What Severance Pay Rules Must Employers Follow in Costa Rica?

Which Employees Qualify for Severance Pay?

• Employees dismissed without just cause after completing at least three months of continuous service generally qualify for statutory severance pay.
• Employees terminated for economic, technological, or organizational reasons usually qualify, provided you cannot prove serious misconduct.
• Employees on open-ended (indefinite) contracts are covered by the standard severance scale based on years of service.
• Employees on fixed-term contracts may be owed damages if you end the contract early without just cause, often mirroring severance principles.
• Employees who resign with employer fault proven (constructive dismissal) can claim severance as if they were unjustly dismissed.
• Employees dismissed with proven just cause under the Labor Code do not qualify for severance, but still must receive accrued wages and benefits.

What Are the Legal Timelines for Paying Severance?

In Costa Rica, severance and all final payments should be made immediately upon termination or within a very short, reasonable period, typically understood in practice as within a few business days. Courts expect you to settle all amounts owed in one lump sum, including severance, unused vacation, proportional Christmas bonus (aguinaldo), and any outstanding wages. Delays can trigger labor claims, interest, and potential penalties. To reduce risk, your company should aim to calculate and pay everything on the termination date or no later than the next regular payroll cycle. Always document the payment with a signed settlement receipt (finiquito) while respecting employees’ rights to challenge it.

What Penalties Apply if Severance Is Not Paid Correctly?

If your company fails to pay severance correctly in Costa Rica, you face financial, administrative, and litigation exposure. Labor courts are generally protective of employees, and non-compliance can quickly become more expensive than paying correctly from the start.

• You may be ordered to pay the unpaid severance plus legal interest from the date it was due.
• Courts can award additional damages and costs, including attorneys’ fees, if the employee prevails.
• Labor inspectors may impose administrative sanctions and require corrective actions.
• Persistent or serious non-compliance can damage your reputation and affect future inspections.
• Disputes can escalate into lawsuits that consume management time and delay workforce decisions.

Does Outsourcing Employment via an EOR Change Severance Liability?

Using an Employer of Record (EOR) such as https://www.playroll.com/employer-of-record does not remove the need to follow Costa Rican severance rules, but it can shift day-to-day compliance work. In a compliant EOR model, the EOR is the legal employer in Costa Rica and is directly responsible for calculating and paying severance under the Labor Code. Your company, as the client, typically bears the economic cost through your service agreement, while the EOR manages the legal risk and administration. However, if the arrangement is poorly structured or seen as sham outsourcing, authorities could still look through to your company. You should ensure your EOR contract clearly allocates severance liability, funding, and decision-making on terminations.

Be 100 Percent Compliant in Offering Severance with Playroll

Costa Rican severance rules are technical, and mistakes often happen around service time calculation, salary components to include, and distinguishing just cause from unjust dismissal. Playroll helps your team navigate these rules by using local legal expertise and up-to-date statutory scales when you plan a termination. You get clear cost estimates before you act, so you can budget and communicate with leadership confidently.

Beyond the numbers, Playroll standardizes your termination workflows, from notice letters to final-pay approvals and documentation. When you hire through Playroll as EOR, we become the local employer of record, handling severance calculations, payouts, and filings in line with Costa Rican law. That lets your company focus on business decisions while reducing the risk of disputes, penalties, and reputational damage.