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Terminating Employees in Chile: Unfair Competition

Companies that enter Chile tend to start up by sending a trusted employee to set up the Chilean company and represent their parent entity. These employees are often granted powers to act on behalf of the parent company and of course its Chilean entity as General Manager. In order to operate abroad they have access to confidential data such as business operations, plans, proceedings, clients, and any other information of the corporate group of the foreign company.

It is important for any company to know what kind of operational measures and legal actions they have at their disposal to terminate the labor relationship if an employee takes advantage and sets up a company under his name; eventually competing in the same market as his employers. The purpose of this entry is to address specific employment law grounds set forth in Article 160 of the Chilean Labor Code in order to deal with this type of situation.

Article 160 No 2 of the Chilean Labor Code provides specific grounds that enable the employer to terminate the labor relationship without having to pay additional severance pay.

In this entry we will deconstruct and explain Art. 160 No 2 of the Chilean Labor Code from an employment law perspective. This article provides that the labor contract can be terminated effective immediately and without severance pay if the employee “Executes negotiations that fall in the line of business of the employee and such prohibition has been set in writing in their employment contract.”

If the fired employee decides to sue his/her employer arguing that the employment contract was wrongfully terminated, the Chilean labor courts generally are not inclined to accept this specific ground for termination since there are two constitutional rights that heavily guard the employees claim: the freedom and protection of work and the right to perform any commercial activity (article 19 No 16 and 21 of the Chilean Constitution).  In simple terms, it is a basic principle in Chilean Law that the employer cannot effectively forbid its employee to perform any commercial activity including those related to the company’s business.

However, the aforementioned constitutional rights are not absolute and their limitations under this scope are heavily linked with what we understand as “unfair competition”.

In this entry we will deconstruct and explain Art. 160 No 2 of the Chilean Labor Code from an employment law perspective in order to address the “unfair competition” aspect in a future entry.

A) Negotiations:

The term “negotiations” refers to activities of contractual nature on behalf of the employee (such as trade, sell, purchase or any other of the kind). It can be any activity derived from a lawful employment position.

In this regard, an actual offer and placement of the employer’s goods and services needs to be made in their respective market. These actions or activities do not have to be executed on the employees behalf but can also come from third parties or created entities made for this sole purpose.

It is particularly important to determine the type of activity that is carried out by the employee in order to establish if there are conflicts of interest with the employer.

B) Fall in the line of business of the employee:

This requirement seeks to confine the activities that the employee will be able to perform. The position that the employee holds in the company is also of great importance since an obvious conflict of interest has to take place in order for this specific requirement to be used .

C) Prohibition has to be put in writing in the worker’s employment contract.

There is not much to say about this requisite other than it is the reason why a standard exclusivity clause is included on every employment contract. In our opinion, it is an excessively formalistic requirement.

Its important to emphasize that Chilean labor law and jurisprudence tend to take a very protective approach towards employees. If the worker decides to challenge the grounds to terminate the labor relationship, it is paramount to analyze if the above-mentioned requirements are met. In some cases, it might be better to terminate the labor relationship under different grounds (generally, grounds pursuant with article 161 of the Labor Code: company, establishment or service requirements resulting from the rationalization and upgrading thereof, decrease in productivity, changes in market conditions or the economy…) in order reduce the companies future liabilities. Sometimes it is more cost effective to pay a severance pay check than to enter into a labor lawsuit with a low probability of success.

Please follow us since we will address the “unfair competition” aspect in a future entry.

 

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Jorge Tuane is a bilingual Associate with the Harris Gómez Group an international and multidisciplinary firm specialising in cross border transactions between Australia and Latin America.