Costa Rica: Business Shutdown and Mass Layoffs

The operational shutdown of a company entails a number of difficult decisions.  However, there is no doubt that laying off personnel is one of the decisions with the strongest impact.  In times when Costa Rica is in shock with the news of several companies that have decided to close their Costa Rican operations, it is logical to raise the question of what obligations and rights arise for both parties of the employment relationship.

In case of mass layoffs, employers should first prepare an appropriate communication plan to inform employees about all the operational and legal details of this decision that may directly affect employees and their families.  In this connection, it is important to be clear about the workforce that will be affected and the dates when the operational shutdown will finally occur, since employees are entitled to be aware of said information in order to start looking for new employment options.

From a strict legal standpoint, the company will not be required to follow any kind of special procedure if the shutdown decision affects the entire workforce, nor is the company required to obtain any authorization or permit from a governmental body prior to the layoff (as it is required in other countries).  In Costa Rica, there is no difference between dismissing five workers and laying off the entire roster of employees.

Pursuant to the Article 28 of Costa Rica’s Labor Code, employers should give prior notice to employees of the impending layoff.  While the law establishes different notice periods (depending on the length of the employee’s employment), all employees are entitled to know the exact termination date in advance.  For example, in the case of an employee who has worked for the company for one year, the employee will be entitled to receive the notice at least one month in advance of the termination date or receive the corresponding payment in lieu of such advance notice.  As long as the employer complies with the applicable notice period, the employer is not required to provide a longer period than what is set forth under the law.

Furthermore, employers are required to deliver in full the severance pay, which is calculated based on the employee’s length of service.  Companies that have a Solidarity Association may use the Association’s existing severance fund to pay for all or part of the employees’ severance.  Employees are also entitled to withdraw their savings from the Association, but may be required to repay any outstanding loan amounts owed to the Association.  In the event of a full operational shutdown of the company, the corresponding Solidarity Association should also undergo a liquidation process since the Association may not exist apart from the employer.

Together with providing prior notice and paying any corresponding severance benefits, employers are also required to pay any outstanding vacation pay and Christmas bonus, and provide the employee with a letter of termination, to enable the employee to withdraw any funds from the Labor Capitalization Fund being managed by the Pension Fund Operator to which the employee is affiliated.

Companies in the process of shutting down their operations may not be able to discharge some employees whose employment falls under special categories.  Pregnant workers, for example, enjoy special protections under the law.  While such employees may still be discharged in the case of a full operational shutdown, the employer may need to fulfill special requirements to properly effectuate the termination or pay additional severance.  Therefore, companies should carefully assess the situation to reach the best solution for all parties involved. 

Although the law does not provide a timeframe by which the termination pay must be made, the norm is that it should be done within a reasonable period, which may be during the following payment period (depending on the paycheck frequency it may be weekly, bi-weekly or monthly) or longer if the company’s size or the complexity of their internal procedures does not allow for an earlier payment.  The common practice is to set a one-month deadline to meet any termination pay obligations.

Finally, employees should be advised that during the notice period prior to an impending layoff the employment contracts will remain in effect and so will the employees’ obligations to perform according to the terms of said contracts until their last day of work.  Therefore, the employer may discharge employees who engage in egregious conduct in violation of their employment contracts within the notice period.  In such cases, the discharged employee may lose the right to part of the severance pay benefits.  

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.