What You Should Know About Severance Pay in Costa Rica

The calculation of severance pay in Costa Rica (liquidación) in case of dismissal is carried out in accordance with the Labor Code, the law that governs relations between workers and employers. Understanding how the employment relationship ends is essential because the amounts owed to the employee depend on whether the termination takes place with employer responsibility or without employer responsibility.

The official Costa Rican Labor Code establishes the rules governing employment contracts, notice, severance, dismissal and other employee rights. Article 28, for example, establishes the applicable notice periods for indefinite employment contracts.

According to this law, the termination of an employment relationship can be done in two ways: with employer responsibility or without employer responsibility. If termination happens with employer responsibility, the worker is entitled to all the applicable benefits and guarantees, namely notice, severance pay, compensation for unused vacation time, and the proportional Christmas bonus or aguinaldo.

If the dismissal takes place without employer responsibility, the reasons must be justified according to Article 81 of the Labor Code and the employee will only have the right to receive amounts that have already been earned, including the proportional Christmas bonus and compensation for unused vacation time. Article 81 contains the statutory causes that allow an employer to terminate an employment contract for just cause.

Employers should remember that termination is only one part of the employment relationship. Our earlier guide to employee benefits and domestic worker rights in Costa Rica explains how vacation, aguinaldo, social security and other statutory benefits fit into Costa Rican labor law. That becomes particularly important when calculating the final amounts owed when employment ends.

Employment Contracts and Severance Pay in Costa Rica

Although the guidelines of the Labor Code provide the tools necessary to calculate and justify a dismissal, it is important that companies also get their internal regulations approved by the Ministry of Labor so as to be able to justify any dismissal caused by a breach of the general guidelines provided by the company.

The creation of a contract is essential when starting a new employment relationship, regardless of whether the contract is for a definite or indefinite period. The contract will dictate a way forward when and if termination happens.

This is especially relevant to severance pay in Costa Rica, because the type of employment relationship, length of service, salary and reason for termination can all affect the final calculation.

When processing a dismissal, the employer should first define whether termination of the employment relationship will be with or without employer responsibility. If it will be without employer responsibility, the employer needs to identify and document the applicable reason under the Labor Code, the company’s internal regulations and the employment contract.

The employer should then communicate the decision to the worker through a dismissal letter that includes the reason for termination. If the worker refuses to receive the letter, the employer must follow the procedure established by Costa Rican labor law for documenting and communicating the dismissal. Proper documentation can become particularly important if there is a subsequent legal proceeding.

Termination With Employer Responsibility

In the event of termination of the employment relationship with employer responsibility, the employer must pay compensation for unused vacation time, if pending, as well as the proportional Christmas bonus or aguinaldo.

The employer must also provide the appropriate notice, or preaviso. The length of the notice is determined by the total amount of time the employee has worked. If the employer decides that the worker should not work during this period, the corresponding notice must instead be paid.

Under Article 28 of the Labor Code, an employee who has worked for less than three months is not entitled to statutory notice. After more than three months but not more than six months of continuous employment, the notice period is one week. After more than six months but not more than one year, it is fifteen days. After more than one year of continuous employment, the required notice is one month.

During the notice period, the employer is required to grant one day a week for the worker to seek employment. This right is expressly established in Article 28 of the Labor Code.

The notice should be established in writing. The Labor Code also contains provisions governing notice when an employment relationship has been based on a verbal agreement.

In addition to vacation, aguinaldo and notice, termination with employer responsibility can result in severance pay, or auxilio de cesantía. The amount is calculated according to the employee’s length of service and applicable salary.

Costa Rica’s Ministry of Labor has published guidance explaining that severance calculations use the employee’s compensation and the number of days applicable according to Article 29 of the Labor Code. Its legal guidance also explains the calculation of notice based on salary during the applicable reference period.

Termination Without Employer Responsibility

The situation is different when an employer terminates the employment relationship without employer responsibility because there is a legally sufficient cause under Article 81 of the Labor Code.

The employee remains entitled to amounts already earned, including unpaid salary, proportional aguinaldo and compensation for unused vacation where applicable. However, a valid dismissal for cause under Article 81 does not create the same obligation to pay notice and severance that exists when the employer dismisses an employee without cause.

The distinction is crucial. An employer should therefore be able to identify and document the specific conduct that supports a dismissal for cause rather than simply labeling the termination as being “without employer responsibility.”

Article 81 identifies several circumstances that can constitute just cause. These include serious misconduct toward the employer or coworkers; certain misconduct outside the workplace that makes continuation of the employment relationship impossible; intentional damage to property connected with the employer’s business; disclosure of protected secrets; serious recklessness affecting workplace safety; and unjustified absences meeting the requirements established by law.

The complete wording is available directly in Article 81 of the Costa Rican Labor Code. Because the justification for dismissal can determine whether notice and severance become payable, employers should review the actual statutory language rather than relying only on a summary.

Calculating Severance Pay in Costa Rica

The Ministry of Labor provides a tool that can be used to calculate the amounts potentially owed when an employment relationship ends.

The official MTSS labor benefits calculator allows users to estimate aguinaldo, liquidación and other employment benefits. The Ministry specifically notes that the severance result is an estimate based on the information entered by the user.

The Ministry has also provided assistance with calculations and labor-law questions for both employees and employers. Its labor services include the calculation of employment benefits and conciliation when the parties disagree about amounts owed after termination.

This can be particularly useful because the calculation of severance pay in Costa Rica is not simply a question of multiplying the employee’s last monthly salary by the number of years worked. The applicable benefits depend on the type of termination, length of employment, compensation history, unused vacation and other circumstances.

Protected Employees and Discriminatory Dismissal

The Labor Code also specifies protections against dismissal for discriminatory reasons and contains additional protections for employees in particular circumstances, including pregnancy and breastfeeding.

An employer should therefore not assume that paying ordinary termination benefits automatically makes every dismissal lawful. The reason for termination and the employee’s protected status can create separate legal issues from the calculation of the final payment.

This is another reason why written contracts, payroll records, disciplinary records and dismissal documentation are important throughout the employment relationship, rather than only when a dispute has already developed.

For additional background on Costa Rican employment obligations, our Costa Rica labor law section contains articles dealing with employee rights, benefits and employment relationships.

Negotiation and Mediation in Employment Disputes

Take into account that labor rights are inalienable and that, in potentially complicated cases, negotiation and mediation between both parties can help reach a mutually satisfying agreement following termination of the employment relationship.

The Ministry of Labor’s conciliation service exists precisely for situations in which workers and employers disagree about matters such as contractual changes or the employment benefits payable after termination. The Ministry describes the service as free and impartial and notes that an agreement reached through the process can have the same effects as a judicial judgment.

Contact us if you have any question or comment about severance payments. You can also leave your comment below or through our social media accounts.