Honduras’ Law on Social Protection means that financial institutions under the Private Contribution Regime (RAP) will transition into pension fund management companies (AFPs), with employer and employee contributions rising to 8.7% and 5%, respectively. Our local expert explains 10 things every company need to know about this law.
1. New employees: The percentage of contribution for employees hired after the law was implemented on 4 September 2015 should reach 4% calculated on the employee’s salary and reaching a maximum of three times the highest minimum wage approved by the Ministry of Labor. This will be deposited in a labour reserve sub-account of individual capitalization managed by a Pension and Unemployment Fund Administrator (AFP). Every employee must open a sub-account in the AFP of convenience.
2. Employees with seniority will accumulate in the AFP only the percentage earned from 4 September until the day the employment relationship ends. The employer will have to contribute the difference to reach a total of 100% - but only if the employee is dismissed (the Labor Code in force at the moment must be taken into consideration).
3. Government employees: The Law on Social Protection does not require the State to have a reserve for the payment of benefits to public workers. These shall continue following the Labor Code, the Civil Service Law and any agreements made with the employer.
4. Administration of funds: The funds will be managed by the AFPs, which in turn will be regulated and supervised by the National Commission of Banks and Insurance.
5. Disposal of the accrued money: On termination of employment - regardless of the reason - the worker may immediately dispose of the money accumulated in the AFP and the interests that these funds generated during their stay in the AFP or the RAP Pension Fund. The new law mandates that workers shall receive 50% of their benefits. To receive these funds the employee must only provide proof of the labour disruption.
6. Loans with Private Contributions Regime (RAP): Employees who have loans with RAP cannot move the funds to another institution until the debt is canceled.
7. Total contributions: Workers must contribute a total of 5% to the new social security system. The employer will contribute a total of 8.7%.
8. Universal application: Unlike the RAP, which only applies to companies with 10 or more employees, the Law on Social Protection applies to all companies equally, regardless of size. For companies with less than 10 employees the effective date of the new law is January 2017.
9. Other parts of the Act: The Act includes 5 Social Protection regimes: the SPF regime; Social Security Insurance Scheme; Health Care Insurance Scheme; Occupational Hazards Insurance Scheme; and the Conditions of Employment Insurance Coverage.
10. In case of dismissal: Any worker who is discharged must receive 50% of benefits due immediately. If it was an unjustified dismissal, the AFP will pay the other 50% gradually to the employee.
The Law on Social Protection will impact labour costs, and companies listed on local stock exchanges must also consider the impact this may have for IFRS purposes. It is also important to keep in mind that the calculation for payroll processing will change with the increase of social security contributions. It is therefore recommended that the payment process is evaluated and the necessary adjustments are made so that it is aligned to the new requirements and so non-compliance penalties can be avoided.
TMF Group has the local experience and knowledge to help companies with this process. Get in touch with the Honduras team to learn more.
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