On April 1st, 2020 the Employment Protection Act was enacted by the President. The law will come into effect on its publication in the Official Gazette. Its purpose is to establish extraordinary and temporary measures to protect employment stability.

A rule was added during the discussion in Congress and which may be relevant to employers is the limitation on dismissals due to force majeure. In fact, during six months or, as the State of Catastrophe decreed by the President persists, employment agreements cannot be terminated on grounds of force majeure based on the effects of the COVID-19 pandemic.

The law allows employees to draw from unemployment insurance in the event of: 1) suspension of the employment agreement by act of authority; 2) pact suspending the employment agreement; and 3) pact temporarily reducing work schedule. We briefly analyze each:

1. Suspension of employment agreement by act of authority

In the event there is an act or declaration by authority establishing sanitary or safety measures which imply the stopping of activities in all or part of the country and which totally prevents or prohibits the rendering of services, compliant employees affiliated to unemployment insurance will exceptionally have access to payments on their individual unemployment account or the common unemployment account, as applicable.

The act of authority has the effect of temporarily suspending the effects of the agreement. This implies the temporary cease of the obligation to render services by the employee and the obligation to pay salary by the and other allowances by the employer.

The effects of the law are temporary and so the legal rules on the suspension by act of authority will be effective for a term of six months.

Employees who are entitled to this benefit

Employees must have minimum unemployment insurance payments indicated in the law (Article 2).

Employees of companies which between March 18, 2020 (State of Catastrophe) and the publication of the law, have paralyzed their activities by mutual agreement or as a consequence of the act of authority or agreed on the continuity of services.

Excluded employees

Employees who have subscribed an agreement with their employer allowing them to continue to render services. Those who have agreed on a work schedule reduction (see number 3 below). And those who receive payment of a medical license subsidy, during the term of the subsidy.

During suspension the employer must bear in mind

  • Continue to make social security payments (except work accidents insurance), considering 50% of remuneration. The Government has announced it will increase to 100%.

  • Employment agreements can only be terminated under article 161 (which covers i) at will in limited cases and ii) needs of the business).

  • Request the benefit for employees before the Administradora del Fondo de Cesantía - Unemployment Fund Manager (AFC) by means of a sworn statement declaring that employees are not excluded.

  • Remit monthly to the Labor Bureau (Dirección del Trabajo - DT) the list of employees under suspension.

2. Pact suspending the employment agreement

Employers whose activity is totally or partially affected by COVID-19, outside of the act of authority, can agree with its employees covered by unemployment insurance, personally or prior consultation with the respective union, a pact temporarily suspending the employment agreement.

In case an act of authority is decreed during the suspension pact, the latter will be suspended until the act of authority expires.

In general, the same rules apply as in the case of suspension of employment agreement by act of authority. Some exceptions:

  • The employer and the employee and/or respective union, are the ones who must present the sworn statement to the AFC indicating the suspension and that employees are not excluded.

  • The suspension may not be deferred. The effects must be executed at least by the first day of the month following the date of the pact.

The legal provisions regarding the pact will be effective for a term of six months.

3. Pact temporarily reducing work schedule

Employers (who are in any of the circumstances indicated in the law) and its employees covered by unemployment insurance, whether personally or represented by their union, can agree on a temporary reduction of the work schedule (up to 50%), prior consultation with the union, if any.

The employer will pay remuneration and social security proportional to the reduced schedule. The employee will be entitled to an amount out of the individual unemployment account and, eventually, the common unemployment account, of up to 25% of remuneration (in the 50% schedule reduction) with a CLP$225.000 cap.

The employee will keep benefits such as aguinaldos, allowances, bonuses and other exceptional or sporadic payments.

The legal provisions on the pact reducing schedule will be valid until the last day of the tenth month of effectiveness (February 28, 2021). However, letter d) below will be valid for six months.

Employer must be in any of the following circumstances:

  1. VAT taxpayers who from October 2019 have seen a reduction of over 20% of their average sales during three consecutive months in comparison to the same three months period in the previous year. The employer will authorize the Chilean IRS (Servicio de Impuestos Internos) to send information to the DT.

  2. Is currently in reorganizational procedure (bankruptcy related).

  3. Is currently in insolvency economic advisory procedure (bankruptcy related). To verify letters b) and c), the DT will request the Superintendency of Insolvency the relevant information.

  4. Companies that are outside of the act by authority alternatives, need to reduce or redistribute ordinary work schedule to keep operational continuity or to protect the health and life of its employees. This circumstance will be shown by a sworn statement of employer and employees on entering into the pact.

Employees who can access this benefit: Employees must have minimum unemployment insurance payments indicated in the law (Article 2).

Excluded employees: Employees under legal protection (fuero) cannot enter into these pacts.

Duration of pacts: Minimum duration is one month.

Employees with indefinite agreement can agree on a maximum duration of five months. Fixed term employees, no more than three months.

The suspension may not be deferred. The effects must be executed starting on the first day of the month following the date of the pact.

Execution of pacts: Preferably, the pact must be executed electronically, using the platform that the DT will set up in its webpage and must include the information indicated in the law (article 12).

During the pact the employer must bear in mind:

  • To continue paying social security of the remuneration agreed in the pact.

  • If the employment agreement is terminated while the pact is effective, any severance will be calculated on the basis of the remuneration prior to the pact.

To read the law (in Spanish), please click here.

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