Harris Gomez Group is proud to co-write a new series of blogs with Spasa Consulting on accounting and financial matters that may be important to foreign companies operating in Chile. Spasa Consulting, is a Chilean based accounting firm that specialises in back office support for multinational companies. Over the years, Spasa has worked with a number of our international clients, all who have appreciated the practical accounting advice and service level that Spasa provides.
This week we are discussing legal gratification, which is unique to Chile and often confusing for foreign companies when hiring employees and negotiating the employment contract.
What is the legal gratification in Chile and who are required to pay it?
It is the part of the profits obtained by the employer in the business year and must be distributed among workers of their company. The law stipulates three conditions that obligate a company to pay a legal bonus:
– That the company pursues profit.
– That there is an obligation to keep accounting books.
– That profits or surpluses of cash are obtained in the declared line of business.
There are two methods of payment of the bonus, but in this article we will refer only to the payment of the bonus in accordance with Article 50 of the Labour Code. Employers who elect to pay in accordance with this article, are required to pay CLP$ 89,563 monthly to each employee.
What is the minimum wage in Chile?
In Chile, the minimum wage is called Minimum Monthly Income (IMM), which is the minimum monthly amount of remuneration for an employee working full time (a normal working week cannot exceed 45 hours per week). It is set by Congress, based on a government proposal agreed with representatives of employers and workers. Generally, it comes into force on July 1 of each year and lasts one year. Currently the minimum wage in Chile is CLP$ 225,000 which is valid until June 30, 2015.
As of July 1, 2015, and as stated in that Act, it will increase to $ 241,000.
Changes to Legal Gratification from 7/1/2015
As stated above, from July 1, 2015 in accordance with Law 20,763 of 07/18/2014, the new minimum salary will be CLP $ 241,000, which automatically modifies the amount of legal gratification paid to employees. The new legal gratification will be CLP$ 95,396.
Practical Tips
- As stated above, the legal gratification is required by law, but we generally advise clients to deduct the bonus amount from the Employee’s salary, thus adding up to the original negotiated amount (i.e. If the Employee is to receive a salary of $5000 USD, the monthly salary indicated in the employment contract will be $4858.00 USD, which, in addition to the annual bonus, will add up to a total of $5000 USD.
- Any additional bonuses or commission plans the company may offer cannot replace the legal gratification.
Harris Gómez Group is an Common Law-Latin American legal and business advisory firm located in Santiago, Chile, Bogota, Colombia and Sydney, Australia. In 2001, HGG was the first Australian law firm to have a local office in Latin America. The firm specialises in Common Law and Latin American cross-border issues in areas such as Mining and Energy, Corporate, Mergers and Acquisitions, Tax, Intellectual Property and Business Enterprises. With over 21 years of experience immersed in the respective legal and business cultures of Australia and Latin America, we create a seamless bridge between the two regions and have become an essential partner to many multinational enterprises
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Often our clients’ needs are complex and require a mix of skills and experience, especially when they are foreign companies wanting to setup shop in Chile. That’s when we bring together specialists from different areas.
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