Employee vs. Contractor: How to Classify Workers in Costa Rica (Quiz included) [2024]
Misclassification of workers in Costa Rica can lead to expensive lawsuits, significant fines, and harsh penalties. Your company must classify workers per local laws in Costa Rica.
For example, in 2020, an Uber driver filed a lawsuit against Uber for misclassifying its workers and not registering them as employees, even though there was an employment agreement present.
The Labor Court of San José ruled in March 2023 that Uber needed to pay for labor benefits, including social security, vacation, and Christmas bonuses—setting a major precedent for other companies in the country.
To avoid a similar lawsuit, global companies need to stay compliant and avoid misclassification as this affects the company’s state in the country and the workers.
Under Costa Rica labor laws, employers must provide specific benefits at minimum to full-time employees, including social security contributions, sick leave, Christmas bonus or aguinaldo, and severance pay. Independent contractors aren’t entitled to any benefits.
In this guide, learn how to classify your workers correctly—and stay compliant with the Costa Rican labor code and employment laws.
Classifying workers in Costa Rica
No matter where you are in the world, it’s essential to classify workers correctly when you hire employees and self-employed individuals, or independent contractors. It starts the employment relationship in a good place.
Costa Rica categorizes employees and contractors differently, and staying within those boundaries will help your company avoid penalties, disgruntled workers, and potential lawsuits. Keep reading to see how to identify each one and offer the correct employment contracts.
What is an employee in Costa Rica?
Per the Costa Rican labor code, a worker is defined as an employee if there’s an employment contract with the employer of record that signals subordination and provides material or intellectual services in exchange for payment. Article 18 of the Labor Code states that if the employer exerts direction and control over the employee and there’s a dependency, it's presumed that an employee-employer relationship exists.
If this labor relationship exists, then full-time employees, as a general rule, are always entitled to the minimum employee benefits required in Costa Rica, including:
- Social security through the Caja Costarricense de Seguro Social or CCSS
- Worker’s compensation insurance
- Maternity leave and paternity leave
- Vacation time
- Severance pay and notice period
- 13th-month salary payment, or Aguinaldo
- Sick leave
- Time off on national holidays
- Overtime pay
Currently, there’s no minimum wage in Costa Rica, but there are recommended pay thresholds for Costa Rica based on workers’ experience.
What is a contractor in Costa Rica?
A contractor or freelancer provides services to a company or organization but is not a full-time employee. As in other countries, employers do not need to withhold taxes. Contractors are responsible for their income taxes and contributions to the CCSS.
Contractors also set their work schedule and time off and are not subject to any dependencies beyond the agreed-upon scope of work.
Independent contractors in Costa Rica are not regulated by any local employment laws. Contractors fall under the Código Civil (Civil Code), the legal entity that oversees and governs the legal system surrounding contracts. Project details must be written in a contract agreement before starting the work, including the payment amount, frequency, method, and any additional work details.
Worker classification overview: Employees vs contractors in Costa Rica
Contractors
Employees
- No required benefits. Contractors are not entitled to benefits and are responsible for their own income taxes and social security contributions.
- Longer onboarding. Contractors come on board for specific projects and need to learn the ins and outs of the company while working remotely and using their own equipment.
- Higher autonomy. Contractors operate on their own schedule without dependency on the employer and follow the scope of work pre-determined to be completed how they prefer by the deadline.
- Time-bound engagement. Contractors are hired for a specific project or need within the company during the agreed-upon time.
- The worker owns equipment and tools.
- Non-exclusive services. Contractors work with different clients and are not contractually bound to a single company.
- High level of control. Contractors should be able to choose when and how they work.
- Provide their own equipment and tools.
- Receive payments after submitting invoices for work.
- Not entitled to statutory benefits.
- Not subject to disciplinary action for misconduct. Instead, the work
- Entitled to benefits. The employer on record must provide employee benefits required by local laws, including overtime pay, vacation time, sick leave, etc. In some instances, health insurance may be required too.
- Integrated into the team. Employees are integrated into the team, requiring less onboarding for ongoing projects.
- Direction comes from the employer. Employees depend on the employer for a predetermined work schedule, how to perform tasks, and other specific rules in the workplace.
- Indefinite engagement. Employees are hired for an indefinite amount of time, but the employer is required to give severance pay and a notice period in Costa Rica if it comes to an end.
- The company owns equipment and tools.
- Exclusive to a specific company. A full-time employee is contractually bound to provide services and follow conduct, regulations, and other dependencies per the employee contract.
- High level of control. Contractors should be able to choose when and how they work.
- Provide their own equipment and tools.
- Receive payments after submitting invoices for work.
- Not entitled to statutory benefits.
- Not subject to disciplinary action for misconduct. Instead, the work
Types of contractors in Costa Rica
In Costa Rica, contractors operate within these three contracting models:
- Sole proprietor (Empresa individual) - an unincorporated business that is run by a single individual proprietor, in this case, the contractor
- Corporation (Sociedad Anónima) - a legal entity with at least three directors and two shareholders
- Limited Liability Company (Sociedad de Responsabilidad Limitada) - Similar to an LLC in other countries, it is a legal entity that protects its assets from liability and has two or more owners
Penalties for misclassifying workers in Costa Rica
Misclassifying employees as contractors can severely affect your company and reputation in Costa Rica. Misclassification can lead to legal disputes, issues attracting new recruits and retaining current employees, and penalties from the local government. Here are some of the potential costs, fines, and penalties:
- The employer on record may have to retroactively pay the CCSS all payments not made during the period when the contractor provided their services.
- If terminated, the employer will need to make a severance payment. If termination is without just cause, then provide notice.
- The employer may be forced to pay all benefits retroactively, including vacation pay, Christmas bonus, and other benefits.
- The employer may also need to back pay for income taxes for the misclassified contractor.
In the case of the San José Labor Court and its case with Uber, the judge ruled for Uber to pay the plaintiff benefits for the period between 2017 and 2022 when he was a driver for the company. The penalty included the plaintiff’s aguinaldo, vacation pay, and back-pay on pension contributions. This case sets a precedent for other companies and their contracts that don’t explicitly separate employees from contractors.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
