.
Disclaimer
Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.