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The Latin American region offers economic promise in industries like automotive manufacturing, financial tech, and mining. Businesses around the globe might find themselves building a company in the region to support their long-term success.
One significant aspect of operating a business in Latin American (LATAM) countries is managing compensation for your team. Each country within the LATAM region has different regulations and expectations for employee compensation. Understanding this market and the laws that shape it can help you stay compliant and manage your company’s growth more effectively.
13th-Month Pay in Latin America
Thirteenth-month pay — also known as a 13th-month bonus or 13th-salary — is a monetary benefit that’s either customary or compulsory depending on the country. Employers typically calculate these bonuses with employees’ individual salaries. The payment should equal one-twelfth of a worker’s salary, which is a full month’s pay.
Some countries have different policies in place for calculating 13th-month pay, like using an average of the three months prior or basing the bonus on the highest month’s earnings. As an employer, it’s essential to understand the calculation requirements to remain compliant in the country you’re operating within.
Thirteenth-month bonuses are often distributed at the end of the year around December, but they are not classified as Christmas bonuses. In countries that require 13th-month pay, it’s common to provide a Christmas bonus as well.
In Latin America, 13th-month pay is often customary and sometimes mandatory depending on the country. The following LATAM countries have mandatory 13th-month pay written in their labor laws:
- Dominican Republic
- Costa Rica
- El Salvador
Each country has slightly different laws surrounding the schedule and requirements of 13th-month bonuses. For example, in Panama, employers must pay the bonus in three equal installments on April 15, August 15, and December 15.
Of the countries listed above, Bolivia, Brazil, Ecuador, Guatemala, Honduras, and Peru also have compulsory 14th-month pay. Some countries require it as a Christmas bonus. When you confront pay in Latin America, make sure you understand the requirements, dates, and conditions surrounding 13th- and 14th-month pay in the region.
Minimum Wage in Latin America
While 33 countries fall under the Latin American umbrella, the region does not have a shared minimum wage. Every country has its own minimum wage requirements, and they can vary widely.
In addition to various minimum wage requirements, each country has its own form of currency. While many nations use the peso, including Argentina, Chile, Colombia, and Mexico, the value of each peso is different. Many currencies are unique to each nation, but you’ll also find USD in Ecuador.
For a brief comparison of minimum wage rates, consider the 2021 minimum wage increase in Argentina. Before the increase, the monthly minimum pay was 31,104 Argentine pesos. With the presence of inflation, the country raised the wage to 31,938 pesos in October and scheduled a second increase to 32,616 to take place in February 2022.
Mexico also introduced a minimum wage increase in 2021. In 2019, the daily wage requirement was 123.33 pesos. The 2021 increase bumped the requirement to 141.70 pesos per day. In Argentina, the new monthly minimum wage amounts to just over 1,000 pesos per day. It’s also important to note that an Argentine Peso is worth only a fraction of the Mexican Peso.
While countries like Argentina and Mexico have different minimum wage scales and requirements, other countries like Nicaragua have a more unique system. The minimum wage will be readjusted by 8.25 percent by 2022. However, the system is more complex than that.
Nicaragua sets minimum wages by industry and inflation patterns. In recent years, the textile and apparel industry experienced a significant wage hike for economic reasons. The most recent adjustment was in response to economic factors in the remaining industries.
Under Nicaraguan labor laws, minimum wage requirements are adjusted every six months to reflect economic growth and inflation. In a system like this, it’s essential to recognize your obligations as an employer and remain updated on wage policies.
Informal Employment in Latin America and Its Impact on Minimum Wage
Informal employment involves hiring workers without contracts and operating outside of governmental policies. It’s a common practice in Latin America. Statistics on informal employment in the region reveal that the practice is most prevalent in El Salvador, Peru, Panama, and the Dominican Republic. As of 2020, informal unemployment made up more than 50 percent of overall employment in each of these countries.
When there’s a notable informal sector in a country, the labor structure is more complex than it is in a country with a negligible informal sector. Typically, workers have three options in a labor market — participate in the formal sector, be an unemployed person, or be a nonparticipant. Working in the informal sector becomes a fourth option.
As minimum wages increase in the formal sector, workers either make more money or lose their jobs because employment costs more than companies are willing to pay. These unemployed workers have the option of looking for a new job in the formal sector or taking on informal positions. As more formal employees lose their jobs and move to the informal sector, the increase in labor supply leads to a drop in informal wages that falls below the competitive wage.
In many Latin American countries, even formal wages involve bargaining, giving the informal sector more room to expand. Many studies have considered the implications of setting minimum wages in the formal sector and how they’ll influence the informal market. Setting a new minimum wage can lead to three outcomes:
- Informal wages increase due to capital reallocation caused by formal wages.
- Higher formal sector wages lead to higher demand for informal goods and services that lead to an increased informal wage.
- The formal minimum wage becomes a benchmark both formal and informal sectors reference.
How Does an Informal Economy in LATAM Countries Impact Competition?
When the formal sector enforces high minimum wages, strict contribution laws, and high taxes, the formal sector shrinks, and the informal sector grows. The informal sector is associated with lower levels of productivity because wages and taxes are lower, and employees are less protected by social programs.
The conditions of the informal sector lead to ongoing competition between informal and formal employers. The formal sector must recognize that requirements like high payroll taxes and contributions are not the most sustainable approach to employment. To address the growing informality in the region, countries have been simplifying employment policies and reducing costs for small taxpayers. With these changes, formalization increases.
As an employer in the region, it’s essential to recognize these changes could take place at any time with the high rates of informality across Latin America. Considering the changing employment policies at all times will help your company remain compliant amidst economic shifts.
Recent Tax Reforms in Latin American Countries
In parts of Latin America, tax policies have changed in recent years to address inefficiencies and respond to economic changes. Take a look at some of the recent changes in the following LATAM countries:
- Brazil: Two taxes — the Program of Social Integration (PIS) and Contribution for the Financing of Social Security (COFINS) — are set to become a single tax. This change will roll out in phases with other tax changes, including a switch from a federal excise tax to a selective tax.
- Argentina: The Digital Services Turnover Tax is now present in the Province of Buenos Aires. This tax aims to require tax payments from residents who use digital services. The tax will depend on jurisdiction, and residents will be taxed accordingly. This tax reform also led to an update of taxes applicable to nonresident digital service providers, like a 21 percent value-added tax.
- Colombia: In response to recent economic changes, Colombia has reduced the corporate income tax to 31 percent for 2021. This tax is set to decrease one percent every year until a new policy says otherwise. The country also increased the personal income tax rate to 39 percent for the highest income bracket.
- Mexico: This LATAM nation introduced an anti-avoidance rule that allows tax authorities to redesignate a transaction for tax purposes if it lacks business intent.
- Paraguay: In 2019, Paraguay replaced the income tax on industrial, commercial, service, and agricultural activities with a 10 percent business income tax.
- Ecuador: At the end of 2019, Ecuador aimed to simplify the tax system and increase revenue for businesses. Individuals earning more than US$100,000 in net income are no longer allowed to deduct personal expenses, and digital services now involve a 12 percent value-added tax.
With constant shifts in LATAM economies, it’s imperative that companies stay informed of taxation policies in any countries they operate in.
Mandatory Contributions in Latin American Countries
Mandatory contributions are a significant aspect of payroll in Latin America. Most countries in the region have a social security system in place that requires funding for medical care, pension schemes, sickness benefits, and other programs.
Every country will have different minimum requirements for employees and employees, but in every circumstance, employers are responsible for making the deductions and sending the contributions to the relevant authorities. This process, alongside submitting income tax, is essential to payroll in Latin America.
For example, Colombia has a social security system that covers pension, health, and labor risks. In total, employees pay about 8 percent depending on their wages, and employers pay up to 37.2 percent depending on the level of employment risk.
In contrast, Mexico’s social security system covers occupational risk insurance, retirement and old-age pension, disability and life insurance, child care, and sickness and maternity benefits. Employees pay anywhere from 4.38 percent to 5.25 percent of their earnings, and employers contribute up to 35.14 percent.
Other LATAM social security systems may cover more or less than Colombia or Mexico. While some countries prioritize features like healthcare funding and pension schemes, others are more well-rounded and involve a series of employee welfare needs.
Payment Preferences in Latin America
Pay in Latin America may be different than what you’re accustomed to in your country of origin. Much of Latin America is unbanked, so checking accounts are uncommon. So are credit cards. Brazil is known to have extremely high annual percentage rates on credit cards, reaching over 400 percent in some cases. Credit limits are also generally low, making them ineffective for everyday use.
Alternative methods to paychecks and direct deposits are customary and sometimes mandatory.
One solution to the lack of banks has appeared in financial tech developments. While very few people belong to a traditional bank, most Latin Americans own smartphones. With this access to technology and app-only cards and banks, digital wallets are often the best way to pay workers.
Fintech developments have also led to voucher-based payment systems. Compensating employees in vouchers can help them pay for monthly expenses like rent and utility bills.
How Can an EOR Simplify Compensation for Businesses Entering Latin America?
An employer of record (EOR) is a company that takes on many of the responsibilities associated with running a business. These companies offload risk from business owners and use their industry resources to keep payroll and other processes organized.
EORs are beneficial for businesses growing in new countries because they allow them to sidestep the process of establishing subsidiaries. An EOR will hire your team under its registered company. It will manage payroll and ensure taxes and benefits are compliant throughout your partnership.
With the complex compensation framework in Latin America, it can be challenging to manage growth in the region on your own. Working with the professionals at an EOR can simplify payroll and protect your parent company from the risks associated with noncompliance.
With tax laws, unconventional payment methods, and various social security policies in Latin America, an EOR can be a valuable asset to your growth. You can leave compensation to the experts and focus on developing your business and strengthening your team for the long term.
Work With Globalization Partners for Payroll in Latin America
As an EOR, Globalization Partners will take the guesswork out of managing compensation in LATAM countries. Our team of specialized HR and legal experts will help your company address the complex compensation laws and requirements in any country you choose to operate in. While we take over all associated risks, you can trust your entity will remain compliant from day one.
Whether you need support for taxes or payroll in Latin America, Globalization Partners has the resources to get you started. Get in touch with our team to discuss our EOR services and how we can bring your business to Latin America.