Hire in Chile with Confidence

Any business hiring in Chile should understand the important legal distinction between who classifies as an independent contractor and who can be hired as an employee. Fines or penalties may be issued to businesses hiring independent contractors under the guise of employment. 

Understanding the distinctions between employees (empleado) and independent contractors (contratista independiente) is critical to compliantly engaging workers in Chile. It is important to work with a partner like Worksuite to ensure you put in place an engagement framework that accurately classifies freelancers as independent contractors for you and lets you know when freelance talent must be engaged as an independent contractor (and therefore governed by the Civil Code) or employed directly (and therefore governed by the Labour Code and other employment laws). 

This is critical to compliantly engaging workers in Chile and thereby avoiding severe legal, financial, and other penalties. 

The key criteria in determining whether an individual is effectively working as an employee versus an independent contractor include the degree of control that the hiring company or client has over the individual. If the real substance of the company-contractor relationship proves to effectively be an employment relationship, the hiring company may suffer legal and financial penalties, including paying a fine along with any overdue payroll taxes. It is therefore important to leverage an employment service partner like Worksuite when hiring in Chile to ensure that independent contractors fall under the correct working relationship with your business.

Who is an Independent Contractor?

The key determinant of someone being an independent contractor rather than an employee is the level of control they work under. This includes considering the hiring company’s ability to make certain decisions on the individual’s behalf (such as their level of compensation), the authority to directly issue instructions to the individual, and the ability to legally enforce authority over them. However, in reality, a variety of factors are considered. In general, an individual will be considered an independent contractor if they:

• Are subject to relatively little control by the hiring company, which means they are free to decide when, where, and how they complete their tasks.
• Do not have fixed hours of work that are determined by the hiring company.
• Can choose the location from which to work.
• Provide their own equipment rather than receive it from the hiring company.
• Can be (or are expected to be) dismissed once the contracted work is complete. 
• Are not integrated into the hiring company’s organizational structure.
• Are paid for a specific project or task rather than on a recurring basis.
• Can refuse to perform a task (unless that task is part of their contract).
• Are not entitled to a minimum amount of work or a minimum pay.
• Are not listed on the hiring company’s normal payroll.
• Do not have their social security payments remitted by the hiring company 
• Do not directly benefit from the hiring company’s business success
• Assume a level of business risk that is higher than what is expected from an employee

There are four main categories under which independent contractors typically operate in Chile. 

• Individual Limited Liability Company (Empresa Individual de Responsabilidad, or EIRL): This is equivalent to being “self-employed” in many other countries and is a popular route for individuals looking to operate as sole proprietors. The EIRL is a distinct legal entity, with the owner being liable to the extent of their capital contribution while their personal assets are protected. Law requires that the company’s name must include the owner’s name or otherwise ensure the nature of the activities is made clear.
• Limited Liability Company (Sociedad de Responsabilidad Limitada, or SRL): LLCs require at least two shareholders (up to a maximum of 50) and at least one director. Like EIRLs, their name must make clear the nature of the company’s activities. The SRL is similar to the LLC found in other countries.
• Corporation (Sociedad Anónima, or SA): Corporations must have  the board of directors and at least two shareholders. Liability is limited to the capital contributions of the shareholders. The corporation is similar to the PLCs found in other countries, and can be public or private.
• Joint Stock Company (SpA): This is similar to a corporation but with greater flexibility. It can be established with just one shareholder and no board of directors. 

There are two main types of contracting model for working with independent contractors in Chile.

A. Direct engagement of the contractor as self-employed or via their own company. Under this model, the hiring company engages directly with the independent contractor – as a sole proprietor, partnership, or company (see above) – and establishes a direct contract for the provision of services. The hiring company then pays the independent contractor directly, following the terms of the contract.

B. Third party. These companies come in two forms, and both are specially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

• Temp/staffing agency: Under this model, the hiring company engages directly with the agency, which in turn supplies one of its own independent contractors to deliver the contracted services. The hiring company pays the agency directly in accordance with the terms of the contract. The contract is, therefore, between the hiring company and the agency, while the agency pays the independent contractor through a separate contractual arrangement. 
• Umbrella company: Independent contractors can also work through an umbrella company. This turns a ‘self-employed’ individual into a legal ‘employee’ of the umbrella company itself. The contractual relationship is between the umbrella company and the client, with the umbrella company running payroll and administration for the independent contractor. The umbrella company invoices the client directly while paying the contractor via PAYE as a standard employee. Umbrella companies levy a fee on the contractor to cover their costs.
• Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential independent contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and make payments to them.

Companies hiring independent contractors in Chile should avoid making payments directly through their payroll system. Beyond these guidelines, there are no specific legal requirements related to paying contractors in Chile. The contract should stipulate the preferred payment method agreed upon by both parties.

The tax year aligns with the calendar year (1 January to 31 December). The currency is the Chilean Peso (CLP) (CLP 1 = USD 0.0011). Employees’ income tax is deducted from their salary at source. The personal income tax rate is progressive, and all individuals who are resident or domiciled in Chile are taxed on total worldwide income. Tax rates for Chilean-sourced income range from 4% (for incomes between USD 947 to 2,105 per year) to 40% (for incomes of USD 8,420 and above). There are no local income taxes. Global Complimentary Tax (GCT) rates on worldwide income also range from 4% (for incomes between USD 11,368 to USD 25,262) to 40% (for incomes of USD 101,050 and above). Contractors must file and pay their own income taxes and social security provisions.

Chile has a privatized and compulsory social security system called Sistema de Capitalización Individual, which operates under the Ministry of Labor and Social Security (Ministerio del Trabajo y Previsión Social). Employees pay a 20% mandatory social security contribution, equivalent to around USD 3,050. Unemployment insurance is 3% (0.6% contribution from the employee and 2.4% from the employer. Employees make payments directly to a Pension Fund Administrator (AFP), most of which charge commission. Employees can pay their contributions using paper forms or electronically via the Previred portal.

Independent contractors operating on a self-employed basis (see below) pay personal income tax, ranging from 4% to 35.5%. Contractors operating as an incorporated business entity typically pay First Category Tax (FCT). This ranges from 25% (from 2023 onwards) for SMEs up to 27% for entities operating on the Partially Integrated System (PIS). Most independent contractors are also required to pay social security contributions via an AFP. Exemptions include women over 50 and men over 55 and self-employed workers who have a total disability or old-age pension.

Contractors operating as an incorporated business are subject to the standard 19% VAT rate, which is paid monthly. Contractors who are self-employed do not pay VAT.