Employer of Record (EOR) in Costa Rica
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An Employer of Record, also known as a Global Professional Employer Organization (Global PEO), assumes the vital role of the legal employer for workers in Costa Rica. This comprehensive function involves overseeing various employment facets, ensuring strict compliance with local labor laws, and efficiently managing essential processes like payroll, taxes, statutory benefits, and the creation of employment agreements.
Key responsibilities of the Employer of Record (EOR) include:
- Ensuring meticulous adherence to Costa Rica’s employment laws.
- Managing the local payroll process with precision.
- Handling the filing of employment-related taxes and essential paperwork.
- Providing detailed payslips to the worker.
- Timely distribution of the worker’s salary payments.
Our Employer of Record (EOR) services in Costa Rica ensure legal compliance, including Intellectual Property protection, allowing your business to focus on core activities. Facilitate seamless global mobility, work visas, and foster a diverse and efficient global workforce. Partner with Mercans, your dedicated Employer of Record in Costa Rica, for a compliant and efficient employment experience for your global workforce.
EOR Solutions in Costa Rica
EOR for Prospective Employees
Mercans offers seamless Employer of Record (EOR) solutions for businesses that have already identified their ideal candidates in Costa Rica. Our services encompass every aspect of the employee lifecycle, ensuring compliance with Costa Rican labor laws and regulations.
EOR + Recruitment
For those seeking assistance in talent acquisition, our EOR and recruitment services provide a holistic solution. We tap into our extensive network and expertise to help you find, onboard, and retain top talent, streamlining your expansion into the Costa Rican market.
Visa Sponsorship and Global Mobility
Navigating the intricacies of expatriate employment is simplified through our visa sponsorship and global mobility services. We facilitate the relocation of your international workforce, ensuring compliance with Costa Rica immigration and employment laws.
AOR for Contractor Payments
Businesses grappling with contractor payments can leverage our Assistance on Record (AOR) services. We handle the complexities of contractor payments, guaranteeing accuracy and compliance.
Converting Freelancers to Employees
Mercans supports the transition from independent contractors to permanent employees in Costa Rica. Our expertise ensures smooth conversions while adhering to legal requirements.
HCM Integration
Integrate Mercans’ EOR services seamlessly with your HCM system in Costa Rica for real-time data exchange, enhanced compliance, and cost-efficiency. Trust our expertise for a unified, compliant, and efficient approach, elevating your workforce management and payroll operations.
Employees vs Independent Contractor Compliance
| Factors | Employee | Independent Contractor |
|---|---|---|
| Employment Laws | Governed by the Costa Rican Labor Code, Constitution, Civil Code, MTSS decrees, and Employment Act. | Beyond the Civil Code, no specific employment laws regulate hiring of independent contractors. |
| Hiring Practice | Submission of CV and cover letter, interviews, assessments. Mandatory contract details. | Hiring practices vary. Independent contractors may provide CV, portfolio, and references, sign NDA. Written agreement needed, not necessarily in Spanish. |
| Tax Documents | Subject to income tax withheld by employer. Employer pays 26.5%, employee pays 10.5% social security. | File and pay own income taxes, social security. Additional municipal taxes may apply. Self-employed individuals contribute 10.5% to 18.6% to social security. Corporate tax rate ranges from 5% to 30%. No local income taxes for self-employed. VAT at 13%. |
| Payer's Tax Withholding & Reporting | Employer withholds income tax, pays to the Ministry of Finance. Employee rates progressive, 10% to 25%. | No specific withholding requirements or reporting for independent contractors. |
| Remuneration | No mandated payment methods. Employees may confirm receipt of electronic payslips. | No legally mandated payment methods. Colón and US dollars commonly used. |
| Workers’ Rights | 13th-month salary, paid leave, 48-hour workweek, overtime, sick leave, maternity leave, public holidays. | No statutory workers’ rights for independent contractors. |
| Benefits | Statutory benefits include pension, disability, sickness, health/medical, workers’ compensation, maternity. | Independent contractors' benefits governed by contract. |
| When Paid | Monthly payments directly into bank account. | Paid according to contract terms, not through payroll. Must submit invoice for payment. |
| Who classifies as Contractor | Defined by the degree of subordination. | Criteria include control, risk, hours, location, delegation, equipment ownership, taxes, dismissal, integration, payment terms. |
| Contracting Models | Sole proprietorship, Limited Liability Company (SRL), Corporation. | Direct engagement or third-party engagement (temp agency, umbrella company, hiring partner). |
| Engagement Models | Direct engagement or third party (temp agency, umbrella company, hiring partner). | Two main types: direct engagement or third-party engagement (temp agency, umbrella company). |
| Contractor Payments | Avoid payments through payroll system. No specific legal requirements. Contract stipulates preferred method. | Payments should not be made through payroll. Contract determines payment terms. |
| Contractor Taxes | Employer withholds income tax for employees. Corporate tax rate for self-employed contractors. | Independent contractors file and pay own taxes, social security. Corporate tax rate for business contractors. VAT at 13%. No specific tax levied on commercial transactions for paying contractors. |
| Social Security Contributions | Employer pays around 27% of gross wages, employee pays around 10%. Self-employed contribute 10.5% to 18.6%. | Self-employed contribute 10.5% to 18.6% to social security. |
This table highlights the distinctions between employees and independent contractors in Costa Rica across various factors, encompassing employment laws, hiring practices, tax documents, remuneration, workers’ rights, benefits, payment methods, classification criteria, contracting models, engagement models, and tax obligations.
Employment Contracts in Costa Rica
Section 18 of the Labor Code in Costa Rica establishes the presumption of a contract, whether written or oral, between the employer and the worker. The mere initiation of the working relationship is enough to assume the existence of a contract, binding the two parties to adhere to the obligations and rights established by law.
Any agreements made by the parties in the labor relationship, whether written or not, become integral to it if they form part of the current conditions. This aligns with a fundamental principle of local labor law, known as the “Contrato Realidad” or Reality Contract, emphasizing the actual contents of the employment relationship, even if different from the written agreement, favoring the employee.
- When personal service is rendered exclusively by the hired individual.
- When there is a salary or remuneration.
- When the contracted worker is under the direction and supervision of an employer or their representative, referred to as legal subordination.
Legal subordination grants the employer general management power over the contracted individual concerning the agreed-upon work and business. The employer has the authority to give orders and instructions, and the worker is obligated to comply. Refusal to comply may lead to the employer exercising disciplinary power, with sanctions commensurate to the offense under Costa Rican Labor Law.
Contrary to common belief, a written contract is not a necessity under Costa Rican Labor Law. Oral contracts hold the same weight in terms of rights and obligations. In cases where contracts are not in writing, they are verified by testimonial evidence. Witness testimonies, especially those in the service of the same employer, play a crucial role in confirming the essential points of the contract.
The classification of work contracts in Costa Rica can be based on various criteria. Individual contracts apply when a single worker is hired, and the most significant classification pertains to the duration:
- Fixed-term contracts specify a predetermined termination date.
- Contracts of indefinite or indeterminate time have no specified end date.
Additionally, employers can enter into agreements for specific tasks or work, providing flexibility under Costa Rican Labor Law.
Working Hours
In Costa Rica, working days are divided into day shifts and night shifts, each with specified maximum hours for a standard work week:
- Day Shift Between 5:00 a.m. and 7:00 p.m., allowing for 8 hours per day and a total of 48 hours per week.
- Night Shift Spanning from 7:00 p.m. to 5:00 a.m., permitting 6 hours per day and a total of 36 hours per week.
- Mixed Shift Involving both day and night hours, either from noon to 10:30 p.m. or from 1:30 a.m. to noon, with a duration of 7 hours per day and a total of 42 hours per week.
Probation Period
The probationary period in Costa Rica is three months, as indicated by the provisions of the Labour Code. During this period, an indefinite-term contract can be terminated without notice or payment in lieu of notice. This three-month probation also applies to domestic workers.
For employment periods exceeding three months but less than six months, a one-week notice period is required. If the employment duration is over six months but less than one year, a two-week notice period is mandated. In cases of employment lasting one year or more, a one-month notice is obligatory. The notice should be provided in writing, but in the case of a verbal contract, the employer can give verbal notice in the presence of two witnesses. Failure to give the required notice necessitates payment in lieu of notice, equivalent to the salary the employee would have earned during the notice period.
Source: §28, 29 & 35 of the Labour Code of 27 August 1943, last amended in 2020
13th Month Salary
In Costa Rica, the mandatory 13th-month salary, commonly referred to as “aguinaldo,” serves as a Christmas bonus for employees. This bonus, equivalent to one month’s salary, must be disbursed by employers before the 20th of December each year. As an integral part of the compensation structure, the aguinaldo ensures that employees receive an additional month’s pay, contributing to festive celebrations during the holiday season.
Payroll in Costa Rica
Minimum Wages
The minimum wage, determined by the National Council on Wages, undergoes a biannual revision and is officially disclosed in the newspaper “La Gaceta” as the “Decreto de Salario Mínimo.” Payment frequency—hourly, daily, biweekly, or monthly—is mutually agreed upon by the parties involved.
In the majority of cases, employee wages are market-driven and often surpass the minimum wage standards. Employers compensating above the minimum wage are not obliged to implement a percentage wage hike mandated by the government’s mandatory resolution, as this requirement only applies to employees receiving the minimum wage.
The minimum wage varies across specified industries, ranging from ₡10,060.75 (US$16.73) per 8-hour work day for general workers to ₡13,141.39 (US$23) per day for specialized professionals. Occupations not explicitly specified adhere to the generic scale, spanning from ₡350,975 (US$528) per month for unskilled workers to ₡644,689.3 (US$1,134) per month for licentiates.
Payroll Cycle
In Costa Rica, the standard payroll cycle is typically monthly, with payments to be processed once each month.
Mercans’ payroll capabilities
Explore Mercans’ full suite of payroll capabilities to streamline your global workforce management here: https://mercans.com/
Social Security and Income Tax in Costa Rica (page 22)
The labor legislation in Costa Rica encompasses Social Costs, referred to as “Cargas sociales,” encompassing various elements that fulfill all the social security requirements for employees. Both employers and employees contribute to these costs. The employee’s portion is deducted by the employer from their salary, similar to the income tax process described earlier, and subsequently transferred to the Costa Rican social security institution, “Caja Costarricense del Seguro Social” (C.C.S.S.).
The breakdown of social security costs for both employees and employers is detailed below:
| Social Cost | Employee | Employer |
|---|---|---|
| Medical & Maternity | 5.50% | 9.25% |
| Old Age, Disability, and Death Benefits | 3.84% | 5.08% |
| Family Welfare Programs | 0.00% | 5.00% |
| Workmen’s Savings Bank | 1.00% | 0.50% |
| INA - National Institute of Learning | 0.00% | 1.50% |
| IMAS - Institute of Social Welfare | 0.00% | 0.50% |
| Complementary Pension | 0.00% | 0.50% |
| Labor Capitalization Fund | 0.00% | 3.00% |
| INS- National Institute of Securities | 0.00% | 1.00% |
| Total | 10.34% | 26.33% |
Additionally, Labor Risk Insurance is compulsory under the Costa Rican Labor Code. Employers must pay this policy to the National Insurance Institute, a state-owned insurance provider, based on varied rates according to the employee’s status or position. These rates adjust depending on the risk associated with the nature of the work, such as a common office clerk having a lower rate of 1% of their salary.
Individuals are entitled to annual tax credits, outlined as follows:
Allowances
- Child: CRC 29,160
- Child (each) (1): CRC 19,320
Note: The child allowance is applicable only if the child is a minor, unable to work, or a university student under 25 years of age.
Notably, income tax exemptions are granted for Christmas bonuses, Social Security contributions, severance, and termination payments as per the provisions of the Labor Code.
Costa Rica Employee Hiring Cost
Let us assume that the Gross Annual Salary, which is the direct income for the employee, stands at CRC 9,999.96. On top of that, there are additional costs that the employer covers, known as Total Annual Employer Costs, totaling CRC 2,703.96. When you add these two components together, you get the Total Annual Cost, which represents the comprehensive expenditure related to this position. In this case, the overall cost, considering both the salary and the employer’s contributions, amounts to CRC 12,703.92. This figure gives a holistic view of what the employer invests annually for this specific role, encompassing both the direct salary paid to the employee and the supplementary costs covered by the employer.
Payment of Tax
Employees who receive salaries and other similar or complementary remunerations or benefits must pay a monthly income tax that is withheld by the employer from the monthly payroll. Individuals do not need to file an annual tax return for this type of income. Self-employed individuals are required to make installments of estimated taxes, which are computed on the average of the last three fiscal years, and a final payment two and a half months after the end of the fiscal year.
Personal Income Tax
- Up to CRC4,181,000 (US$7,003) Exempt
- Above CRC4,181,000 to CRC6,244,000 (US$7,003 to US$10,459) 10%
- Above CRC6,244,000 to CRC10,414,000 (US$10,459 to US$17,445) 15%
- Above CRC10,414,000 to CRC20,872,000 (US$17,445 to US$34,963) 20%
- Above CRC20,872,000 (US$34,963) 25%
- Above CRC941,000 to CRC1,381,000 (US$1,576 to US$2,313) 10%
- Above CRC1,381,000 to CRC2,423,000 (US$2,313 to US$4,058) 15%
- Above CRC2,423,000 to CRC4,845,000 (US$4,058 to US$8,116) 20%
Above CRC4,845,000 (US$8,116) 25%
Effective from January 1, 2023, the new tax brackets have come into effect.
Employee Benefits in Costa Rica
Statutory Leaves
- Governed by the Costa Rica Labor Code.
- Regulations cover working hours, vacations, and holidays.
- Limits daily and weekly working hours.
- Emphasizes the importance of fair treatment and compensation for earned leave.
- Employees eligible for weekly holidays and public holidays.
- Exceptions for specific industries.
- Paid public holidays include specified dates.
- Double pay for employees working on Sundays or statutory holidays.
- Different rules apply to domestic employees (cooks, maids).
- Individual employment contracts outline holidays and vacations.
- No specific stipulation in Costa Rican employment law.
- Left to negotiation between employees and employers.
- Special regulations in the Costa Rica Labor Code.
- One month before and three months after childbirth.
- 50 percent salary coverage from the employer, the rest from the Social Security Administration.
- Termination during pregnancy leads to legal consequences.
- Legal protection for pregnant employees.
- Provisions for paid breaks and breastfeeding rooms.
- Support for working mothers.
- Employers pay at least 50 percent of the salary for the first three days.
- Social Security Administration covers the remaining days.
- Legal requirement for compensation during sick leave.
- Not explicitly regulated.
- Considered through a sample of running expenses for two persons and one pet.
- Provides insights into average monthly and annual costs in US dollars and euros.
- All employees are entitled to weekly and public holidays in addition to earned vacation time.
- Public holidays, as declared by the government, are considered paid with regular payment.
- Non-Christian employees can request alternative days off based on religious requirements.
- Exceptions for certain establishments, including those selling alcohol, hotels, bars, pharmacies, etc.
- Specific regulations for various scenarios where work is necessary on weekly holidays.
- Two weeks of annual paid leave for every 50 weeks of work.
- Entitlement to one day’s wages or earned leave if terminated before completing a year’s work.
- Detailed rules for medical leave, with variations based on private employment contracts.
- Employee contracts must align with the Costa Rica Labor Code, preserving employee rights.
- Designated paid public holidays, including January 1, Easter Thursday and Friday, April 11, May 1, etc.
- Employees earning a salary are compensated for August 2 and October 12 holidays.
- Double pay for employees working on Sundays or statutory holidays.
- Different rules apply to domestic employees (cooks, maids).
- Individual employment contracts determine holidays and vacations.
- Entitlement to at least a half-day off on paid holidays and for every week of work.
- Universal healthcare system called Caja Costarricense de Seguro Social (CCSS).
- 100% coverage for medical procedures and drugs for citizens, permanent residents, and visitors.
- Monthly fee based on income for access to public healthcare.
- Options for private healthcare through the National Insurance Institute (I.N.S.) or foreign private insurance.
- Access to English-speaking doctors in private facilities.
- Notable private hospitals: CIMA, Clinica Biblica, and Clinica Catolica.
- Approximately 30 CAJA hospitals and 250 clinics in Costa Rica.
- Upfront payment required for healthcare, even with insurance.
- Many costly medical procedures done in neighboring countries.
- Working hours stipulated in employer-employee contracts.
- General pattern: eight hours a day, not exceeding 48 hours a week.
- Extension up to nine hours allowed under certain conditions.
- Breaks allowed for lunch and coffee.
- Business days vary for different establishments.
- Government employees work Monday to Friday, 7.30 am to 4 pm.
- Most banks open Monday to Friday, with some open on Saturdays.
- Mall business days usually Monday to Friday, with some open on weekends.
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- Night shifts allowed for six hours every night, not exceeding 36 hours per week.
- Special working days on weekends and holidays with a maximum of 12 hours.
- Overtime considered an exception, paid at 50% extra of regular hourly wages.
- Overtime on holidays paid at double the rate.
Termination, Severance Pay and Notice Period
Severance Pay
In Costa Rican law, Severance Pay, termed as “auxilio de cesantía,” is a benefit granted when the termination of employment results from causes not attributed to the employee. It is considered an “expected right” or “not consolidated right” of the worker, ensuring compensation in case of unforeseen job termination.
Employment Termination
The termination of employment in Costa Rica is regulated by the Labor Code, granting the right to both employers and employees to end the working relationship. Employers can terminate within the first three months or later for serious faults committed by the worker. These faults include acts against morality, attacks on the employer or colleagues, criminal acts, and unjustified absences.
Employees also possess the right to terminate the contract without responsibility if serious faults are committed by the employer, such as lack of payment, immoral acts, or endangering health and safety.
Notice Period and Severance Payment
Section 28 of the Labor Code allows either party to terminate the contract without cause, provided prior notice (preaviso) is given. After three months of employment, if no notice is given, the employee is entitled to receive one month’s salary or a fraction thereof as compensation.
The notice period varies based on the duration of employment: one week for over three months but less than six months, two weeks for over six months but less than a year, and one month for employment exceeding a year.
If the termination occurs without justification after three months of service, the employer is obligated to pay severance. The severance amount increases with the duration of service, potentially reaching up to twenty-two days per year worked, with a maximum calculation based on eight years, as outlined in the Labor Code.
Notice Period Calculation
The notice period calculation is contingent on the employee’s tenure. For employment over three months but less than six months, the notice period is one week. For employment over six months but less than a year, the notice period is two weeks. Finally, for employment exceeding a year, the notice period is one month. These provisions ensure a fair and structured approach to employment termination in Costa Rica.
Work Permit
Permanent Residence Permit
- Issued for having a Costa Rican family member or after living in Costa Rica with a temporary permit for three years.
- Provides indefinite residence and employment rights similar to Costa Rican citizens.
Temporary Residence Permit
- Issued for various purposes, including retirees, investors, spouses of Costa Rican citizens, and foreign workers in different categories.
- Valid for a maximum of two years, renewable, and may require a separate work permit depending on the type.
Differences
- Permanent permits are indefinite, while temporary permits have a maximum two-year duration.
- Temporary permits may not automatically grant work rights; a separate work permit might be necessary.
- Permanent permits offer comprehensive rights, including employment, akin to Costa Rican citizens.
For Provisional Visa at Consulate
- Letter of application to the Consul, detailing personal information, reason for residency, etc.
- Birth certificate, police clearance, valid passport, and copies.
- Additional documents if applying based on a Costa Rican relative.
- Proof of financial means.
For Residence Permit at Immigration Department
- Completed application form.
- Letter of application to the head of immigration with similar details.
- Proof of consulate registration, birth certificate, police clearance, and passport copies.
- Notarized passport pages after arrival in Costa Rica.
- Additional documents related to the purpose of travel.
- Proof of financial means and paid residence permit application fee.
Work Permits
- Work permits are challenging to obtain due to preference for Costa Rican citizens.
- Issued only for positions in considerable shortage with no qualified Costa Rican applicants.
- Temporary Residence Permit holders for retirees, rentiers, or investors may own a business but cannot personally engage in work; hiring employees is permissible.
Permanent Residence Permit
- Issued for having a Costa Rican family member or after living in Costa Rica with a temporary permit for three years.
- Provides indefinite residence and employment rights similar to Costa Rican citizens.
Temporary Residence Permit
- Issued for various purposes, including retirees, investors, spouses of Costa Rican citizens, and foreign workers in different categories.
- Valid for a maximum of two years, renewable, and may require a separate work permit depending on the type.
Differences
- Permanent permits are indefinite, while temporary permits have a maximum two-year duration.
- Temporary permits may not automatically grant work rights; a separate work permit might be necessary.
- Permanent permits offer comprehensive rights, including employment, akin to Costa Rican citizens.
For Provisional Visa at Consulate
- Letter of application to the Consul, detailing personal information, reason for residency, etc.
- Birth certificate, police clearance, valid passport, and copies.
- Additional documents if applying based on a Costa Rican relative.
- Proof of financial means.
For Residence Permit at Immigration Department
- Completed application form.
- Letter of application to the head of immigration with similar details.
- Proof of consulate registration, birth certificate, police clearance, and passport copies.
- Notarized passport pages after arrival in Costa Rica.
- Additional documents related to the purpose of travel.
- Proof of financial means and paid residence permit application fee.
EOR Solutions in Costa Rica
Employer of Record San José
Mercans, with a dedicated presence in San José, serves as your trusted Employer of Record (EOR) partner in Costa Rica. Our local entity ensures seamless and compliant workforce management for foreign companies, providing comprehensive EOR services. From payroll and benefits administration to legal compliance, Mercans simplifies international expansion for businesses in San José, allowing them to focus on their core objectives.
Conclusion
Choose Mercans as your trusted employer of record Costa Rica for comprehensive and compliant workforce solutions. Our expertise in payroll, statutory compliance, and EOR services ensures a seamless expansion experience, allowing you to navigate the complexities of the Costa Rican market with confidence. Contact us today to learn more.