Since the validity of the Constituent Mandate 8 on 6 May 2008, hiring staff in Ecuador has been somewhat complex. The mandate ruled that outsourcing labor hiring intermediation and any form of employment-related activities to which the company or employer in Ecuador is dedicated is prohibited.
Additionally, the Constituent Mandate arranged that the labor relationship between employer and employee be direct and bilateral.
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In this sense, as a foreign company interested in hiring personnel in Ecuador, you should keep in mind that outsourced recruitment and hiring companies, such as Professional Employer Organizations (PEOs) are not authorized to operate in Ecuador.
It’s important to understand your employment options in Ecuador to make the most of the local talent to support your business.
Two main options for hiring staff in Ecuador
In practice, companies are known to accept outsourced hiring services in favor of foreign companies not established in the country. However, outsourcing hiring requirements is an unauthorized activity that could create challenges for your new business in Ecuador.
Although outsource hiring processes have been banned since 2008, businesses do have the option of contracting civil services in Ecuador, which can be categorized into two types:
- hiring specialized technical expertise, and
- hiring for support service categories, such as cleaning, security, communications, and others.
It is important that you know the limitations and conditions that would apply for your hiring options in Ecuador.
1. Hire employees through company incorporation
Keep in mind that, even if a foreign company does not have a presence in Ecuador, you may hire employees in the country. If you do hire employees in Ecuador, these labor relations will be governed by Ecuadorian laws and all relevant terms and benefits should be granted to such employees in local law (including social security affiliation).
In order to directly hire employees in Ecuador, a company must generate a permanent commercial establishment for tax purposes, with the consequences and obligations that it would have under Ecuadorian law. In practice, in addition, to comply with the employer’s obligations to its employees, to begin operations in the country you must first incorporate a company in Ecuador and obtain a tax identification number.
In this option, therefore, an employment contract must be concluded and submitted to Ecuadorian social security for the employee. The employee and employer must fulfil all other requirements and particularities in their work relationship in accordance with Ecuadorian law.
2. Hire contractors through the Civil Services Provision
It is legally possible to form civil contracts for hiring staff in Ecuador to provide specialized technical services, such as consulting. This arrangement is made under what’s called a service provision regime. Employers can choose to hire for these services, provided that the following conditions are met:
- The contracted service does not constitute habitual activity or the essence of the business
- The person providing the service has an independent physical, economic and administrative infrastructure, i.e. they’re operating their own business
- The service must be provided in the contractor’s own facilities.
On the other hand, it is forbidden to enter into civil contracts with natural persons if the relationship with them demonstrates any of the following elements:
- Provision of lawful and personal services
- Relationship dependency or legal subordination that implies working hours and compliance with the employer’s orders.
- Payment of remuneration or salary.
Additionally there should be no elements of a labor relationship in your engagement with a provider of specialized technical services.
Interpreting Ecuadorian employment law
In Ecuador, the principle of interpretation is in favor of the employee in case of doubt (pro-operative indub). Therefore, even if someone is hired under a service provision regime, if elements of an employment relationship exist in that engagement, there’s a risk that your business may encounter legal challenges by the state or your employee.
If the existence of an employment relationship is determined, the employee would be granted the right to be recognized for all elements of an employee-employer relationship that were not previously paid or recognized under the service provision relationship.
Additionally, during a potential labor dispute, local authorities may conclude that the relationship with suppliers simply constituted a simulation of outsourcing, intermediation or any other form of service provision agreement. This decision could impose a fine to the employer totaling up to 20 minimum salaries (currently for 2019, this amount is equal to US$7,880) for each worker involved in the dispute.
Doing business in Ecuador
Ecuador experienced significant economic growth between 2007 and 2014 thanks to an increase in oil prices. From there, the country has been working on addressing structural and policy challenges to improve the business environment for locals and foreigners alike. The country’s 2018-2021 Prosperity Plan has received support from the International Monetary Fund. Ecuador aims to instill clear, robust legal frameworks to support the nation’s adaptation to an increasingly uncertain global economic context.
While this is underway, foreign companies can expect to find opportunities in developing and emerging industries such as online commerce and fintech, and other technological innovation that is sweeping through the region. Ecuador’s geographic location and well-established regional trade routes offer businesses expansive reach into both Northern and Southern parts of the continent. Having the US Dollar as their currency can also simplify invoicing and transactions, removing foreign exchange mechanisms and fees. While hiring staff in Ecuador may present challenges, the countries offer many advantages to entrepreneurs and multinationals looking to begin commercial operations on its shores.
Employ staff in Ecuador with our help
In general terms, hiring staff in Ecuador is achievable with clear understanding of local law and support from experts. The country offers many commercial opportunities for businesses looking to expand their operations in Latin America, and a good understanding of local employment law is essential to success.
At Biz Latin Hub, our team of professionals carries extensive knowledge about labor matters at the local and regional level. With our suite of market entry and back-office needs, we can support you with all necessary procedures to hire personnel in Ecuador.
For the above considerations, if you or your company is interested in starting business in Ecuador, and needs assistance to comply with the processes derived from those legal and administrative processes, reach out to us.
You can contact one of our country managers in the different jurisdictions of Latin America here at Biz Latin Hub and we will see how we can help you and your company in Ecuador and throughout Latin America.
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