If you’re not familiar with Ecuador employment law and thinking of hiring, read this first!
By Heather Conley
Let’s say you want to open a small business in Cuenca. Why not? It’s a great city, arguably the best in Ecuador, and you want to contribute. ou have dreams, you have skills – you want to give back. But if your business idea depends on staff, STOP! First, hire yourself a good labor lawyer. You are not in Kansas anymore.
Take salary. You agree to pay your employee the base salary of $425 a month, the minimum required by law, but understand that you are really obliged to pay her a minimum of $595 a month. Huh? How did that happen?
The law requires you to pay: an additional 11.15% each month to IESS (Social Security), a month’s salary for Christmas, a month’s salary for family holidays; 15 days of vacation, and after your employee has been with you a year you must pay another 8.33% into Social Security (called the fondo de reserva).
It looks like this when broken down into monthly costs:
$425 = base salary
$47.38 = IESS (Social Security)
$35.41 = 13th month Christmas
$35.41 = 14th month family holidays
$17.68 = vacation pay for 15 days
$35.40 = fondo de reserva
And of course, there’s OT. And weekend/holiday pay. And pay for nighttime work. At 150%, 200% and 125%, respectively. (Called hora suplementaria, hora extraordinaria, and hora nocturna).
Or take firing. Let’s say your new hire doesn’t work out – regularly comes late to work, doesn’t do a good job. You could be stuck with this person forever if you failed to make him sign a contract from the get-go. But let’s say you got this signed contract, this contrato indefinido, and it only becomes clear after the probation period of 90 days that you’ve got yourself a lemon. The only way to get rid of him without paying stiff penalties is to go to court with a visto bueno, a kind of lawsuit, and prevail. But if you can’t make your case – and the standards are high — you will have to compensate your employee by paying an indemnización equal to three months’ basic salary and also pay a dismissal penalty, called a desahucio, equal to 25% of his last annual salary, and even more to account for vacation pay and other expenses. These monies are due on his last day of work.
Let’s say your employee quits after three months. You will still have to “compensate” her with the indemnización, or three months’ pay. (If your employee has worked for more than three years, you will be liable for a year’s indemnización.)
If your little business is lucky enough to make a profit (utilidades), you are required by law to share 15% of it with your employees. If you take a loss, though, it’s all yours.
None of this takes into account the hefty costs of hiring women who could become pregnant, disabled persons, or long-term employees. You want to look out for them, of course, but with the added financial burden to you, well . . . maybe you’d rather hire a man or an able-bodied person instead or terminate a great loyal worker you’d really rather keep on.
Consider. If your employee gets pregnant (embarazada), you cannot fire her because she can sue you and get her job back, or she can sue you and receive 12 months of basic salary from you (that would be $5,100). While you continue to employ her, you must pay three months of maternity leave and, when she returns to work, reduce her hours to six a day for the next 12 months so she can nurse (lactancia).
If you have to let a disabled employee go, you have to pay 18 monthly basic salaries, not 12. If you one day reach a place where your star employee is coming up on 25 years of service, you are looking at onerous pension liabilities if you don’t fire him well before.
So maybe you think to get around all this expense and red tape by hiring a contractor to perform the work you need. Nuh-uh. The law is clear: if you provide a regular schedule, detail duties to be performed, provide equipment or materials or training, you have an employee. Contractors are professionals like lawyers or accountants.
There’s a final thing to think about when opening a business, and it’s a big one. What if you do all the work to get set up right and your worker steals your ideas or your clients? It happens all the time. Of course, it’s not right! But what are you going to do to protect yourself? Get a “non-compete clause” in your employee contract. Violating the non-compete clause can cost the offender beaucoup bucks, as much as $100,000. You should also have a clear-cut contract with your clients who might think to continue with your worker on the side. In sum, you need three contracts from Day One: the contrato indefinido for the worker, the non-compete clause, and the client contract. For emphasis, you might also insist that the parties sign the contracts at your lawyer’s office.
So, go ahead with your dreams. Open your business. But make sure you can afford it, and get a good employer advocate lawyer to produce the contracts you need and look out for you.
The employer advocate lawyer who provided the information for this piece is Galo Cardenas, of Cordero, Moreno & Corral in Cuenca.