The Supreme Court of Chile has ruled that where an employee’s dismissal on the grounds of ‘company needs’ is held to be unfair, the employer is entitled to deduct its contribution to the employee’s individual unemployment insurance account from the amount payable relating to years of service.

By: Cristián  Olavarría

Firm: Munita & Olavarria

On 4 March 2019 (in Case Rol 23.348-2018), the Supreme Court, reversed the ruling of the Court of Appeals of Temuco, deciding that in the event of an employee dismissal on the grounds of 'company needs' despite being unjustified, the employer is not prevented from deducting the contributions made by the employer to the employee’s individual unemployment insurance account from the amount of the employee’s severance payment relating to years of service.

In the first instance, the Labor Court of Temuco Labor Court accepted an employee’s claim, declaring she was unfairly dismissed. As a result, the Court ordered her employer to pay her an additional amount equivalent to 30% of monthly salary for each year worked (the standard award in this scenario). In addition, the Court ordered the employer to return to the employee the amount deducted from the employee's settlement equivalent to the employer’s contribution to the unemployment insurance fund. The individual unemployment insurance account is a mandatory insurance fund to benefit employees in the event of unemployment (for fixed-term employment contracts only the employer contributes, whereas for permanent contracts, the employee also makes a contribution). The company filed an appeal before the Temuco Court of Appeals which was rejected.

Subsequently, the defendant filed a remedy called ‘recurso de unificación de jurisprudencia’ before the Supreme Court requesting a correct interpretation of Article 13 of Law No. 19,728 in relation to unemployment insurance deduction.

The Supreme Court accepted the defendant’s case, stating that when a dismissal is declared to be unjustified the economic sanction for this is legally defined as an increase of 30% of the severance payment. Therefore, the provisions of Article 13 of Law No. 19,728 apply where a court deems dismissal for ‘company needs’ to be unjustified.

As a result of this decision, if a dismissal is declared to be unjustified, the employer is still entitled to deduct amounts corresponding to the employer’s contribution to the employee’s unemployment insurance from the severance payment relating to the employee’s years of service.