How to handle payroll in Ecuador

As the eighth largest economy in Latin America, Ecuador offers many opportunities for businesses, but it is also a complex country to navigate. So when starting a business and hiring employees there, it is very important to understand the laws and intricacies surrounding payroll. Here are some useful pointers:

Paying employees

To set up payroll in Ecuador, it is necessary to obtain an Ecuadorian tax identification number, which is the last step in the company incorporation process. Once the Tax ID is issued, credentials for accessing the country’s Labour Ministry and Social Security websites can be obtained. All employee information, including contracts, must be uploaded to these systems.

When taking up long-term employment, employees sign a contract, which includes agreeing to a three-month probation period. During this period, their contract may be terminated without severance pay or any penalties.

Employers are entitled to write their own employment contract, but it must be presented in a standard format when uploaded to the Labour Ministry’s website. It is likewise required to include an accurate start date as all of an employee’s information going forward will be processed through this system.

Workers can also be offered temporary contracts for a maximum of six months, but they must be paid a 35% premium on top of their agreed salary.

In Ecuador, many companies pay staff twice a month. During the first half of the month, employees are paid 40% of their gross salary.

But it is mandatory for both staff and employers to contribute to the Social Security fund on a monthly basis. Each employee puts in 9.45% of their gross salary, while employers give 12.15%, bringing the total contribution to 21.6% every month. Private medical insurance is also offered as an additional by some employers, but it is not mandatory.

Following the second year of employment, however, employers are obliged to pay additional reserved funds into Social Security amounting to 8.33% of an employee’s gross salary each month. Staff members have the choice to either receive this payment monthly or to have it accumulate it in their social security fund.

Employees who work extra hours will be paid at different rates based on an overtime schedule, which ranges from a premium payment of 25% to 100%.

Paid leave

Staff members are entitled to 15 days of vacation after they have worked for their employer for one year. After their fifth year of employment at the same company, they receive one additional day per year until they reach a maximum of 15 extra days.

Sick leave payments are based on the number of days that an individual is ill. For instance, if an employee is off work for less than three days, they are entitled to full pay, but their employer needs to certify a document, which must also be validated by a Social Security medical centre. If staff members are away for longer than three days, it is necessary to notify Social Security, which will pay 75% of their salary, while employers pay the remaining 25%.

Maternity leave consists of three months of paid leave, plus a nine-month special period where mothers work a shortened six-hour day. During the first three months, Social Security pays 75% of their salary, while their employer pays the remaining 25%.

If a woman is fired during pregnancy, her employer will be required to pay a settlement of 12 months worth of salary on top of any other elements of her settlement deal.

Income tax 

Employers are responsible for working out how much income tax should be withheld from each employee’s pay packet each month, depending on their salary, before paying the relevant sum to the tax authority. At the end of each year, employers must report the employee’s taxes and personal deductions on a 107 Form.

13th and 14th salary

Each staff member is given a 13th salary as a Christmas bonus, which should be paid in full on 22 December. It is calculated based on any and all income, including bonuses, commissions and overtime, that an individual has received from December of the prior year until December of the current year. The figure is then divided by twelve. As a result, it may add up to more than a month’s salary.

Some employees chose to have a portion of their 13th salary paid to them on a monthly basis during the course of the year, while others take the entire accumulated amount in December.

Another bonus is the 14th salary, which is equal to the government’s monthly minimum wage (currently $386) and is paid in March or August, depending on the workplace’s location.

Diego Mantilla 

Diego Mantilla is director of client services at TMF Ecuador. Diego joined the organisation in 2013 and has more than 20 years’ experience of managing financial and accounting issues in companies such as Ernst & Young, Repsol YPF Ecuador, Techint International and Michelin of Ecuador S.A. He is a commercial engineer in finance, an authorised public accountant from the Pontifical Catholic University of Ecuador and holds an MBA from the University of Cádiz.