Practice Area Articles
January 16, 2023
Fabián Esteban Jaramillo Intriago and Fabián Jaramillo Terán
Back to International Employment Law
KEY DEVELOPMENTS FOR 2023
Ecuador and Mexico FTA
After several years of negotiation, a Free Trade Agreement between Mexico and Ecuador is about to be signed, which will allow our country to become a member of the Pacific Alliance. These agreements generate an opening of markets for national production. This will in turn generate an increase in productive activity and job offerings.
Employers must prepare for this scenario, which will be ideal for boosting the economy, obviously affected by the COVID-19 pandemic.
State budget 2023
In October 2022, the Ecuadorian government under President Guillermo Lasso presented the state budget for the coming year 2023.
The budget proposes a reduction of public spending as a mechanism to reduce the fiscal deficit that has been permanent in recent years and that has affected the growth of the economy. For the year 2023, a positive index is expected that will result in an increase in commercial and productive activity. At the same time there are important projects to help the poorest sectors of society.
Because of this, employers must take advantage of a growing economy with increased business opportunities in 2023, as well as a more dynamic marketplace.
Minimum wage increase for 2023
The decrease in formal work in recent years in Ecuador has been notorious. At the beginning of the year 2022, it was determined that seven out of 10 Ecuadorians able to work did not have a formal job. This year an increase of 1.1% has been announced for adequate employment in Ecuador. Unquestionably, other legislative measures are required to solve the serious employment problem.
However, President Guillermo Lasso established by presidential decree that the monthly minimum wage for 2023 would be $450, one of the highest in the region.
This increase in basic remuneration discourages new entrepreneurs in their desire to start formal activities. Employers must also take this increase into account for the coming year 2023.
KEY DEVELOPMENTS FOR 2022
Reform of labour code
The current Government office led by Guillermo Lasso is pushing forward reforms to the labour regime with the intention of making changes in favour of a more flexible system. The intention is to adapt the Ecuadorian Labour Code, which has existed since 1938, to reflect the reality of the current employment market where no more than 30% of people have a stable job in Ecuador.
The Government expects to make changes to several elements of current labour contracts, making these changes applicable only to new workers after the law has passed. No workers with an existing labour contract will be affected. Some of the areas to be included in these reforms include the flexibilization of work hours, promotion of youth and senior job opportunities, and reduced hiring cost for employers.
Employers should keep a close eye on these possible changes, which will allow both current and future national and international investors to take advantage of new hiring opportunities in Ecuador. These will also allow employers to plan out new strategies for their production lines and the efficiency of the new labour hiring models.
Tax reforms in light of the COVID-19 pandemic
The Ecuadorian Government plans to introduce tax reforms that aim to compensate the losses caused by the COVID-19 pandemic and deal with historic tax issues that were caused by past governments and criticized by the current office. These tax reforms are expected to have an impact on several industries in Ecuador, as well as on individuals. Some of these changes include: (i) elimination of taxes on female hygiene products; (ii) elimination of taxes for foreign accommodation; (iii) elimination of hereditary taxes for sons/daughters and spouses; and (iv) elimination of special consumption taxes for mobile phones, videogames and hybrid/electric vehicles.
The changes to the tax regime have three aims: (i) to incentivise foreign investment; (ii) to reduce taxes for the middle and lower class; and (iii) to generate government resources from the highest earning individuals and companies.
It will be essential for employers to stay updated on any proposals that will come into force, since some of these changes could pose an interesting incentive for further investment or new development opportunities in the country.
Ratification of foreign investment dispute resolutions presents new opportunities for local and international businesses in Ecuador
On 16 July 2021, Ecuador ratified the ICSID Convention which deals with foreign investment dispute resolutions. This came into effect on 3 September 2021. The expectation is that the ratification will provide foreign investors with added security and certainty when choosing Ecuador for the development of their business. These recent changes, as well as the possibility of incentives to be applied in the coming year, create an interesting opportunity for current employers in Ecuador as well as employers considering expanding their business to the country.
KEY DEVELOPMENTS FOR 2021
Ministerial Agreement issued to regulate teleworking
In August 2016, Ministerial Agreement MDT‑2016‑190 was issued that created and regulated telework contract in Ecuador. Even with its novelty, teleworking was not adopted by private companies, and it was obligatorily applied in the public sector for a minimum of workers in the oil sector. It is with the COVID‑19 pandemic that the interest and real need for telework is born. Partly as a result of this need, the Organic Law of Humanitarian Support was issued on 22 June 2020, which amended the Labour Code and formally included in its text the institution of teleworking. This was the first eminently legal provision that contemplated teleworking in detail and has since been adopted in a variety of companies and productive sectors nationwide whose capabilities and nature of the labour done allow so. It is likely that this trend will continue and increase in the coming year.
New Labour contracts
In recent years Ecuador has maintained an approximate 60% of its population in underemployment and unemployment. This percentage has only increased because of the COVID‑19 pandemic, which is why the Organic Law of Humanitarian Support was published as well as several agreements from the Ministry of Labour that created new contracts that sought to promote hiring opportunities that, until then, were almost inexistent. Among the ones incorporated by the Humanitarian Support Law are the agreement for the preservation of sources of work, the special emergency contract, and the emergency reduction of working hours. Although these present new contractual opportunities for the worker and employer, they have the limitation that all these figures have a maximum duration of one year, extendable for a single additional year. For their part, the ministerial agreements presented new forms of contracting in the form of the youth contract, entrepreneurship contract, contract for the productive sector and contract for the tourist, cultural, and recreational areas. These contracts present incentives for employers, entrepreneurs, and workers from different fields to generate new job opportunities without the costs involved in the indefinite time contract that has been the general rule present in the Labour Code. The only deficiency of these figures is that they have been created by Ministerial Agreements and not by a Law, which generates uncertainty about their prolonged presence within the Ecuadorian legal system. Nonetheless, this new contracts are due to be implemented in 2021.
Humanitarian Law's interpretative provision regarding force majeure
With the publication of the Organic Law of Humanitarian Support, an interpretative provision was included to article 169, numeral 6 of the Labour Code. This article contemplated the possibility of terminating labour contracts due to force majeure (i.e. events like fires, earthquakes, and any extraordinary event that was not foreseeable or resistible that made work impossible, like the COVID‑19 pandemic). This provision has been used during the pandemic to terminate a large number of labour contracts. Nonetheless, this interpretative provision of the Organic Law of Humanitarian Support, which applies backwards in the time of its publication on 22 June added an additional requirement to be able to apply force majeure as a cause for termination of an employment contract. The requirement was that the impossibility of carrying out the work due to unforeseeable circumstances or force majeure must be linked to the total and definitive cessation of the economic activity of the employer. This provision generated new doubts about an article that existed since the publication of the Labour Code in 1938, doubts that were reflected in several claims of unconstitutionality of this provision as well as consultations to the Constitutional Court raised by Labour Judges who already received cases based on force majeure, both which have not yet been resolved. Thus, the trend or jurisprudential expectation for 2021 depends on the resolution taken by the Constitutional Court on this issue, a decision that will mark an accentuated jurisprudential line on the decisions of Labour Judges regarding force majeure in the case of the pandemic for the termination of labour contracts.