Latin America Contractor Laws Hiring Managers Need to Know

No matter where your business is based, you already know that global hiring comes with certain challenges, especially when it comes to complying with the employment laws of other countries.

Managers must — well, manage — the ins and outs of the local labor laws of each country where they employ contractors.

Even if you’re hiring freelancers from the same region, like Latin America, it doesn’t mean the rules are the same across the board. 

Each country has its own unique laws around contractor classification, payments, taxes, and compliance, so it’s important to dig into the specifics wherever you’re hiring. Just because it’s all “LATAM” doesn’t mean one-size-fits-all.

The alternative? Partner with RemoFirst and let us worry about handling compliance issues.

Key takeaways: 

• Countries across Latin America have specific restrictions about how cross-border employers can work with local talent.
• Contractors or employers may be required to register with local tax authorities, though the responsibility for this registration differs from country to country.
• Local currency fluctuations can have a unique impact on how a company works with and pays contractors.

Common Considerations When Employing Contractors in LATAM

Latin America comprises 33 countries across Central America, South America, North America, and the Caribbean. 

Rather than turn this into the blog version of “War and Peace,” we'll focus on the laws governing contractor employment relationships in six countries where companies frequently seek freelance talent: Mexico, Brazil, Argentina, Colombia, Peru, and Chile. 

Before we go into more specifics for each country, here are a couple of areas where the regulations frequently overlap:

• Independent contractors are generally required to be registered with local governments. In Mexico, this responsibility falls on the employer. Others, like Argentina, Brazil, and Colombia, require contractors to register themselves.
• In certain countries, including Brazil, Colombia, Chile, and Mexico, contractors must be genuinely autonomous and work without set schedules or direct supervision.

Don't forget: the risk of permanent establishment (PE) when hiring contractors looms large. It's important to keep the potential legal and financial consequences of PE at the forefront of your mind, no matter where you employ workers.

Mexico

Mexico introduced significant labor reforms in 2021 that solidified the country's stricter stance on subcontracting and cross-border employment. Some of the changes include:

• Moving core business activities to another country is off-limits for Mexican companies.
• Businesses can only employ contractors for specialized services that fall outside their primary business objectives.
• For contractor relationships to be compliant, the contractor's work must not be integral to the company's core business.
• The working relationship between a contractor and a company should not mirror that of a full-time employee at that company.

Failure to comply with these regulations can lead to substantial penalties, including the inability to deduct contractor expenses for tax purposes. Performing regular audits can help ensure proper classification.

Brazil

Brazil offers companies access to a large, tech-savvy talent pool — but there are a few key things to know before diving in. The country has a set of contractor regulations that can be complex, though manageable with the proper prep. 

Here are some key points to keep in mind:

• To ensure compliance, Independent contractors can operate through specific legal entities, such as a Microempreendedor Individual.
• Brazil's labor courts have a track record of ruling in favor of workers in misclassification cases, potentially resulting in obligations for retroactive statutory benefits and severance pay.
• Employment contracts should clearly articulate the independent nature of the engagement, outlining specific deliverables, timelines, and payment terms.

Given the risk of audits and the potential for labor disputes, companies seeking to engage contractors in Brazil should consider consulting with local legal experts first.

Argentina

Global employers continue to turn to Argentina's skilled talent despite the administrative hurdles the country's inflation presents when managing contractors.

When hiring in Argentina, it's essential first to understand that:

• Non-Argentinian companies must verify tax compliance through documentation such as the Constancia de Inscripción and confirm that contractors manage their own Social Security contributions and income tax obligations.
• Payments made in currency other than the Argentinian peso (ARS), such as U.S. dollars (USD), can lead to additional reporting requirements.
• Payments to contractors based in other countries may trigger additional taxes.

It's worth repeating: the dynamic nature of Argentina's economy presents unique challenges for employers. Working with an on-the-ground partner can lower the risks.

Colombia

Colombia boasts a significant freelancer community, particularly within the tech and design sectors. To compliantly benefit from Colombia's burgeoning digital economy, consider that:

• Contractors can operate either as individuals or through their own legal entities.
• Independent contractors typically do not receive benefits such as healthcare or severance unless they voluntarily contribute to the Social Security system.
• Contracts should clearly define the project scope, timeline, and specific deliverables to demonstrate the contractor's independence.

As in other countries, misclassifying workers in Colombia can result in financial penalties or potential lawsuits.

Peru

While Peru offers flexible contractor options, proper documentation and adherence to tax rules remain particularly important for employers. Additionally:

• Having written service contracts helps clearly define the contractor's independence.
• Payments made to local contractors usually require a 10% income tax withholding.
• While contractors are responsible for their own social contributions, non-Peruvian companies might still have obligations for certain withholdings.

Unlike in some other countries in LATAM, contractors in Peru most often operate as individuals without having to open entities as sole proprietors. This may heighten the risk of misclassification, which can lead to investigations by labor authorities, particularly if a contractor's work closely resembles that of an employee.

Chile

Chile is recognized for its relatively stable economy and skilled workforce. The use of contractors is common, and the country's legal framework supports a distinct separation between contractors and full-time employees. 

Managers should keep in mind that:

• Contractors are required by the Chilean Internal Revenue Service (Servicio de Impuestos Internos, or SII) to issue electronic invoices, known as boletas de honorarios electrónicas, for the services they provide. 
• Companies must report payments made to independent workers for tax transparency purposes.
• Written agreements should emphasize the contractor's autonomy and avoid establishing ongoing direction or control.
• Some contractors may choose to contribute to Chile's Social Security system on their own, though employers are not required to support their contractors in this process.

Compliantly Hire Contractors in LATAM With RemoFirst

Thinking about working with contractors from Mexico, Brazil, Argentina, Colombia, Peru, or Chile? Looking elsewhere in LATAM? Or in 150+ countries worldwide? RemoFirst has your back.

You can manage and pay your global contractors directly through our platform for only $25 per person, per month. 

As an Employer of Record (EOR), we'll ensure contracts are compliant, take care of onboarding, and simplify your payroll processes — ensuring payments are made on time, and in your contractors' local currencies.

Sign up today to manage your global contractors with RemoFirst.