We invite you to read the column written by our partner Jorge Arredondo on the bill that seeks to eliminate the 11-year cap on legal compensation for termination of employment contracts.
Recently, the Labor Committee of the Chamber of Deputies approved moving forward with the bill that seeks to eliminate the 11-year cap on legal compensation following the termination of an employment contract, invoking various grounds (company needs or written dismissal by the employer). The big question is whether the problem with our labor legislation, in relation to the termination of employment contracts, lies in the cap on compensation or rather in the grounds for dismissal that we have in our country.
Currently, in Chile, the grounds for termination of an employment contract can broadly be divided into three categories. The first are subjective grounds, which include resignation, mutual agreement, death of the employee, and expiration of the term. In principle, none of these grounds entitle the employee to compensation, except in the case of mutual agreement, where the employer voluntarily decides to make some kind of payment. The second are due to conduct attributable to the employee in the performance of their duties, including probity, serious breach of contractual obligations, and unjustified absences in certain cases, among others. Finally, there are the needs of the company and eviction. The latter do include legal compensation.
As is well known, legal compensation is capped at 90 UF and 11 years of service, unless the employee began working before the 1981 code came into force. This is the legal cap, but nothing prevents an individual or collective agreement from being reached so that this cap does not apply.
In light of the current debate, it is important to note that today only 17% of the working population has been working for the same employer for more than 11 years (according to data provided by Representative Giordano of the Broad Front in the commission’s discussion on July 15) and only 18% of the dismissal claims processed in Chile between July 1, 2024, and June 30, 2025, have been due to company needs. Therefore, although laws should be general in nature, this bill legislates for an extremely small niche.
In view of the above, the question should rather be whether the current grounds for termination of contract are correct. For example, since 2001, it has not been possible to use the grounds of technical unsuitability to justify the dismissal of a worker, i.e., that the employee did not meet the required profile.
In turn, the grounds of company needs are based on reasons external to the worker’s services, i.e., organizational issues that make dismissal necessary, which often leads to litigation initiated by former employees who consider the grounds invoked to be inadmissible. This judicialization is sometimes absurd and could and should be avoided, given the level of collapse that labor courts are currently experiencing due to the number of cases.
Taking into account the facts presented, it would appear that the problem lies not only in the legal cap on compensation, but also in the grounds for dismissal. Thus, it would seem sensible to seek solutions that analyze all the circumstances that affect the termination of employment contracts in Chile.
Column written by:
Jorge Arredondo | Partner | jarredondo@az.cl
