Hiring Employees in Costa Rica: Company Incorporation vs Professional Employer Organisation (PEO)

Foreign investment in Costa Rica is growing year by year, with companies looking to profit from a stable and growing economy. Whilst a company incorporation in Costa Rica is reasonably simple, management of payroll can be more problematic. In this article, we will have a look at some of the challenges involved with hiring in Costa Rica through a PEO versus a company incorporation solution.

Before PEO, we consider the Option to Incorporate your Company in Costa Rica?

Incorporating a company in Costa Rica is a relatively simply process that can be completed via the national social security website, Caja Costarricense de Seguro Social (CCSS). The company’s legal representative must log-in with an electronic signature and then will be asked to fill out some information for the authorities, the approval process may take up to a month.

The documents asked of the company are:

• Company certificate extended by a Public Notary or the National Registry
• Copy of the company’s bylaws
• Copy of the legal ‘ID
• Copy of employee’s ID
• Address for notifications
• Email address

Social security fees your company would have to pay as an employer

In Costa Rica, the social security fees are paid both by the employer and the employee. The division is made as follows:

• Employees pay 10.34 % of their own salary.
• Employers pay 26.3 % of their employees´ salary.

This payment is made once a month to the Caja Costarricense de Seguro Social, the Instituto Nacional de Seguros (National Insurance Institute) and different retirement funds. The employer must deduct the percentage varying according to the employee, and adds it to their own payment at the end of the month.

Hiring in Costa Rica – What is the “Aguinaldo”?

Aguinaldo is an extra salary due at the beginning of December which is calculated by taking an average of the salary and bonuses received by an employee in the last 12 months (November-December) worked. If an employee has only worked for some of these 12 months, the salaries and bonuses received are added and then divided by 12. Employers must pay the Aguinaldo within the first 20 days of December.

How many vacation days do employees receive in Costa Rica?

Employees have a right to a minimum of 14 vacation days for every 50 weeks worked under the same employer but an agreement can be reached between the two parties to grant more days. They cannot be accumulated or substituted for payment except for in special situations depending on the type of business. If this is arranged, it can only happen once every three years. If the employment relationship ends before the 50th week, then workers have a right to one day of vacation for every completed laboured month.

What happens when an employee is fired?

There are two situations in which an employee can be fired:

With just cause: The employer would only have to pay:

• Aguinaldo (proportional to the number of months worked since the start of the financial year)
• Vacations, if still applicable

With no just cause: The employer would incur responsibility for ending the employment relationship and they would need to pay:

• Aguinaldo (proportional to the number of months worked since the start of the financial year)
• Vacations, if still applicable
• Severance assistance: the amount depends on the length of the employment relationship, the range is between one week for 3-6 months worked and up to a month for more than a year
• Advance notice: it consists of a period of time given to the employee before ending the employment relationship. Depending on the circumstances, it may be substituted by payment. Both employers and employees need to give advance notice when ending the employment relationship. The period of time depends on the length of the employment relationship

Why Professional Employer Organisation ‘PEO’ services in Costa Rica?

The first half of this article has explained all the process of hiring an employee via a local legal entity (i.e through the incorporation of a local Costa Rican company). Another innovative solution for overcoming the challenges of hiring is to use a Professional Employment Organisation (PEO) in Latin America. PEOs cooperate with foreign companies and assist in the management of many HR tasks, including payroll, regulatory compliance and many other duties. By partnering with such an organisation, it is possible to have more time to directly manage your employees without having to worry about the more administrative aspects of hiring and maintaining an employee. Furthermore, a huge advantage of PEOs is that it allows you to hire and manage employees from abroad without having to go through the same bureaucratic processes involved in setting up a branch or incorporating your company. Many PEOs have licenses to work in dozens of different countries and have specialised knowledge in assisting with tasks like the ones mentioned above.

Do you need to hire employees in Costa Rica?

If you are looking to hire employees in Costa Rica, you have two options:

1. Hiring through a local legal entity, or
2. Hiring through a Professional Employer Organisation (PEO)

One of our main pieces of advice for companies looking to hire employees in Costa Rica is to work with a local group with ample corporate experience.

If you require more information regarding the company incorporation process in Costa Rica or PEO hiring services, please get in contact with the Biz Latin Hub. Our team provide a range of tailored business services to assist companies looking to begin commercial operations in Costa Rica and Latin America.

Contact us now for personalized information about your hiring options in Costa Rica, and to discuss whether hiring through a PEO or a company incorporation solution may be the best fit for your business needs.

Do you need accounting, taxation and financial assistance in Costa Rica or Latin America? Check out the following video for more information about our business services.