Minimum wage and Legal Gratification in Chile: What you need to know

A good number of our clients have asked us about the new minimum wage in Chile and the potential impact it might have on their existing and future employees.

This week’s blog will help bring clarity around the specifics of the revised minimum wage, a stipulation unique to Chile, Legal Gratification, and how one impacts the other.

Legal Gratification and the Minimum Wage or Minimum Monthly Income (IMM) are very closely related. Changes to the IMM will almost always mean a change to the amount of Legal Gratification paid to employees. Legal Gratification is a government mandated profit-sharing bonus due to all employees of a Chilean organization. It can be calculated in one of two ways, but we always recommend using the method that calculates the amount of legal gratification as 25% of the employee’s base salary capped at 4.75 times the IMM. When the IMM increases, so does the cap for Legal Gratification.

The IMM or Minimum Monthly Income is the legal minimum monthly pay for any employee working full time (a normal work week not to exceed 45 hours). This amount is set by Congress after conferring with employer representatives and workers. Any change to the law typically takes effect in January and/or July of each year.

As of July 1, 2016, Chile’s monthly minimum wage increased to CLP 257,500.

As expected, this impacts the way that legal gratification is calculated, increasing the monthly cap from CLP 98,958 to CLP 101,927.

In cases where legal gratification is paid monthly, this increase in minimum wage results in an increase in the monthly amount of legal gratification paid. In addition, the difference between these two amounts should be paid retroactively from January to June, resulting in a lump sum retroactive payment that we recommend including in the July or August payroll for employees (even though the deadline for payment of this difference is April, 2017).

Calculating and paying the retroactive CLP can be painful, even though the amounts are not that significant. At Globalization Partners, using our unique blend of global PEO services and our Global Employer of Record Platform, we help streamline that process and so many others to make paying employees in Chile and 150 other countries as easy as possible. Have a question about payroll in Chile or another country? Don’t hesitate to contact us. We can help.

Email us at:  info@globalization-partners.com