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07. Termination of Employment Contracts
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07. Termination of Employment Contracts

Grounds for Termination

The Labour Code establishes provisions regarding the termination of the labour contract and employment stability. Accordingly, the labour contract may only be terminated by agreement of both employer and employee, by the employee’s resignation, by the death of the employee, by the expiry of the fixed-term agreed upon in the contract, by the completion of the work for which the employee was hired, by an act of God or circumstances beyond the control of the parties (force majeure) and upon dismissal by the employer. As a general rule, in Chile an employer cannot terminate a labour contract at will. Employers must ground terminations on a company-related business need. Recently, courts have become more and more strict when considering if the invoked business grounds are enough to justify a termination.

Collective Dismissals

Currently, the Labour Code does not contemplate a procedure to regulate the collective dismissal of employees.

Individual Dismissals

Terminations for cause:

  • serious misconduct by the employee, such as lack of probity, sexual harassment, physical abuse against the employer or another employee, injury to the employer, immoral conduct affecting the company and harassment at work;
  • carrying out activities prohibited in the work contract;
  • failure of the employee to appear at work without justified cause on two consecutive days, two Mondays in the month or a total of three days in the month; likewise, unjustified absence, or without prior notice on the part of the employee who is in charge of an activity, task or machine, the abandonment or stoppage of which would cause a serious disruption in the progress of the work;
  • abandonment of work, understood as: a) the unjustified departure of the employee from the site of the work and during the working hours, without the permission of the employer or the person representing him and b) the refusal to perform, without a justified cause, the tasks agreed upon in the contract;
  • acts, omissions or recklessness that affect the safety or operation of the establishment, the safety or activity of the employees, or their health;
  • material damage caused intentionally to the installations, machinery, tools, work tools, products or merchandise; and
  • serious breach of the obligations imposed by the contract.

Terminations grounded on business needs:

  • needs of the company, establishment or service;
  • written eviction of the employer;
  • in the event the employer has been subjected, through a judicial resolution, to a bankruptcy proceeding for the liquidation of its assets.

Is Severance Pay Required?

If the employer dismisses the employee based on the general grounds of “company/business needs” such as changes in economic conditions, downsising of the company, or in case of termination at will (when permitted by law), the following severance compensation will be awarded to the employee:

  • severance compensation for years of services: amounting to one month’s remuneration for each year or fraction thereof in excess of six months spent in the service of the same employer, with a limit of 330 days’ worth of remuneration. However, for the purposes of calculating this severance compensation, the law stipulates that the basic monthly remuneration cannot exceed a maximum of 90 “Unidades de Fomento” (approximately US$3,435), although this capped amount may be waived by the parties;
  • if the dismissal notice is not given 30 days in advance, the employee will be entitled to receive a severance compensation equivalent to one month’s remuneration (same cap as above applies). If the employer does not pay the above severance to the employee, certain increases may apply, up to 150%.

Nevertheless, if the employee is dismissed for cause, i.e. serious breach of contract by the employee, material misconduct, etc., no right to severance compensation arises for the employee. However, the employee may contest the dismissal before the Labour Courts and if the courts rule in favor of the employee, the company will be obliged to pay the severance indicated above plus an additional penalty of up to 100% of the above-calculated severance compensation, depending on the termination cause invoked.

According to article 162, paragraph 5 of the Labour Code, if, at the time of dismissal, the social security contributions are not duly paid, the dismissal will not result in terminating the labour contract. Consequently, the employer could be forced to pay the remuneration and other payments established in the labour contract to the employee, until these social security contributions are ultimately duly paid.

Separation Agreements

Labour release settlement agreements must be made available to the employee within 10 working days after separation.

Is a Settlement Agreement required or considered best practice?

A settlement agreement is mandatory in Chile. This must be granted and made available to the employee within 10 working days of the employee’s separation. Only if the parties agree, would it be possible for the payment to be issued in installments. However, this rule also establishes that the parties are not required to subscribe to, or even sign, the settlement agreement in the case of contracts of a duration of no more than 30 days, unless they are extended for more than 30 days or upon expiration of this maximum period, the employee continues to provide services to the employer with the employer’s knowledge.

What are the standard provisions of a Settlement Agreement?

The termination of the employment contract must contain at least:

  • the legal ground of the employment relationship.
  • the amount, if any, to be paid for severance pay (substitute for notice, proportional vacation and severance pay, if applicable) and other amounts that the employer must pay to the employee so that nothing is owed;
  • a release provision.

Does the age of the employee make a difference?

As a general rule, no it does not. In the case of the termination of a minor allowed to work, it must be ratified by both the minor and the person who, in accordance with the law, gave him/her permission to work.

Are there additional provisions to consider?

A settlement can contain everything that the parties want to agree upon, as long as the legal minimums are met. It may be agreed that, in the event that one of the provisions or clauses is inapplicable, it may be established that these will not render the remaining conditions of termination or settlement ineffective.

Remedies for Employee Seeking to Challenge Wrongful Termination

The employee may choose not to agree to the terms of the settlement. If this is the case, he shall not sign the agreement, and in the same document together with his signature, he may make a “reservation of rights” in writing, indicating the non-payment of remunerations or benefits, or because of the existence of discrepancies in the amounts thereof.

If the employee does not sign, the corresponding lawsuit(s) may be filed in due time. Generally, it will be 60 working days to challenge the termination cause, with a suspension of the term while the claim lasts before the Labour Inspectorate, with a maximum limit of 90 days. The judicial working day counts as Saturdays, that is, it only counts as holidays and Sundays.

If an employee challenges the cause of termination before the courts, severance can be increased from 30% to 100% depending on the invoked cause. Likewise, if a court establishes that a termination was discriminatory or intended to affect unionisation rights, additional compensation can be applied, from 6 to 11 monthly remunerations and, in some serious cases, employees can choose to be reinstated at work.

Whistleblower Laws

In Chile, the legislation for the protection of whistleblowers is very restricted in contrast to the advanced regulations on the subject in comparative law. In addition, it does not include forms of reparation or compensation to the complainant for the reprisals suffered, or other protections unrelated to the protection of his/her labour situation.

Only Law No. 20.393 of 2009 establishing the criminal liability of legal entities for the crimes of money laundering, financing of terrorism and bribery are certain companies required to introduce procedures, albeit that are restricted to these areas. In the commission of any such crimes, the employer may be liable for the criminal acts committed by employees and dependents within the scope of their duties.

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