Latin America (LATAM) continues to build its reputation as a diverse and desirable region for investors who want to expand and tap into burgeoning economic development opportunities. Foreign direct investment (FDI) in LATAM has rebounded to record levels since the onset of the COVID-19 pandemic, according to the United Nations Conference on Trade and Development’s World Investment Report released in June of 2022, with recent growth largely fueled by booming merger and acquisition (M&A) activity.
When it comes to hiring, LATAM’s highly skilled workforce is prized by multinational companies (MNCs). For North American companies, the region’s closer time zones can also make it easier to manage a team than in Europe, Asia Pacific and Africa.
However, hiring in LATAM does not come without challenges.
“While companies can gain a competitive advantage by expanding and building teams in LATAM, they may also face unexpected roadblocks in navigating the region’s unfamiliar business climate,” says GoGlobal’s Director of Client Solutions Ana Vizzotto, who is based in Brazil. “For instance, there are nuances around administering employee benefits that make hiring in LATAM different from other regions of the globe.”
Here are key considerations in employee benefits that companies should account for when building a team in LATAM.
Labor laws and practices lean in favor of workers
The legislation in some LATAM countries is very protective of the worker because inflation is much higher and workers do not always enjoy the same socioeconomic benefits seen in Europe or North America, according to Ana. For example, while pre-pandemic unemployment in the U.S. stood in the 3-3.5% range, unemployment in LATAM ranged from approximately 5% in Mexico to nearly 18% in Costa Rica.
Apart from legalities, business customs also tend to protect and benefit workers. For example, common supplementary benefits include allowances for transportation, meals and groceries. Private healthcare, while supplementary, is also 100% expected, according to Ana. Local laws usually designate that, rather than cash, supplementary benefits should be provided as a debit-type of card loaded with funds. Doing this frees workers from tax liability.
Supplementary benefits are usually awarded monthly and, according to Ana, have become so commonplace that workers expect them to be outlined as part of the total compensation practice when they receive a job offer.
Bonuses are common (and usually compulsory)
“Bonuses are a great way to reward employees and incentivize performance,” says Ana. “But unlike in the United States and many other countries, the administration of bonuses is usually compulsory in LATAM countries.”
The 13th Month Bonus, often referred to as ‘Aguinaldo,’ is required in nearly every country across the region. Each country sets its own rules for bonuses and the required payment amount usually ranges from an additional 15 days’ to 30 days’ pay. Many LATAM countries also require the payment of a 14th bonus.
The payment schedule of bonuses varies by country and sometimes there are provisions in the labor code for additional bonuses based on a company’s profitability.
Commissions are regulated by labor legislation
MNCs should be mindful about distributing sales commission payments to workers in LATAM.
“While monthly commissions are often paid out to sales teams in some countries, this practice is not always cost-effective in most LATAM countries,” says Ana. “In most countries in this region, commissions are regulated by the labor legislation. They require timely payment – usually stipulated on the employment contract – as well as detailed justification from the employer on how they are calculated. Commission also adds to the employee base salary, becoming taxable for both employer and employee.”
For this reason, according to Ana, the payment of commissions should be carefully evaluated on a case by case basis in LATAM.
Profit sharing is often required
The employment laws of many LATAM countries also require companies to share profits with employees. The standard in some countries is to pay a set percentage of the company’s annual revenue to its workforce. For example, employers in Mexico must pay employees 10% of pre-tax income. In Peru, the profit percentage employers must share is determined by industry.
“Profit sharing has a significant impact on a company’s financial position and failure to comply can result in serious fines, legal troubles and reputation damage,” says Ana. “Therefore, all profit-sharing programs should be carefully planned and reviewed by a team of experts before operations commence in any LATAM country.
An Employer of Record (EOR) can customize a compliant and effective benefits package
Companies that build a workforce in LATAM enjoy advantages not always readily available in other talent pools, according to Ana, who has provided global workforce management and EOR solutions in markets around the globe.
“Widespread employee loyalty and sense of responsibility are huge draws for companies that hire in LATAM,” says Ana. “When LATAM workers are provided with the right set of opportunities and benefits, they tend to stay with companies for a long time and rarely move jobs. This commitment from workers is a novelty in today’s competitive, tight talent market.”
Companies may need help accounting for and building a “winning” benefits package that fosters loyalty from LATAM workers.
“Strict regulations around benefits can make cross-border payroll and workforce management a headache for MNCs that expand to LATAM,” says Ana. “Hiring talent through an Employer of Record (EOR) is often the right solution for building a team in the region.”
By helping MNCs customize benefits packages for workers that align with regulatory compliance requirements and local business customs, an EOR can help set up a company for long-term success in LATAM.