Ecuador is known for its beautiful landscapes, wildlife and of course the Galapagos Islands. But is also a great place for companies that are trying to continue their expansion and internationals process and strategies. The country currently occupies the 123rd place in the Doing Business ranking. More and more companies are setting up operations, particularly in the capital of Quito. It is important employers know basics about operating payroll in this country prior to hiring.
Here are key aspects to be mindful of:
- Is local registration required? If so, what is the deadline?
Yes, when a company has a new employee, they must inform IESS (Social Security) and the Ministry of Labor. They have 30 days to report.
- What is the list of documents that need to be provided for the registrations?
- Employment contract signed by Legal Representative and employee
- ID – the personal identification in Ecuador
- Basic service or utility bill / invoice containing employee address
- employee disability certificate
- IESS code if the employee is a foreigner
Complete Personal information of the employee is needed in addition to the above and below documents where applicable: Marriage certificate, – Birth certificates of children under 18 or Certificate of disability of dependents.
- Does the employer need to keep the employee files physically at the office or electronically is sufficient?
It is important to keep the physical information at the company office.
- Is de-registration required? If so, what is the deadline?
Yes, when the company has a termination, they must inform IESS (Social Security) and the Ministry of Labor. On the website of the Ministry of Labor, the employer has to issue the legal document for terminations. They have 30 days to report any change.
- What is the list of documents needed for de-registration?
Only the Legal document that is issued by the Ministry of Labor website signed by the Legal Representative and the employee. The employee must also send a letter or an email with the decision to terminate the employment contract. This should be on record.
Risks associated with New Hire and Termination Process
- New hires
- IESS (Social Security): If the company has late registration, the company could report for the next three months, but with fine: 4 % over the employee´s salary. If the company does not report in 90 days, they must raise a request IESS and work through an official process as issued by the IES
- Ministry of Labor: There is no specific fine. However, if the company does not manage the upload the employee information they can´t make the termination file (finiquito) or report changes in salary.
- IESS (Social Security): If the company has a late registration, the company will pay social security for the period of time they do not report the termination. It will be an additional cost for the company, not deductible.
- Ministry of Labor: There is no specific fine.
- Are vacation days processed via payroll on a monthly basis?
Each month the employer has to make the vacation provision. In Ecuador, employees have 15 days including weekends. (11 business days). If the employee takes vacations, the employer has to enter the days taken.
- What are the rules for the processing (e.g. vacation days are calculated based on the average base salary of the past 3 months).
The vacation provision is calculated each month, based on salary + extra time + bonus + other income, that mean all income for the employee divided for 24. Days are calculated in dates proportionally during the year.
- Are any accruals processed via payroll for vacation days?
Yes, every month the employer has to make the provision and keep a detail of the days taken and days pending.
- Do employees need to provide any paperwork for requesting vacation days? If so, does it need to be wet signed?
Yes, for better control, employees must send an email or a signed letter with the request and approval of their superior for the vacation days to be taken.
- Are there any extra months that need to be processed via payroll (e.g. 13th month)?
- During the year, the employer must prepare information for the 13th salary, the 14th salary, income tax withholdings for employees and employees with profit sharing.
- If so, what are the accrual rules and when are those paid?
- 13th salary, all employee income during the year / 12 (months) = as additional salary. The company must pay employees until December 24.
- 14th salary, is a fixed amount for the employee of US $ 400 (for 2020) each year, the amount changes. The company must pay employees until August 15.
- Income tax withholdings for employees, is a report to the SRI (Tax organization) with information on employee withholding taxes. The company must make withholdings for employees every month based on a table and pay SRI every month. The annual report (accumulation) that we have to present in January.
- employees with profit sharing, the report the employer has to submit to the Ministry of Labor and the calculation is based on 15% of the company’s earnings in the year. This amount the company must pay in April to employees.
Salary and pro-ration
- Is the annual salary divided by 12?
Yes, it is.
- What are the pro-ration rules / formula in the event that an employee does not receive a full salary for the month?
The employer must consider the 30 days for month in any case.
Tax and Social Security
Social security: the company must pay 12.15% of all employee earnings, it is the cost of the company. And the employee must pay 9.45% for all employee earnings. The discount and payment to IESS is monthly.
Withholding of income tax for employees: the company withholds the income tax of the employee, on all income, except authorized personal expenses. The base is US $ 11,315 during the year.
Natural persons and undivided estates. The year 2020:
Excess up to
Tax on basic fraction
% Tax on the surplus fraction
- What elements are exempt from tax and social security?
Only refunds to employees
- When are contributions to be paid to the different authorities?
Only the last detailed payments.
- Besides tax and social security, are there any other payments that are to be made to another authority? If so, which one, how is it calculated and when is it to be paid?
Only the last detailed payments.
- What are the different types of overtime paid and the rules associated with them?
Overtime, after normal hours, maximum 4 hours per day and 12 hours per week. 25% surcharge on salary. If the employee works until 24: 00h, he has a surcharge of 50% of the salary, and if the work is between 24: 00h and 6: 00h the next day, the surcharge is 100%.
- How are those calculated (e.g. based on the hourly rate)?
The calculation is monthly salary / 240 (8 hours per 30 days) * 125% or 50% or 100% * # hours overtime.
- How is the hourly rate of the employees calculated?
It is the monthly salary / 240 (8 hours per 30 days).
- Are there any legal increases that need to be processed throughout the year? If so when? What are the calculation rules / basis in law?
Normally the increases are once a year, in private companies the amount only depends on the decision of the company. In January, the government announced increase in the basic salary. By 2020 it is US $ 400.00
- Are there any legal increases resulting from union agreements? If so, please clarify the process.
No, there are no increases from union agreements. In Ecuador the union agreements have almost disappeared.
Interested in doing business in Ecuador? Auxadi can become the ideal partner for your investment in a new market. From our 16 international subsidiaries, in coordination with our centralized International Desk, and Hubs in Madrid and Chicago, we offer our clients an integrated solution in accounting, tax and payroll in more than 50 countries, thanks to our MultiCountry IT Platform. Count on our professionals and experience for your investments in Ecuador and other countries in Latin America, Europe and Asia.