(a) No.
(b) No.
(c) No.
(a) Yes, the standard of any employment relationship is "dependence and subordination." If a relationship between two parties meets this standard, it is characterized as an employment relationship. If the relationship does not meet this standard, it is not an employment relationship and will probably be characterized as an independent consultant relationship.
(b) Yes. The classification of the individual for tax purposes will follow the criteria indicated for employment purposes above. Therefore, if an individual providing services is deemed to be an employee for employment purposes, they will also be deemed to be an employee for tax purposes.
(c) Same as (a).
There is nothing specific, but with the rise in digital platform services, we are seeing an increasing global trend in case law and legislation aimed at protecting platform workers' labor rights. For more insight into these developments, along with other employment law updates, click here.
The main risks are as follows:
- While there is a degree of risk that the relationship will be characterized as an employment relationship, it is not imminent. It will depend on a judicial claim by the contingent worker.
- The contingent worker realizes they are, in reality, an employee and sues for notice, severance and vacations. They could also sue for payment of unpaid social security obligations.
- Nonpayment of social security involves the risk of a possible dismissal being declared null and void if the social security contributions are outstanding at the time of dismissal.
- Theoretically, there could be a tax exposure. The tax authorities could claim that the employer has not complied with its obligation to withhold the employee's local tax.
The law does not define the standard of "dependence and subordination." However, the labor authority has consistently indicated that dependence and subordination are revealed in acts such as:
… continuity of services rendered in the workplace, an employee's assistance obligation, the fulfillment of a work schedule, the obligation to follow orders or instructions given by the employer, the act of surveillance over the employee's performance of activities, the employee’s subordination to different kinds of control, the obligation to report to a superior about the work performed, etc.
Court decisions have followed these same parameters.
It is important to note that one of the fundamental principles of Chilean employment law is the principle of reality. This means in essence that regardless of what formal documents indicate, if in reality the elements of an employment relationship are present and the standard is met, then the relationship will be characterized as an employment relationship. In other words, substance prevails over form.
A fine could be imposed that ranges from USD 700 to USD 1000 (depending on the size of the company) for each employee.
In addition, an employee could ask the court to declare that the relationship is an employment relationship and the employee should be able to ask for the respective acknowledgment, severance, vacation, etc.
Having contingent workers could give rise to withholding taxes or VAT on payments made to the nonresident employer company, employment taxes on the salary paid to the contingent workers, or the risk of creating a permanent establishment (PE) in Chile for the nonresident employer company. How these risks play out will depend on the specific circumstances.
Chilean legislation defines the two following types of PE:
- Fixed place of business PE: This is when a nonresident entity maintains a place in Chile that is used for the permanent or regular performance of all or part of its line of business or activity, whether or not it is used exclusively for this purpose, such as offices, agencies, facilities, construction projects and branches.
- Agency PE: This is when a nonresident entity carries out activities in Chile represented by an agent; and, in the exercise of such activities, the agent usually concludes contracts, plays a main role that leads to their conclusion or negotiates essential elements of these without being modified by the person or entity without domicile or residence in Chile. No PE is established when the agent does not economically or legally depend on the principal, or when the nonresident entity exclusively performs auxiliary activities of the business or preparatory activities for the start-up of the business.
Additionally, double tax treaties generally include a third type of PE — the service PE — which is created in case a nonresident entity renders services in Chile through employees or other natural persons entrusted by the company for that purpose, during a period or periods that exceed 183 days within any 12-month period.
In line with this, a foreign entity would be exposed to the risk of creating a PE if such conditions are met, whether a contingent worker or a straightforward employee provides the service.
There are no specific tax penalties for creating a Chilean PE.
The tax implications would be that the foreign entity would have to register as a Chilean taxpayer, start to pay Chilean income taxes and VAT, and comply with all other tax reporting and payment obligations to which Chilean taxpayers are subject.
Nonpayment of social security involves the risk of a possible dismissal being declared null and void if the social security contributions are outstanding at the time of dismissal.
The employer must pay outstanding social security (with the corresponding interest).
Not paying social security or not affiliating the employee to the system is sanctioned with fines that range from 10 UTM to 60 UTM (approximately USD 700-3,900).
Nonpayment of pension involves the risk of a possible dismissal being declared null and void if the social security contributions are outstanding at the time of dismissal.
The employer must pay outstanding social security (with the corresponding interest).
Not paying social security or not affiliating the employee to the system is sanctioned with fines that range from 10 UTM to 60 UTM (approximately USD 700-3,900).