Navigating myriad different labour provisions in Latin America can be a minefield for regional legal teams looking to ensure their clients are compliant with local obligations. The following article was first published on the Latin American Corporate Counsel Association’s website on 15 December 2017. In it, lawyers from across Latin America provide an overview of the main features of social security contributions across six countries, including recent updates.
Brigard & Urrutia Abogados
D’Empaire Reyna Abogados
Funes de Rioja & Asociados
Munita, Olavarria & Saez
There are many differences in mandatory contributions as a percentage of the payroll across Latin America. While in Argentina over 45% of payroll is composed of social security contributions, in Peru or Venezuela this figure decreases to 22.5%. Mandatory contributions include those for pensions and health insurance and in some countries, for family benefits, work injury and unemployment insurances.
The proportion of the contributions paid by employers or employees is also quite different across these countries. Argentina is the country with the highest percentage of contributions coming from the employer (30%), followed by Brazil (27.8%), Colombia (25.02%), Venezuela (17%) and Peru (9.6%). Chile has the lowest employee contribution at 4.1%. It is worth noting that in Chile, employers do not have to contribute to pensions or health insurance. These are the responsibility of the employees themselves. Similarly, in Peru employers do not have to make pension contributions.
In terms of contributions paid by the employee, Chile shows the highest rate of 20.6%, followed by Argentina (17%), Peru (13%), Brazil (9%), Colombia (8%) and Venezuela (5.5%).
Social security contributions cover pension, health, work injury and unemployment insurances and family benefits.
The actual employer contribution rate depends on the firm’s size and its main activity.
- Pension and unemployment insurance and family benefits: This amounts to 21% for those employers whose main activity is in services - except for small and medium businesses - and 17% for the remaining employers (whose main activity consists of primary and secondary production)
- Health insurance: 6% of the employee’s payroll - regardless of the employer’s main activity
- Work injury insurance: The employer should provide insurance to cover risk at work and professional illnesses. The amount depends on the employer’s main activity and its level of risk. According to an official survey carried out by the Argentine Superintendence of Work Risk, the cost of insurance varies from 1.8% in the financial services field to 8.2% in the agricultural sector
Employer contributions are not capped. Contributions are made by the employer monthly when the employee’s salary is paid. The employer must declare taxable earnings and corresponding contributions to the tax authorities.
The actual employee contribution is unique for all type of workers (17%) and is automatically deducted from the employee’s salary by the employer on a monthly basis and is composed of the following:
- Pension: 11%.
- National Institute of Social Services for Retirees and Pensioners - INSSJP: 3%
- Health Insurance: 3%
The overall monthly salary cap on the employee’s contributions is 81,918.55 Argentine pesos (US$4,746.14).
On 13 November 2017, the Argentine national government sent Congress a series of measures to modify social security contributions, encourage greater investment, promote the creation of employment and fight against tax and labour evasion. One of the proposed measures is a gradual implementation of a minimum non-taxable amount of 12,000 pesos (U$S 701.10). As of 2018, the first 2,400 pesos (US$ 140.22) of gross compensation will not be subject to pension contributions. By January 2022, this amount will reach 12,000, and will be updated in accordance with the consumer price index and in line with inflation.
This measure seeks to reduce the hiring of lower-skilled workers, reducing the implicit incentive of social charges to operate outside the law through unregistered employment.
At the same time, proposals have been put forward for a gradual unification of the applicable rate of the employer’s pension contributions eliminating the current differences on the contributions by a firm’s size and its main activity.
In this regard, the employer’s contributions to the pension system will be unified at 19.5%, (from January 2022 onwards), replacing the current 17% and 21% rates. In practice, this will increase the pension contributions for companies whose main activity consists of primary and secondary production (currently 17%). It will decrease for those engaged in services (currently 21%).
Social security contributions cover allowances for sickness, disability, maternity leave and pensions in Brazil.
The actual employer contribution rate corresponds to approximately 27.8% of the employee’s salary. It can vary, however, between 26.8%, 27.8% or 28.8%.
Employers are legally required to make social security contributions based on the employee’s pay plus all benefits granted as part of their salary.
Contributions are paid to the National Social Security Institute and there is no cap on the contributions payable by employers.
In addition, employees must contribute a percentage of their pay, varying from 8%, 9% and 11% depending on their pay level. It is always capped, however, at a maximum contribution, which varies based on the minimum wage. As of 1 January 2017, this cap is 608.44 Brazilian reais (US$197.14).
The contribution payable by employees is taken from their monthly pay. The employer must pay this amount to the government, together with its own contribution by the 20th day of the following month.
In Chile, social security contributions cover pension, health, work injury and unemployment insurance.
Chile is the only country out of the six included in this article where the employer does not have to contribute to pensions or health insurance.
All employees must pay approximately 13% of their salary into a pension fund, which is paid into an individual account. Employees must also pay 7% of their salary towards health insurance. These contributions are withheld by the employer from the employee´s monthly salary and paid directly to the pension fund administrators and healthcare institutions.
There is a limit on contributions payable from the employee’s income to the pension fund. The monthly income considered for this purpose is equivalent to 75.7 “inflation Indexed Units” (UF), which is comparable to approximately US$3,149.68. In terms of health insurance, the same limit applies, however, employees can purchase a more expensive health plan, in which case they will pay a higher amount.
Regarding the actual employer’s contribution rates, the law states that the employer must provide insurance against labour accidents and professional illness. The contribution rates are as follows:
- A basic contribution of 0.9% of the employee’s taxable wages
- An additional contribution, which varies based on the organisation’s activities and associated risks, capped at 2.4% of the employee´s taxable income
The law on unemployment insurance establishes that both the employer and the employee must contribute as follows:
- Employee: 0.6% of taxable income; and
- Employer: 2.4% of taxable income.
There is also a limit on these contributions for unemployment insurance based on the employee’s income. The monthly income considered for this purpose is equivalent to 113.5 UF, equivalent to approximately US$4,719.46.
Social security contributions cover pensions, health and labour risks in Colombia.
Every employer must ensure its employees are affiliated with the General Social Security System and make monthly contributions based on the employees’ monthly wage.
Contributions are calculated as follows:
- Health: 12.5%, of which the employer pays 8.5% and the employee 4%. Employees earning less than 10 monthly minimum legal wages are exempt from health contributions;
- Pensions: 16%, of which the employer pays 12% and the employee 4%, with employees earning more than four monthly minimum legal wages being required to make additional contributions to the pension system, ranging between 1% and 2% of the employee’s salary; and
- Labour risks: between 0.348% and 8.7% is paid by the employer, varying in accordance with the level of risk
The minimum earnings used to calculate contributions are one monthly minimum legal wage, and the cap is 25 monthly minimum legal wages. The date of payment of contributions varies according to the employer’s ID number.
Note that if variable pay (non-salary benefits) exceeds 40% of the employee’s take-home pay, the excess must be added to the base salary when calculating social security payments.
Social Security contributions in Peru cover pensions and the National Health System (work injury insurance is mandatory in certain industrial activities).
In relation to pensions, employees are entitled to choose the system into which they will contribute, namely:
- The National Pension System, which is under the responsibility of the Government Pension Fund Office – ONP. The monthly contribution rate is 13% of the employee’s salary, which goes to a common fund, or
- A private Pension System managed by Pension Fund Administrators(AFP). The monthly contribution rate varies, depending on the AFP administrator the employee has selected (approximately 12.9% of the salary). The contribution goes to an individual account.
Both systems cover disability, retirement and the beneficiary of the employee’s pension.
Employees pay the contributions and the employer must withhold the percentage from the employee’s remuneration. On the other hand, the Peruvian Social Security (EsSalud) is responsible for health services. In this system, the contribution rate payable by the employer is 9% of the employee’s salary.
Contributions also cover allowances for temporary disability and maternity leave.
Regarding the National Health System, the private sector participates in providing medical services through Health Care Providers (EPS). In this system, the employer pays a contribution rate of 9% from the employee’s salary. However, the employer divides the payment as follows: 6.25% corresponds to EsSalud, and 2.75% to the EPS. However, the EPS will only provide certain services, the ones which are most common and at the same time less complex, while the most frequent and more complicated services are provided by EsSalud.
Work Injury Insurance: when the employer’s main activity is considered a high-risk activity, specialist work injury insurance should be provided. The contribution rate is an average of 0.6% of the employee’s salary.
In Venezuela, employers must ensure their employees are affiliated with the social security system, which is mainly composed of:
- The Venezuelan Institute of Social Security (IVSS) contributions to cover risks of income loss due to age, an accident at work or occupational illness, disability, sickness, maternity, unemployment and death in certain cases;
- The Housing Fund (FAOV) contributions to help employees with their housing needs; and
- The National Institute of Training and Education (INCES) parafiscal contribution intended for technical job training.
Employers must pay a portion of the contributions to the Social Security System and also deduct a portion from the employee’s remuneration. An outline is as follows.
- The employer’s contributions to the IVSS (for all cases other than unemployment insurance) vary according to the level of risk of the business activity, ranging from 9% (the lowest risk) to 11% (for high-risk companies) of the employee’s salary. Employees’ contribution to the IVSS is 4% of their salary. The monthly salary from which contributions to the IVSS are calculated has a threshold of five times the statutory minimum salary (the statutory minimum salary as of November 2017 is approximately US$52.61 per month, at the DICOM exchange rate). These contributions must be paid on a monthly basis.
- The employer’s contributions to the IVSS for unemployment insurance is 2% of the employee’s salary while the employees’ contribution is 0.5%. The monthly salary from which these contributions are calculated has a threshold of 10 times the statutory minimum salary and are paid on a monthly basis.
- The contribution to FAOV is also paid every month and equates to 2% of the monthly global salary of each employee from the employer, and 1% of the monthly global salary from the employee
- The contribution to INCES only applies to employers with a payroll of five or more employees. Employers must pay 2% of the total employee’s salaries (including other regular payments made to the employee, such as monthly, quarterly or even annual bonuses, personal use of the company car quotas, overtime hours if frequent, for example) within the first five days of each quarter. Employees must pay a contribution of 0.5% to INCES for their profit-sharing benefit paid at the end of each year.
As the above will clearly show, social security contributions rates across South America can vary greatly, emphasising the importance of having a clear understanding of the many differences to ensure compliance with the law across each jurisdiction.
Brigard & Urrutia AbogadosD’Empaire Reyna AbogadosEstudio OlaecheaMunita, Olavarria & SaezVeirano AdvogadosFunes de Rioja & Asociados