Severance Pay by Years of Service in Chile

How the severance formula works

The indemnización por años de servicio is a statutory payment owed to an employee on an indefinite contract who is dismissed for business needs, or whose dismissal is declared unjustified by a court, once they have completed at least one year with the employer. It is set out in article 163 of the Código del Trabajo. The basic rule is one month of the last monthly remuneration for each year of service, with a period longer than six months counted as a full year, and with a maximum of eleven months.

Foreign HR teams often assume that severance is negotiated freely or based on a company policy. In Chile the floor is set by law and cannot be waived in advance, although employers can offer more. Mistakes in the calculation are among the most common reasons for labor court claims. This page focuses on the numbers. Our page on dismissals and severance covers the broader process of choosing the legal ground and notifying the employee.

What we handle

Base salary, cap and notice pay

The monthly figure used for the calculation is the employee's last monthly remuneration, which generally includes fixed salary and regular payments that form part of ordinary pay. It is subject to a ceiling of 90 UF per month, so highly paid executives do not receive eleven months of their full salary. The UF is an inflation-indexed unit, which means the ceiling's value in pesos changes over time. For many senior foreign employees that ceiling is the single most important number, and a negotiated package is usually where the difference is made up.

If the employer dismisses for business needs without giving thirty days' written notice, it must also pay one month's remuneration in lieu of notice, subject to the same ceiling. Vacation accrued but not taken, and the final salary, are paid separately through the finiquito. The details of the settlement document, and the way it can reserve rights over the numbers, are covered on our finiquito page.

Surcharges, exclusions and common errors

When a court finds that the ground the employer gave for dismissal was not justified, it orders the severance and notice pay and adds a statutory surcharge. The size of the surcharge depends on the ground invoked. This is why a weak dismissal letter can cost far more than the severance it was meant to avoid. Fixed-term and project contracts have different rules, and an employee dismissed for proven serious misconduct has no right to the payment.

The most frequent errors are using the wrong base (for example ignoring regular commissions), counting years incorrectly, forgetting that the ceiling applies, treating an agreed exit as if it carried statutory severance, and paying late. Tax treatment of severance has its own rules, and we recommend that you consult a tax adviser. Severance claims are subject to deadlines, so employees who think they were underpaid should act promptly.