June 03, 2019 Issue: June 2019

CENTRAL AMERICA - Outsourcing Labor in Central America

By: Alvaro Aguilar, Partner – Director of L&E Regional Practice, Aguilar Castillo Love

Not every job position in a company can be outsourced. This article describes in general terms how the labor laws of the various countries in Central American deal with labor outsourcing.

Costa Rican employment law defines labor relations as follows:

An individual labor contract, regardless of its name or type, is one in which a person is obligated to render services to another, or carry out a work, under the permanent dependence and immediate direction, or delegated upon the same, and in exchange for a consideration of any type or form.
It is presumed that such a contract exists between the worker who provides his/her services and the person who receives them.

In general terms, there are three essential elements that determine if a labor relation exists:

  1. The personal provision of a service.
  2. The payment of a consideration (salary).
  3. Subordination.

Another characteristic of the Costa Rican system is the assumption of the existence of a labor activity. Hence, a labor relationship will exist at any time the provision of a personal service shows signs that characterizes it as such, such as:

  • Permanent physical presence at the work site;
  • Supervision and assessment of job performance;
  • Being subject to a work schedule;
  • Use of name tags or other identifying marks;
  • Exclusiveness;
  • Use of tools, equipment, and work stations provided by the company; and
  • Regularity and continuity of the consideration.

The presence of the above characteristics will confirm the existence of a labor contract.

Furthermore, two General Law Principles characterize all labor relations in Central America:

  1. Pro Worker Principle, which states that in case of doubt regarding the facts or the specific law to be applied, the matter will be decided in favor of the worker.
  2. Principle of Primacy of Reality, also known as Reality Contract, which means that the type of relationship will be determined in accordance with what is being carried out in reality. In other words, what is actually occurring in the workplace is preeminent over the written agreement in the contract.

Case law defines outsourcing as:

Decentralization of production, through which the achievement of the secondary objectives of the company are pursued, not by including workers in its payroll, but rather by the combination of partial contributions, carried out by auxiliary companies or external collaborators, these being the ones who assume the full responsibility for any and all risks related to, or caused by the work being done.

This auxiliary company or external collaborator must be a person (whether physical or legal), with an organizational, administrative, and financial structure, which is totally independent of the buyer of the service, which has been previously and legally established, which offers its services on the market to multiple buyers, and whose commercial livelihood is the performance of such an activity.

In this regard, legislation has been cautious when handling this legal form, since there have been many cases where employers have tried to implement it to cut costs, social security charges, and other benefits.

Recommendations for implementation

To be able to hire under an outsourcing scheme, the following considerations must be taken into account (some of the parameters may not be applicable in some jurisdictions):

  1. The company offering the service must provide the work materials and tools.
  2. The company or professional offering the service is the one who establishes the work schedule and rest periods.
  3. The company or professional offering the service must be the one to lead and impose sanctions to the personnel used to lend the service. This must not be subject to policies, orders, guidelines, and/or procedures of the hirer. The purchaser of the service only supervises the carrying out of the contract, so that the workers are not subject to the purchaser, since their work contract is with the auxiliary company that lends the professional services.
  4. The company or professional offering the service must be the only one responsible for salary payments and social security charges. In this regard, the same must register as an employer before the social security administration and the insurance companies for occupational hazards.
  5. The company or professional offering the service must rotate its personnel periodically, so that the workers would not consider themselves part of the personnel of the buyer of the service.
  6. The company or professional purchasing the service must not make offers of any kind to such employees; much less provide any benefits enjoyed by its own employees.
  7. External collaborators in charge of providing the outsourcing service must not use of type of logo or business or ID card belonging to the hiring company. They must be properly identified with ID cards as contractors.
  8. External collaborators in charge of providing the outsourcing service must not participate in any activities or benefits intended for the regular staff of the company purchasing the service, such as company physician, employees’ cafeteria, employees’ Christmas party, etc.

Based on the above, the decision to hire a person under an outsourcing service contract, does not make its relationship to the company an exclusive one. If the relationship starts showing signs of a labor relationship like those listed above, it could be categorized as a labor relationship under the Reality Contract Principle, where the judge goes by the actual nature of the service, instead of written contractual stipulations.

In order to proceed with the outsourcing contract, it is important to take into account that the required contract must not include the following elements:

  • Service provided person-to-person, or payment of service on a personal basis.
  • Submission to supervision, direction, and assessment by the representatives of the company, including submitting to policies and procedures of the company, as well as the compliance of orders or guidelines.
  • Exclusiveness in the lending of the service.
  • Physically remaining on the premises of the company and use of the human resources and equipment belonging to the company.
  • Use of business cards or ID badges of the company.
  • Participation in activities intended for the personnel of the company, such as those of the solidarity association (employees’ association), Christmas (year-end) party, etc.
  • Personalized treatment by the personnel of the company, such as access to the company physician, December bonus, money loans, etc.
  • Use of tools, equipment, and resources of the company, depending on the nature of the service.
  • Performing an activity that constitutes the main and habitual livelihood of the business.

Considering the above, if a company intends to outsource a service to an auxiliary company or external collaborator, it must weigh the following:

  1. It must be a formally and legally established company.
  2. It must be registered as an employer with the Social Security Administration.
  3. It must be a company that can certify that it directly manufactures or sells the products or services offered by its professional and habitual activity, and which possesses its own organizational structure and capital.
  4. It must sign a contract that protects the company from contingencies related to the rendering of the service, particularly regarding the personnel supplied.
  5. During the entire period when the service is being provided, the company must supervise the implementation of the contract, specifically ensuring that:
  • The personnel have a work contract with the supplier.
  • All personnel are covered by social security and occupational hazards since day one.
  • No employee of the supplier company must receive any training directly from the hiring company.
  • The supplier must name a coordinator to supervise the services, who will directly give the orders and instructions to the employees of the supplier, as well as carrying out the leadership, supervision, and discipline to the employees. The intention is that nobody who works for the hiring company would carry out any functions that could be deemed as supervising, directing, managing, or disciplining, as if this person were an employer of an employee hired by the supplier company.
  • The supplier must submit a copy of the Occupational Hazards insurance policy, as well as a copy of the monthly salaries report from the social security entity where the employee is listed.
  • No employee of the supplier company must use logos or proprietary brands or designs of the hiring company.
  • The contract must clearly indicate how, where, under what conditions the service will be rendered, the detailed nature of the service, and the rationale for rendering the service on the premises of the hiring company. At all times, what is supervised is the fulfillment of the contract and not the employees of the service supplier.

In view of the above, not all job positions can be occupied by way of the outsourcing model, since Central American legislation seeks to protect the basic rights of workers, such as social security, occupational hazards, remuneration benefits, work stability, among others. And, as described above, in case of doubt, the matter will be resolved according to what is most beneficial for the worker, or what is interpreted as happening in actuality (Reality Contract).

Conclusion

The outsourcing model is viable and is used in the areas such as maintenance, cleaning, security, and IT. However, because of the characteristics of the Central American judicial systems, outsourcing cannot be implemented for all the occupational needs that a company could have.

All of the above is a general overview of the labor principles applicable to labor outsourcing, as well as guidelines and suggestions for its implementation. Not all the suggestions or suggestions necessarily apply in every country of the region, due to either a legal restriction or judicial interpretation. Therefore, the recommendation is always to consult with a local legal adviser in each jurisdiction before outsourcing labor.