Indefinite-term employment contracts are the rule of thumb for hiring in Peru. Without prejudice to the foregoing, fixed-term and part-time employment contracts may be executed in special cases.
Hiring system in Peru
For Peruvian Employees
Indefinite-term employment contracts are the rule of thumb for hiring in Peru. Without prejudice to the foregoing, fixed-term and part-time employment contracts may be executed in special cases. We detail the main features of each of these contracts below:
- Indefinite-term Employment Contracts: They do not have a defined duration. This form of employment contract grants employees all labor rights and benefits in force, which are detailed below, and does not require any formality to be valid.
- Fixed-term Employment Contracts: They grant employees all the rights and benefits established for employees hired for an indefinite term. Under the legislation, the execution of such contracts is subject to the effective existence of an objective motive or cause that justifies the temporary hiring (for example, the start of a new activity, specific work or service, substitution, etc.) and their validity is subject to compliance with the requirements set forth by law (execution in writing and explanation in the contract of the cause for the alleged temporary hiring).
- Part-time Employment Contracts: They regulate labor relationships that cover work schedules with a weekly average of less than four (4) hours per day. Part-time employees are entitled to all the labor benefits in force, except for: (i) compensation for arbitrary dismissal; (ii) severance pay (CTS); and (iii) the vacation time of thirty (30) days (they only have the right to six (6) business days’ vacation per year). These contracts must be entered in writing in order to be valid.
For all these contracts, the statutory trial period is applicable; during this period, the employees do not have the right to receive any compensation in the event of arbitrary dismissal. The trial period is computed from the start of the labor relationship and may have a maximum duration of: (i) three (3) months for all employees (ii) six (6) months for qualified employees or those in positions of trust; and (iii) twelve (12) months for management workers. To be valid for over three (3) months, the trial period must be in writing.
For Foreign Employees
The labor relationships of foreign citizens entering Peru to provide dependent services to a domiciled company are regulated by the Foreign Personnel Hiring Act. These employees are entitled to the same benefits granted to private activity employees and have the same contributions and taxes. The difference lies in the fact that, in order to start the provision of services, it is necessary to get the approval of the employment contract by the Ministry of Labor and Employment Promotion (MTPE) and, basically, to get the qualifying immigration status.
As a rule of thumb, foreign employees must not exceed 20% of the total personnel of a company. The total remuneration received by foreign employees must not exceed 30% of the total payroll. The company may request to be exempted from these limits in the case of professionals and/or specialized technical personnel, or management personnel for a new business activity, or in the event of a corporate restructuring or reorganization, among others.
None of the limits as to number of personnel and salary amount apply to foreign employees who provide services in Peru on an immigrant visa, who are married to Peruvian citizens, or who have Peruvian children, parents or siblings; who are foreign investors with a permanent investment in Peru of at least five (5) Tax Units (UITs); or who provide services in the country under bilateral or multilateral agreements executed by the Peruvian Government, among others.
Companies must follow the approval process before the MTPE by submitting a file that contains, besides the employment contract, the declaration of the fulfillment of or exemption from the limit percentages and the Sworn Statement certifying the work experience or professional training of the foreign employee. The company must keep in the file of each foreign employee a copy of the documents supporting the employee’s qualification, such as the work certificate and/or the professional degree. We should mention that the fact of belonging to the Pacific Alliance does not grant any facilities for the approval of foreign employees.
Fringe benefits in Peru
Employees are entitled to the following fringe benefits, the cost of which is borne by the employer:
- Vacations: Equivalent to thirty (30) calendar days of rest, with one (1) month of paid remuneration.
- Statutory Bonuses: Two (2) monthly remunerations a year
- Extraordinary Bonus: 9% of the statutory bonus
- Severance Pay: 1.1666 monthly remunerations a year
- Profit Sharing: Between 5% and 10% of the before-tax net income
- Family Allowance: 10% of the Minimum Salary (US$25 approximately)
Vacations: This benefit confers the right to thirty (30) calendar days of paid vacation for each complete year of service, provided employees have worked the minimum number of days required by law.
Statutory Bonuses: Two (2) bonuses per year are paid, the first one in July and the second one in December.
Extraordinary Bonus: It is equal to 9% of the statutory bonuses and is paid at the same time as the statutory bonuses. If the employee is affiliated to a Healthcare Service Provider (EPS) the bonus is equal to 6.75% of the statutory bonuses.
Severance Pay (CTS): This is a fringe benefit to cover contingencies derived from termination of employment and to promote employees and their families. It is deposited in the employee’s bank account in May and November. Employees are authorized to use a portion of this benefit before termination of their labor relationship, subject to certain conditions.
Profit-Sharing: Companies with over twenty (20) employees who develop corporate income-generating activities must distribute a percentage of their annual income before taxes among their employees. Law sets the profit-sharing percentage. This varies by the type of company:
- Fishing, telecommunications and industrial companies: 10%
- Mining companies, wholesale and retail businesses, and restaurants: 8%
- Companies engaged in other activities: 5%.
Family Allowance: Employees who have one or more dependent children under the age of eighteen (18) or who have older children pursuing higher education or university studies, are entitled to this benefit until their children reach the age of twenty-four (24) years.
Global Annual Remuneration: The employer may agree with employees who earn a basic salary of at least S/8,300 per month (approximately US$2,541) to pay them a Global Annual Remuneration (RIA) in twelve (12) monthly installments that include all the above-detailed benefits, except for profit-sharing.
Taxes and contributions levied on remunerations in Peru
Remunerations are subject to the following taxes and contributions:
- Health Social Security (EsSalud): 9%
- Mandatory Life Insurance: It depends on the type of policy
- Occupational Life and Disability Insurance: It depends on the type of policy
- Pension System: 13% for the Public System or 12.94% for the Private System (approximately)
- Income Tax: Between 8% and 30%
Income Tax: The employer is responsible for withholding and paying the income tax on labor revenues to the Tax Administration. This tax is paid by the employee. It is applied at progressive rates based on income categories ranging from 8% to 30%.
Health Social Security (EsSalud): This contribution is paid by the employer and is designed to finance the Health Social Security System (EsSalud) so that it may provide employees healthcare services and financial help in case of disability through the payment of subsidies. Employers may provide private medical insurance, either through their own services or through Healthcare Service Providers (EPS). With providing such insurance, employers may get a credit of up to 2.25% of the contribution to EsSalud, which becomes 6.75%, subject to certain limits and conditions.
Mandatory Life Insurance: This is a group insurance provided to employees who have rendered services to the same employer for over four (4) years. However, the employer may optionally provide such insurance after the third month of services.
Pension Systems: The employee may join the National Pension System (SNP) or the Private Pension System (SPP) which are mutually exclusive. The employee pays this contribution; the employer is solely responsible for withholding it. With SPP, the contribution comprises a credit to the individual capitalization account (10%) plus a premium for disability, survivors and funeral expenses insurance, plus the fee paid to Pension Fund Management Companies (AFP). Such fee is calculated based on the remuneration earned and on the pension fund balance.
Other Contributions: Other contributions depend on the activity developed by the companies.
Termination of the Employment Relationship in Peru
The employment contract is terminated in the following cases:
- Compliance with the termination condition or expiry of the term of fixed-term contracts
- By agreement between the employee and the employer, which must be put in writing
- By resignation of the employee, who must provide thirty (30) days' prior notice
- Because of permanent absolute disability or death of the employee
- Because of retirement of the employee
- Due to justified dismissal, the cause of which must be related to the skill or conduct of the employee, according to the cases established by Peruvian law
- In cases of collective dismissal, under Peruvian law
The dismissal will be subject to the verification of a justified cause provided by law. If there is no such cause, the employer will be penalized with the payment of a compensation. However, the Constitutional Court has established certain cases in which employees may also request the reincorporation into their job position, according to:
Dismissal without Cause
When the employer does not state a legal cause or motive = Reincorporation / Compensation at employee’s election
When the employer falsely and fraudulently charges the employee of committing gross negligence = Reincorporation / Compensation at employee’s election
When the measure violates the fundamental rights of the employee = Reincorporation
Dismissal with Reasonable Charge of Gross Negligence
When the gross negligence is not proven during the process, although the procedure regulated by the law was properly followed = Compensation
When the employee is the victim of acts of hostility comparable to dismissal = Compensation
Compensation shall apply only once the trial period has been completed and is limited to twelve (12) monthly remunerations. In the case of employees hired for an indefinite term, the compensation amounts to one and a half remunerations for each year of completed service. Conversely, in the case of employees hired for a fixed term, the compensation amounts to one and a half remunerations for each month not worked up until the expiry of the contract. In both cases, the fractions of year are paid by twelfths (12ths) and thirtieths (30ths).
Management staff and those in positions of trust who are hired as such do not have the right to request reincorporation and are only entitled to receive a compensation for arbitrary dismissal, unless they have previously held an ordinary position, in which case they may also be entitled to reincorporation into such ordinary position.
Other Labor Obligations
Safety and health at work obligations: Companies with 20 or more employees must prepare an occupational safety and health at work manual and establish an occupational safety and health committee, with participation of employees and company’s representatives. In the case of workplaces with less than 20 employees, a supervisor must be designated.
Companies must also implement registries for accidents, diseases, trainings, medical examinations, statistics, safety and health equipment, etc., and documentation pursuant to the occupational safety and health management system, through magnetic or physical means. For companies that perform risky activities, or depending on specific industry regulations, examinations need to be scheduled for the beginning, during and at the end of the labor relationship. If not, they are mandatory every two years, and at the end of the labor relationship - only if requested by the employee.
Employers must ensure the presence of a doctor in the workplace. In any workplace with more than 500 employees, the doctor must remain for at least 6 hours a day, 5 days a week, and in any workplace with less than 500 employees, health supervision is conducted by a doctor, without the requirement of a minimum of hours as long as the company has an Occupational Health Annual Plan, and an Employee’s Health Surveillance Program.
The General Law of Disabled People (Law 29973) states that people with disabilities may work in equal conditions like other employees. Hence, private employers with over 50 workers must hire people with disabilities at a rate not lower than 3% of their payroll, with certain exemptions.
Employees in construction, transportation and industrial companies commonly form the strongest unions, the most important being the Confederación General de Trabajadores del Perú (CGTP) and the Central de Trabajadores del Perú (CTP). To form a company union, a minimum of 20 workers is required, while other types of unions (activities, professions, specialties) require a minimum of 50. Agreements reached with unions that comprise over one-half of a company’s employees are applicable for all employees, even if they are not members of the union.
Quick Guide on Main Benefits and Labor Obligations in Peru
Work Contract: It has a trial term of 3 months and at the end of this term the worker may have the protection against arbitrary dismissal.
Work day: 8 hours a day or 48 hours a week (maximum).
Vacations: 30 calendar days for each complete year of service.
Bonuses: 2 salaries per year (National holidays and Christmas).
Social Security: Equal to 9% of the remuneration or income. It is the responsibility of the employer to declare and pay them.
National Pension System (SNP) / Private Pension System (SPP): The rate of the SNP is 13%. The rate of the SPP fluctuates between 13% and 15% according to the chosen AFP.
Family Allocation: 10% of the Minimum Salary (US$25 approximately)
Compensation for the Time of Service (CTS): It is the 1/12 of the remuneration for each complete calendar month of services. The fraction is compensated by 1/30.
Workers participation in the Profits: The percentage varies between 5% and 10%.
Maternity leave: 45 days of parental rest and 45 days of postnatal rest.
Night Shifts: A surcharge of 35 % of the valid monthly minimum remuneration shall be added. Night shifts are considered between 10:00 p.m. and 06:00 a.m.
Arbitrary Dismissal: The compensation is equal to 1 1/2 of the monthly remuneration for each complete year of services with a maximum of 12 remunerations. The fractions of a year are paid 1/12 and 1/30 as applicable.
Retirement: The minimum retirement age is 65 years and the obligatory retirement / automatic retirement age is 70 years.