Sources of rules and practice

Overview

Provide an overview of the primary sources of law, regulation and practice that govern or affect executive compensation arrangements or employee benefits.

The Chilean Labour Code provides the regulation at a national level on matters such as minimum salary, enforceable conditions and frequency of payment. Decisions rendered by the Supreme Court and the Labour Inspection have a relevant use as a source of interpretation of the statutes. Corporations Act No. 18,046 and Securities and Exchange Act No. 18,045 provide a framework for compensation paid by corporations and entities, subject to the supervision of the Securities and Exchange Supervisory Authority.

Enforcers

What are the primary government agencies or other entities responsible for enforcing these rules?

The primary government agencies responsible for enforcing these rules are the Labour and Employment Inspection, the Courts of Justice and the Securities and Exchange Supervisory Authority.

Governance

Governance requirements and shareholder approval

Are any types of compensation or benefits generally subject to specific corporate governance requirements or approval by shareholders or government agencies? What is the general process for obtaining approval?

For companies other than corporations, there are no statutory requirements or approvals.

For corporations, in general, the shareholders need to approve compensation and benefits of the board of directors, and the board of directors has to approve executives’ compensation and benefits. However, there is an exception whereby the shareholders, when approving a capital increase, agree that part of such increase will be awarded as stock option plans, which may not exceed 10 per cent.

On the other hand, the Securities and Exchange Supervisory Authority has ruled that every corporation subject to its supervision has to respond to a questionnaire regarding corporate governance good practices.

Corporations are not forced to comply with these practices, but they need to answer the questionnaire. Part of the questionnaire refers to the formal annual procedure analyzing compensation structures and policies, its publicity and submission for approval of the shareholders.

Consultation

Under what circumstances does the establishment or change of an executive compensation or benefit arrangement generally require consultation with a union, works council or similar body?

Under no circumstances.

Prohibited arrangements

Are any types of compensation or benefit arrangements prohibited either generally or with respect to senior management?

There are no special prohibitions for private companies.

Rules for non-executives

What rules apply to compensation and benefits of non-executive directors?

Non-executive directors could be comparable to the Chilean definition of independent directors. The law provides that independent directors shall be compensated according to what the shareholders’ meeting decides annually, and its compensation shall be at least equal to that of other directors, or may exceed this by no more than 33 per cent.

Disclosure

Mandatory disclosure of executive compensation

Must any aspects of an executive’s compensation be publicly disclosed or disclosed to the government? How?

Public disclosure of executives’ compensation is not mandatory, notwithstanding the good corporate governance practice recommended by the Securities and Exchange Supervisory Authority for those corporations under its supervision. If five or more executives hold the same position, executive compensation shall be disclosed to unions once a year without indicating the name of the executive, but only the position they hold. There are no special requirements on how to deliver this information.

Employment agreements

Common provisions

Are employment agreements required or prevalent? If so, what provisions are common? Are any terms prohibited or unenforceable?

Employment agreements are required for all dependent workers (employees). An employment agreement is defined by the Labour Code as being ‘an agreement by which employer and worker commit themselves reciprocally, the latter to render personal services under dependence upon and subordination to the former, the former to pay a determined remuneration for these services’.

Common provisions of an employment agreement are as follows:

  • description of the services and details of the location where the services shall be performed;
  • salary;
  • bonuses and incentive targets;
  • term of the agreement (usually indefinite);
  • severance, if higher than the statutory severance;
  • non-disclosure terms;
  • exclusivity terms; and
  • post-employment restrictive covenants on non-solicitation and non-compete.

The employment contract cannot include provisions that contravene the minimum legal benefits established for employees. If this were the case, the provision that violates the legal norm would be unenforceable.

Incentive compensation

Typical structures

What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?

A company must offer an annual profit-share incentive to executives by one of the two following ways:

  • distribute at least 30 per cent of the company’s annual net profit to executives in proportion to their respective remuneration; or
  • pay each employee 25 per cent of their annual income with a cap of 4.75 minimum monthly wages per year (approximately US$1,880).

No other statutory incentive compensations are required. However, annual or biannual incentives related to executives’ performance and the results of the whole or part of the company are common.

Restrictions

Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?

There are no limits, except for the limit of 10 per cent for capital increases awarded as stock option plans, discussed in question 3.

Deferral

Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?

Yes, this is permissible (eg, in stock option plans). The stocks involved in the plan shall be subscribed and paid within five years of the shareholders’ meeting where the capital was increased and the plan approved.

Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?

There are no limitations. Distinctions and different exclusions are permitted between employees eligible to receive the compensation provided they are based on objective criteria and non-discriminatory reasons (eg, equal remuneration between men and women who perform the same duties).

Recurrent discretionary incentives

Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?

Yes, and once recurrent they become acquired rights and may not be withdrawn. However, compensation at the sole discretion of the company would likely be deemed unlawful because otherwise the company could decide when to pay such compensation, and employment law requires provisions on compensation to describe clearly the events that trigger the incentive and when such events can take place.

Effect on other employees

Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?

No, provided disparate treatment exists on the basis of an illegal reason (eg, discriminatory reasons).

Mandatory payment

Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?

Yes, provided it is proven that the employee failed to fulfil the terms and conditions of the compensation. The company has the burden of proof in this regard.

Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?

In general no, although the subject remains debatable. Recent case law states that if a compensation is accrued under conditions that are met while the employment relationship is in effect, but the employment relationship terminates before payment date, the employee is, in any case, entitled to the proportional payment corresponding to the compensation at the termination date.

Equity-based compensation

Typical forms

What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?

Usually, stock option agreements for executives are the prevalent form of compensation award. Parties are free to agree the vesting period applicable to each equity compensation award, but the stocks involved in the plan shall be subscribed and paid within five years of the shareholders’ meeting where the capital was increased and the plan approved. The employer may select plan participants, considering the criteria indicated on question 12.

Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?

See answer to question 3. Delegation is not possible.

Tax treatment

Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?

There is no special tax treatment for equity compensation awards.

Registration

Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?

No.

Withholding tax

Are there tax withholding requirements for equity-based awards?

In case of stock options, the beneficiary of such an option must be subject to taxation in Chile upon the acquisition of the option. The option means the right to acquire a given number of shares in the future. If the option is sold by the beneficiary, the capital gain will be taxable as well. In addition, the exercise of the option will be taxable. In this case, the tax basis will be the difference between the fair market value and the special value of the stocks sold by the employer. For employees, the applicable tax is employment tax. For board directors, the surtax applies.

Inter-company chargeback

Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?

Yes. They usually refer to operational services conducted by the local affiliate company. The extent of services rendered by the affiliate company on behalf of the parent company may lead to the determination that both companies are a single employer, thus considered jointly and severally liable for the obligations the executive is entitled to. Also, lack of a detailed scope of services may be the basis for a tax objection by the tax authority.

Stock purchase plans

Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?

Employee stock purchase plans are prevalent. No issues arise frequently on such agreements.

Employee benefits

Mandatory and voluntary employee benefits

Are there any mandatory benefits? Are there limits on changing or discontinuing voluntary benefits that have been provided?

Yes. The following types of paid leave are mandatory:

  • annual holiday: 15 working days after one year of service;
  • sick leave, provided medical certification exists (the first three days of sick leave are not covered by such medical certification);
  • parental leave: 24 weeks for women employees, extendable up to 30 weeks if postnatal work is carried out part-time (the mother may transfer up to six weeks to the father);
  • paternity leave: five days within the first month of the birth;
  • bereavement leave: ranging from three to seven days in case of death of an unborn child, child, spouse or parent;
  • marriage leave: five days;
  • medical exams leave: half a day once a year for a mammogram or prostate exam;
  • unemployment insurance: available (coverage extension is determined by the reason for termination of employment and the number of months contributed); and
  • health insurance for non-occupational events.

Changing or discontinuing voluntary benefits is not allowed because a verbal arrangement or permanent practice may tacitly create an acquired right that the company may not unilaterally change. Otherwise, the affected executive may require back payment.

Typical employee benefits and incentives

What types of employee benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?

This varies according to the range and size of the company, as follows:

  • non-work use of work equipment (eg, company car, mobile phone, laptop);
  • complimentary health insurance on top of the mandatory health insurance;
  • total or partial housing;
  • payment of school tuition for children;
  • membership of social clubs;
  • use of credit card for employment purposes;
  • special allowances for certain events (eg, Christmas, Independence Day and holidays);
  • a pension-fund contribution on top of a mandatory pension borne by the employee that is a non-taxable income and may only be withdrawn upon retirement; and
  • equity compensation awards.

There are no special tax or financial incentives or disincentives for these benefits.

Termination of employment

Rules for termination

Are there prohibitions on terminating executives? Are there required notice periods? May executives be dismissed without cause?

No prohibitions exist. Termination at will is available provided the executive has been granted power of attorney or holds a trusted position. The company must give 30 days prior notice with a copy thereof to the Labour Inspection. Otherwise, the company pays the executive a compensation in lieu equivalent to one monthly remuneration up to a cap of approximately US$3,600. The 30-day prior notice requirement is not applicable for terminations with cause.

Mandatory severance pay

Are there statutory or mandatory minimum severance requirements? Are there any other mandatory, post-employment benefits?

Yes. Severance is required and shall equal to at least one monthly salary per year of service and fraction thereof; if the fraction is greater than six months, this is considered as a full year, subject to the following caps:

  • no more than 11 years’ pay; and
  • each monthly salary must not exceed approximately US$3,600.

These caps may be waived if the parties consent to increase them (but never to decrease them). Executives are also entitled to outstanding holiday pay, regardless of the reason for employment termination. No other mandatory post-employment benefit exists.

Typical severance pay

What executive severance payment level is typical?

For executives, the caps listed in question 27 are usually waived, in order to reflect the actual monthly salary and time of service the executive accrues. Change in control protection is common in the case of hiring, using the whole or a portion of the time of service the executive completed at his or her previous employment. Severance and other compensations are kept separate with no reciprocal discount.

Reasons for dismissal

Are there limits on dismissal for ‘cause’? Are there any statutory limits on ‘constructive dismissal’ or ‘good reason’? How are ‘cause’ or ‘constructive dismissal’ defined? Are there legal or customary rules relating to effecting a termination for ‘cause’ or ‘constructive dismissal’?

Termination for cause is limited at a statutory level by the lists of conducts included in the Labour Code (eg, serious breach of employment, harassment, act of violence, unjustified absence), mainly referred to as employees’ conduct that severely endangers an employer’s operations, or health and safety in the work environment. Typically, termination for cause requires a severity threshold test to be taken. Employees terminated for cause are not entitled to compensation in lieu of prior notice or severance. If the reason for termination for cause is found unlawful, the company is required to pay compensation in lieu of prior notice and severance with a 30 to 100 per cent surcharge.

Constructive dismissal is also subject to statutory regulation, and mainly occurs when the company fails to fulfil its obligations (ie, those agreed in the employment agreement or statutory requirements). If found to be constructive dismissal by the authority, statute orders the termination to be considered as a ‘without cause’ termination, requiring the company to pay the severance and compensation due to the employee.

There are legal rules relating to effecting a termination for cause and constructive dismissal. Both are regulated In the Labour Code regarding implementation requirements and formalities of termination.

Gardening leave

Are ‘gardening leave’ provisions typically used in employment terminations? Do they have any special effect on benefits?

Gardening leave is not generally used and is rarely applicable but does require the consent of the executive involved.

Waiver of claims

Is a general waiver or release of claims on termination of an executive’s employment normally permitted? Are there any restrictions or requirements for the waiver or release to be enforceable?

Yes, these are normal and enforceable.

Post-employment restrictive covenants

Typical covenants

What post-employment restrictive covenants are prevalent? What are the typical restricted periods?

See answer to question 8. Typical restricted periods range from four months to three years.

Enforceability

Are there limits on, or requirements for, post-employment restrictive covenants to be enforceable? Will a court typically modify a covenant to make it enforceable?

Such covenants shall meet certain requirements to be enforceable, namely the following:

  • the executive’s consent;
  • a legitimate supporting reason to protect the business interest of the former company in order to fairly promote trade rather than merely restricts employees’ freedom of work;
  • a limited scope business or geographic scope;
  • a reasonable term; and
  • consideration paid to the individual subject to the restriction.

Covenants are subject to judicial assessment so extensions may be modified.

Remedies for breach

What remedies can the employer seek for breach of post-employment restrictive covenants?

The company may seek damage compensation. No injunctions are available to protect covenants under Chilean law.

Pension and other retirement benefits

Required retirement benefits and incentives

Are there any required pension or other retirement benefits? Are there limits on discontinuing or modifying voluntary benefits that have been provided?

Yes. Pension funds shall be borne by the executive and withheld by the company, and shall be equivalent to approximately 13 per cent of the monthly remuneration. On the other hand, disability and survival insurance shall be borne by the company and shall be equivalent to 1.26 per cent of the monthly remuneration.

Discontinuing or modifying benefits that have regularly been provided by the company is prohibited as the company may not alter the status quo of benefits that an executive may experience from the company.

Typical retirement benefits and incentives

What types of pension or other retirement benefits are prevalent for executives? Are there tax or other financial incentives or disincentives for such employee benefit arrangements?

Additional contributions to pension funds borne by the company are common. This contribution is a non-taxable income that may only be withdrawn upon retirement.

Supplemental retirement benefits

May executives receive supplemental retirement benefits?

Yes (see question 36). There are no limitations to agreeing upon supplemental retirement benefits provided the reasoning behind such benefits is legitimate non-discriminatory. A discriminatory benefit is forbidden when the decision behind it is made on the basis of race, colour, age, marital status, union activity, religion, political opinion, nationality and national or social extraction. Decisions based on occupational requirements for an employment position would not be considered discriminatory.

Indemnification

Directors and officers

May an executive be indemnified or insured for claims related to actions taken as an executive, officer or director?

Yes.

Change in control

Transfer of benefits

Under what circumstances will an asset sale in your jurisdiction result in an automatic transfer of benefit obligations to the acquirer?

This will occur whenever a total or partial modification of ownership or possession of a company or the sale of all or part of its assets happens. This transfer is implied by the statute.

Executive retention

Is it customary to provide for executive retention or related arrangements in connection with a change in control?

Yes, and usually structured by means of a retention bonus.

Expedited vesting of compensation

Are there limits or prohibitions on the acceleration of vesting or exercisability of compensation in a change in control? Are there restrictions on ‘cashing-out’ equity awards?

No, provided it is agreed by the parties.

Are there adverse tax consequences for the employer or the executive relating to benefits or payments provided pursuant to a change in control?

No, there are none.

Multi-jurisdictional matters

Exchange controls

Do foreign exchange controls rules apply to the remittance of funds, or the transfer of employer equity or equity-based awards to executives?

Yes. Such control is conducted by the Central Bank of Chile and mainly refers to information on the currency and amount remitted.

Local language requirement

Must employment agreements, employee compensation or benefit plans, or award agreements be translated into the local language?

This is not required, but employment authorities usually require a translation for inspection purposes.

Net salary arrangements

Are there prohibitions on tax gross-up, tax indemnity or tax equalisation payments?

Yes, these are prohibited.

Choice of law

Are choice-of-law provisions in executive employment contracts generally respected?

No. Employment agreements are subject to public policy restrictions and therefore subject to the principle of territoriality. Chilean law will apply exclusively if services are provided in Chilean territory.

Update and trends

Key developments of the past year

What were the key cases, decisions, judgments and policy and legislative developments of the past year?

Key developments of the past year47 What were the key cases, decisions, judgments and policy and legislative developments of the past year?

Not applicable.