- Contractual Systems and Duration
- Initial Trial Period (Probation)
- Working Time
- Vacation and Holidays
- Remuneration
- Profit Sharing
- Social Security and Retirement by the Employer
- Termination of the Labor Relation
- Work by Women and Minors
- Labor Unions
- Tax Matters

1. Contractual Systems and Duration

1.1. Generally, the minimum duration of a contract of a stable or permanent nature is one year, whether it is a fixed-term contract or an indefinite-term contract.

It is understood that a fixed-term contract is the one whose duration is established in the contract itself. Such duration cannot be less than one year nor more than two years. These contracts cannot be renewed. If the labor relationship continues upon the end of the contract term, the contract automatically becomes an indefinite-term contract.

An indefinite-term contract is the one whose duration is not determined, and it remains in effect until termination through one of the forms established in the law.

1.2. The following contractual systems are excepted from the above rule:

The contract for a specific work which is not executed for purposes of performing the employer’s customary activities. In other words, the services rendered by the employee must not be required by the employer on a permanent and regular basis in the course of the business. The contract ends with the performance of the given job.

It is understood that the employee under a contract for a specific work commits himself to perform a given job in exchange for a fixed compensation, without considering the time involved in its performance.

The temporary contract is understood to be the one that is executed in order to comply with special demands of the employer, such as replacing personnel that is away on vacation, leave of absence, illness or maternity, or satisfying an increased work load caused by greater demand for production or services during the employer’s customary activities or in connection thereof. The duration of such contracts cannot exceed six months in one year, when their purpose is to cover greater demand for production or services referred to the employer’s customary activities or in connection thereof.

The ocassional contract has the purpose of meeting emergency or extraordinary requirements other than the employer’s usual activity. The duration cannot exceed thirty days in one year.

The seasonal contract is executed to perform cyclic or periodic work. These contracts provide guarantees for the employees’ stability insofar as they compel the employer to hire the same employees to render their services each season when required. If the employer fails to respect their stability, it could be considered that dismissal without notice has occurred.

The part-time contract is the one where the employee agrees to provide his personal services on Saturdays, Sundays and obligatory rest days in complete or partial working time, and such working time is regarded as normal for purposes of remuneration.

2. Initial Trial Period (Probation)

2.1. An initial trial period of up to ninety days can be established in fixed-term and indefinite-term contracts during which the parties can freely terminate the contract and no rights to any indemnities will arise. The trial period can be agreed to only once and such provision has to be included in the contract.

2.2. The employer cannot keep more than fifteen percent of the total number of his employees and workers under trial contracts at the same time. This limitation is not applied to employers that are commencing operations during the first six months.

3. Working Time

3.1. Safe for exceptional cases, the normal working time is eight hours per day and forty hours per week, divided into five days.

3.2. The working time may consist of one shift with a short break mainly for eating, or it can be divided into two shifts with a rest period of up to two hours after the first four working hours.

3.3. Saturdays and Sundays are obligatory rest days, unless the particular business makes work mandatory during those days. In that case, upon a prior agreement between the employer and the employee, equal time for rest during the week can be established.

3.4. Working time between 7 p.m. and 6 a.m. has twenty-five percent surcharge over the amount that would be paid for regular work during day time.

3.5. Supplementary time is understood to be working time after the normal time and cannot exceed four hours in one day and twelve hours in one week.

If supplementary work is performed in the daytime or no later than by 12 midnight, such hours are paid with a fifty percent surcharge in relation to the normal working time. In order to determine the amount paid for each supplementary hour, only the amount of the wages and not of the fringe benefits mentioned below must be considered.

If such work takes place between 12 midnight and 6 a.m., the surcharge is one hundred percent. Such surcharge is also applied when supplementary work is performed on Saturdays or Sundays.

4. Vacation and Holidays

4.1. Every employee is entitled to enjoy an uninterrupted vacation period of 15 calendar days every year. After the fifth year of work for the same employer, the employee is entitled to one additional vacation day per each year in excess. Additional vacation days cannot be more than fifteen and could be compensated in money at the employers will.

4.2. The right to enjoy vacation arises after completing one year of work, The employer has the right to determine the periods when the employees may enjoy their vacation.

4.3. Vacation is paid. Payment is equivalent to one twenty-fourth of the amount received by the employee during the complete previous year. In order to determine this payment, all amounts paid for supplementary and extra time, commissions and any other payment regularly made by the company is taken into account.

4.4. Besides local holidays, the following are national holidays and, hence, obligatory rest days: January 1st, Good Friday, May 1st, May 24th , August 10, October 9, November 2, November 3, and December 25.

5. Remuneration

5.1. Payment of remuneration can be stipulated on a daily basis when work is not of a permanent nature, or on a weekly or a monthly basis in the case of permanent work.

5.2. If the employee works on permanent partial basis, remuneration must be paid in proportion to the amount corresponding to complete working time.

5.3. Remuneration is freely agreed by the parties. There is a general minimum living wage, which is currently US$4 per month used only for referential purposes. The current minimum wage is US$240.00. There are also minimum sectoral wages for different branches of activity. Such minimum sectoral wages are generally greater than the minimum wage and are fixed annually.

5.4. No employee can be paid a wage lower than the applicable minimum wage, even if there is an agreement between the parties.

5.5. In addition to his wage, the employee’s remuneration comprises other benefits, such as:

• THIRTEENTH REMUNERATION.- This payment is made no later than on December 24 of each year, and is equivalent to one-twelfth of the amount received by the employee between December 1st of the previous year and November 30 of the current year. To calculate the payment, salaries, overtime, commissions and extras should be included.

When the employee has not worked for the employer during the twelve month period mentioned above, the thirteenth remuneration is equivalent to one-twelfth of the amount received by the employee during the period worked. In other words, he receives a proportional payment.

• FOURTEENTH REMUNERATION.- It has to be paid no later than on August 15 of each year for emplyees working on the Sierra and Oriente regions, and no later than on March 15 of each year for employees working on the Costa region, and is equivalent to one minimum wage. It embraces the period between September 1st of the previous year and August 31 of the current year for Sierra and Oriente regions, and between April 1st of the previous year and March 31 of the current year for Costa region. According to the existing table of payments this remuneration is equivalent to US$240.00.

When the employee has not worked for the employer during the twelve-month period mentioned on the above paragraph, the employee has the right to be paid in proportion to the period worked.

• RESERVE FUND.- After the first year of work, an amount equivalent to one monthly salary has to be deposited annually with the Ecuadorian Social Security Institute.

6. Profit Sharing

6.1. The employer must distribute 15% of the annual net profits among his workers and employees. The amount is deductible for tax purposes.

6.2. If the employer grants voluntary bonuses for an amount equal to or greater than the one corresponding to such profit sharing, the employer is not obliged to distribute the above mentioned 15%.

7. Social Security and Retirement by the Employer

7.1. The employer is obliged to enroll his employees with the Ecuadorian Social Security Institute (“IESS”). The employer contributes with approximately 12.15% and the employee with 9.35% of his monthly wage. The benefits in addition to the wages specified in paragraph 1.5.3 above are not included in this calculation.

7.2. This obligation exists even if the employer has private insurance for his employees, and it includes expatriate employees.

7.3. The basic risks covered by the IESS are: illness, maternity, disability, retirement, work accidents and occupational diseases, severance payment, and death.

7.4. When an employee completes twenty-five years of work with the same employer, the employer is obliged to assume his retirement.

7.5. Retirement pension could not be less than US$20 when the employee has also the retirement pension of IESS, or US$ 30 if he has not; or higher than the average basic salary of the last year of work.

7.6. The parties may agree to the single payment of a retirement fund, instead of the retirement pension.

8. Termination of the Labor Relation

8.1. The labor relation between the parties terminates for the following causes mainly:

• By agreement of the parties

• By completion of the contract term

• Termination of employment (“desahucio”)

• “Visto Bueno” (legal reasons for one of the parties to terminate the contract unilaterally)

• Dismissal without notice

8.2. If one of the parties wishes to terminate a fixed-term contract upon the end of its term, it must give prior notice of this decision to the other party through the Labor Ministry. This is known as “desahucio”. In the case of temporary, occasional, seasonal and per hour contracts, such notice is not necessary.

8.3. In the case of faults committed by the employee, the employer may terminate the contract upon the prior authorization of the Labor Ministry. This is know as “Visto Bueno”. The reasons for terminating the contract are specifically listed in the law and relate mainly to (i) unexcused absence or tardiness during more than three consecutive days; (ii) lack of discipline or serious nonperformance of the internal regulations; (iii) ineptitude to perform the job; (iv) offense to the employer.

The “Visto Bueno” process must begin within thirty days following the fault committed by the employee. If the Labor Ministry does not grant the “Visto Bueno”, the employee may continue in his position or may be considered as having been dismissed without notice and is entitled to the corresponding indemnity.

The labor relation could be suspended at the time the “Visto Bueno” is requested, if the employer deposits with the Labor Ministry an equivalent to a monthly salary.

8.4. If the employer unilaterally dismisses the employee, or if the “Visto Bueno” procedure is denied, a dismissal without notice occurs. In this case, the employee is entitled to the indemnities listed below, depending on the type of contract:

8.4.1. Indefinite-term contract:

- In relation to the time of work:

• Up to three years of work: the amount corresponding to three months’ remuneration.

• More than three years: the amount corresponding to one month’s remuneration per each year of work, but in no case this amount can exceed twenty-five months’ remuneration. Fraction of one year is considered a complete year for this calculation.

- A bonus equivalent to 25% of the last monthly remuneration per each year of service.

- Workers who have completed more than 20 and less than 25 years of work for the same employer whether continuously or interruptedly are entitled to the proportional portion of the retirement paid by the employer.

8.4.2. Fixed-Term Contract:

- The employee may elect between an indemnity equivalent to 50% of the remuneration for the time lacking to complete the agreed term, or an indemnity calculated in accordance with the formula for indefinite-term contracts.

- A bonus equal to 25% of the last monthly remuneration per each year of service.

8.5. In order to pay indemnities, remuneration is deemed to include all the amounts received by the employee in cash, in kind or in services, including what it paid for extra, supplementary or piece work, commissions, sharing in benefits, or any other payments of a general character, during the last month of work.

Excepted from the above are the legal profit sharing percentage, per diems or occasional subsidies, the thirteenth and fourteenth remunerations, salary components not yet incorporated in the workers’ remunerations, and other social benefits.

10. Labor Unions

10.1. A minimum of thirty employees is required to create a labor union

11. Tax Matters

11.1. The employer must act us a withholding agent for income tax purposes in connection with the wages paid to the employees. The income tax rate is progressive in relation to income, and ranges from 0% to 35%.

© Corral & Rosales, 2010

PLEASE NOTE: These comments are intended to provide general information only. Corral & Rosales cannot accept any responsibility for loss suffered by any persons acting or refraining from action as a result of information contained herein. Any specific legal questions should be addressed to the firm in Quito, Ecuador.