What Severance Pay Rules Must Employers Follow in Chile?

Which Employees Qualify for Severance Pay?

• Employees with an indefinite-term contract dismissed for company needs (despido por necesidades de la empresa) or economic/organizational reasons.
• Employees with at least one year of continuous service with your company at the time of termination.
• Employees whose dismissal is properly notified in writing, stating the legal cause and factual grounds as required by the Labour Code.
• Employees not dismissed for serious misconduct (despido por causa justificada) where the employer can prove the just cause.
• Employees whose base for severance excludes variable items not considered “last monthly remuneration” under Chilean law.
• Employees who do not sign a valid settlement agreement waiving claims in exchange for mutually agreed compensation above the statutory minimum.

What Are the Legal Timelines for Paying Severance?

In Chile, severance must usually be paid at the time you formalize the termination and sign the settlement (finiquito) before a notary, labour inspector, or authorized official. In practice, this means you should be ready to pay on or very shortly after the employee’s last working day. The Labour Code allows the parties to agree on payment in installments in limited cases, but this must be clearly documented in the settlement. Any delay can trigger interest and readjustments based on inflation indices. To stay safe, your company should treat severance as due in full upon execution of the finiquito unless you have explicit, legally compliant installment terms.

What Penalties Apply if Severance Is Not Paid Correctly?

If your company fails to pay severance correctly in Chile, you risk financial, administrative, and litigation exposure. Labour courts tend to interpret protections in favor of employees, and non-compliance can quickly become more expensive than paying correctly the first time.

• Labour authorities can impose administrative fines that increase with company size and seriousness of the breach.
• Courts can order payment of unpaid severance plus readjustments and interest from the date it was due.
• If the dismissal cause is found unjustified, you may owe additional surcharges on severance (up to 30, 50, or 80 percent in some scenarios).
• Non-compliance can trigger inspections, reputational damage, and more frequent scrutiny of your HR practices.
• Disputes may lead to legal fees and management time spent in conciliation hearings and court proceedings.

Does Outsourcing Employment via an EOR Change Severance Liability?

Using an Employer of Record (EOR) such as the service described at https://www.playroll.com/employer-of-record does not remove the need to follow Chilean severance rules, but it can shift day-to-day compliance work. In Chile, the EOR is typically the legal employer on paper and is responsible for calculating and paying statutory severance. However, your company, as the client, usually bears the economic cost through your service fees and may face joint or indirect liability if the structure is challenged. Courts can look at who truly directs the work when assessing responsibility. You should ensure your EOR contract clearly allocates severance funding, documentation, and dispute-handling obligations.

Be 100 Percent Compliant in Offering Severance with Playroll

Managing Chilean severance correctly means tracking tenure, contract type, legal cause for dismissal, and caps on years of service that count toward severance. Playroll helps your team structure compliant terminations, from drafting cause letters to aligning the severance base salary with what the Labour Code recognizes as last monthly remuneration. With local expertise, you reduce the risk of misclassifying the termination ground or overlooking mandatory notices.

Playroll also coordinates the timing and method of payment so your company is ready when the finiquito is signed, including handling indexation, interest, and any agreed installments. If you employ through an EOR model, Playroll can act as the local employer, calculate statutory and contractual severance, and document settlements in a way Chilean authorities accept. That lets your HR team focus on business decisions while staying confident that severance compliance is covered end to end.