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Understanding Payroll in Ecuador: What Global Companies Need to Know About Ecuador Payroll

May 30, 2017  | Tag: Country Payroll

Ecuador is home to the famous Galapagos Islands with its plethora of exotic creatures, and a beautiful and dramatic natural landscape. From the waves of the coast to the volcanoes of the central cities, its economy is reliant mostly on petroleum and agricultural products. 

Ecuador has around 16 million people in the nation with a GDP of $101 billion. The economy has benefited from strong political leadership that has helped pulled the country out of poverty, though it still continues to struggle with unemployment and general stability. 

The South American country has had some policy changes recently, and it all appears to be moving the country in the right direction. Instead of targeting the middle class, Ecuador has restructured their business fee structure on major exports. Taxes are not excessive for either employees or employers, but having international payroll solution can help with the sometimes confusing local and national customs in the country.  

Getting Started 

The first thing to do is hire a legal representative who has the right identification papers. This rep will be the person who shoulders the tax liability for the company, so it is important to establish trust first. He or she can also recommend which format to register the company under. For example, a Sociedad Anonima is similar to a corporation, and the only kind of business that can give its employees work visas (foreign employees need a work visa if they plan to work for 3+ months) You will need a permanent office if registering as a Sociedad Anonima.

Businesses will need to file paperwork with the Superintendence of Companies, Mercantile Registry, and the National Office of Tax. If you are dealing with direct exporting and importing (e.g., to distributors) then you will not need a local office, and do not need to register as a corporation. Companies are not required to open a bank account to conduct their affairs, but a legal rep can help decide if it is in the company's best interest to establish one. Once you have decided how to register the company, a legal rep will get to work on filing. The process is straight-forward but not necessarily simple. Those who know the culture (not just the language) will be able to navigate the official waters and government agencies much better than an outsider.  

Payroll Assessment

Employee Rights 

Ecuador functions on a five-day, 40 hour work week, with anything over 40 hours being paid at time and a half. Holidays and rest days are double time, and night work is typically time and a quarter. In addition, Christmas bonuses and profit sharing, pensions, and severance pay may all be required, and will be spelled out in the employee's contract. 

Recognized unions will use collective bargaining to ensure fairness for workers, though not every worker will be in the union. Rules for rest periods are normally dictated by the type of business you run or through collective bargaining. For example, drivers in the transportation industry should get a half hour break for every 4 hours of work.  Contracts are required in Ecuador, and should specify the length of service (even if it is indefinite), and the terms of service. The employee can end the agreement with 15 days advanced (written) notice. A probationary period can be set up for 90 days. 

Compensation

The minimum wage in Ecuador is $5,680(£4,434; €5,083) a year, with the top executives salaries capped based on how much the lowest paid members of the company receive. If a worker is not in a union, there are no laws regarding raises and bonuses on a year-to-year basis. However, due to the cap on the top executives salaries and general customs, workers should receive more consideration based on their hard work to the company. 

Employees who are terminated before their contract, either due to a business closure or otherwise, normally collect severance pay as well as bonus called a desahucio. Desahucio is typically 25% of the employee's monthly salary multiplied by how many years an employee has served the company. The terms of the severance payments should be spelled out in the employee contract.  All employees who work more than 20 years at a company are entitled to a retirement pension. 

Tax Requirements 

Corporate tax rate in Ecuador is 22%, with personal income tax being taxed on a sliding scale up to 35%. Social security is 12.15% for companies and 9.45% for employees. Those making $8,570(£6,691; €7670) a year or less will not be taxed. Sales tax is 12%, and nonresidents of Ecuador (people who are there for less than six months) are taxed at a flat 22% of their income. Taxes for employees are typically automatically withheld. 

Leave, Maternity and Sick Time 

Mothers can take up to 12 weeks of paid maternity leave, with 75% of the salary paid by social security and 25% paid by the employer. Paternity leave is capped at 10 days. All employees are entitled to 15 days of uninterrupted annual vacation (including rest days), and sick time can be up to two months at 50% of the worker's salary.

Extended sick time is generally paid by Ecuador's social security organization, unless the employee has not registered with the social security office. Employers are not required to give employees a certain amount of sick time a year. There are 12 national holidays in Ecuador, including New Years and Christmas, Carnival, and independence days. 

Date  Ecuador's Public Holiday Schedule
 January 1st  New Years Day
 February- March (Floating)  Carnival (1st Day)
 February- March (Floating)  Carnival (2nd Day)
 Friday before Easter Sunday  Good Friday
 March - April (Floating)  Easter Day
 May 1st  Labor Day
 May 24th  Anniversary of the Battle of Pichincha
 August 10th  Independence Day
 October 9th  Independence Day of Guayaquil
 November 2nd  All Souls' Day
 November 3rd  Independence of Cuenca
 December 25th  Christmas Day

Final Thoughts 

Global payroll isn't just helpful for corporations who may not speak the language or understand the country's full tax code: it is helpful for anyone who is not native to Ecuador. There are too many variables to leave payroll regulations to chance in this country. 

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.


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