In early March, draft legislation will be introduced to modernize Chile´s labor legislation. It attempts to make work days more flexible, give minimum guarantees to people who provide services in gig economies, create new rules of control and oversight, as well as provide alternatives for the payment of severance claims, among others.

In this piece we will discuss the plan for improving and modernizing the payment of severance compensation.

Alternative compensation for severance claims

In order to not affect job stability, and so the new system is not unnecessarily expensive, the bill intends to create a second compensation mechanism for the termination of contracts, which will be an alternative to the current method.

Its creation would involve establishing a new monthly contribution charge from the employer which would be accumulated in a fund that the employee withdraws after the settlement. The amount would be less than the current regime that delivers one month of compensation per year worked, with a maximum of 11 years. This mechanism already exists for private household workers (who do not have the right to unemployment insurance). It is important to highlight that this new system does not intend, in any way, to replace the current one and does not imply a reduction or elimination of it.

The idea is based on statistics that indicate that more than 90% of settlements do not have any type of compensation, particularly the most vulnerable jobs, which last less than a year.

For reasons of viability, it is estimated that the worker should select which system to adhere to, so that it would be better to enter the job in which, by default, the current regime is maintained, and after one or two years the employee can choose the better alternative.

As we have indicated, the measure is under evaluation and no decision has been reached in this regard. It is a complex and difficult issue to modify because for many workers today it constitutes a guarantee of stability in employment.

Finally, we can conclude that the payment of compensation for years of service, if this measure is approved, may be for dismissal or resignation of the worker and the amounts involved for both cases would be less than the current system. We can also conclude that the cost of the employer would be increased due to the need to create a new fund that would be the responsibility of the employer.