How to pay your employees in Ecuador
Article 4 minute read

How to pay your employees in Ecuador

19 November 2018

With the eighth largest economy in Latin America, Ecuador has many opportunities for businesses but it is a complex country to navigate.

When starting a business and hiring employees, it is very important to understand the laws and intricacies surrounding payroll in Ecuador.

Paying employees

To set up payroll in Ecuador, a company must obtain an Ecuadorian Tax ID, which is the last step in the incorporation process. Once the Tax ID is issued, the credentials for access to the Labor Ministry and Social Security website can be obtained. All employee information including contracts must be uploaded to these systems.

Employees sign a labor contract for long term employment that includes a three-month probation period. During this period, the contract can be terminated without severance or other penalties. The labor contract can be written by individual companies but when it is uploaded to the system it must be in the standard format on the Labor Ministry website. The contract must be uploaded with the correct date of hire as all information going forward will be processed through the website system. There is an option to offer temporary contracts for six months maximum but employees with these contracts are paid an additional 35% of the agreed salary.

In Ecuador, many companies pay employees twice a month. The first half of the month the employee is paid 40% of the gross salary. It is mandatory for both the employer and employee to contribute to social security monthly. The employee contributes 9.45% of the gross salary while the employer contributes 12.15% for a total contribution of 21.60% monthly. Another deduction that is not mandatory but a benefit given by some individual companies is private medical insurance.

After the second year of employment, employers have the obligation to pay reserved funds. This is an additional payment of 8.33% of the gross salary paid out each month. The employee has the choice to receive the payment on a monthly basis or can accumulate it in Social Security.

Employees who work extra hours are paid different rates based on the overtime schedule, it ranges from a 25 percent to a 100 percent increase.

Paid Leave

According to the law, employees receive 15 days of vacation after they have worked for the employer for one year. After the fifth year of employment at the same company, the employee will receive one additional day per year until they reach the maximum of 15 extra days.

The sick leave policy for employees is based on the amount of days that you are ill. For instances where the employee is out for less than three days, a document must be certified by the employer and validated by the Social Security medical centre. For an illness longer than three days, Social Security must be notified to set up payment where they will pay 75% of the salary and the employer will pay 25%.

Maternity leave policy is three months of paid leave and then there is a nine-month special period where the mother has a shortened work day of six hours. Social Security pays 75% of the salary while the employer pays the other 25% in the first three months of leave. If an employer fires a pregnant woman, they must pay a settlement of 12 salaries additional to the other components of the settlement.

Income tax 

Employers have the responsibility to make a projection about how much income tax has to be taken out of employee’s payroll on a monthly basis depending on salary. On a monthly basis, the employer must withhold Income Tax and pay to it to the tax authority. At the end of the year, they must issue the 107 Form.

13th salary and 14th salary

Employees are given an extra salary, called the 13th salary, as a Christmas bonus which should be paid in full on 22 December. The amount is calculated to include bonuses, commissions and overtime meaning it can add up to more than a month’s salary. Some employees chose to a have a portion paid to them on a monthly basis while others take the entire accumulated amount in December. The calculation is made considering all income received from December of the prior year until December of the current year divided by twelve.

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

TMF Group

TMF Ecuador is a leading provider of payroll services to both local and global customers. Keeping companies compliant when dealing with all aspects of payroll is very important and it can be complex. That is why you should partner with trusted experts in Ecuador. Our experience and knowledge will take away the burden of payroll so you can focus on running your business. Whether you want to set up a new business in Ecuador or wish to get assistance with your payroll processing, talk to us.

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Written by

Diego Mantilla

Director Client Services

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