Navigating employment termination in Ecuador requires a thorough understanding of local labor laws to ensure compliance and avoid potential legal disputes. The process involves specific requirements regarding notice periods, grounds for dismissal, procedural steps, and the calculation and payment of severance entitlements. Employers must adhere strictly to the regulations outlined in the Labor Code to execute terminations lawfully, whether initiated by the employer or the employee, or occurring due to mutual agreement or other circumstances.
Understanding the nuances of Ecuadorian labor law is essential for businesses operating in the country. Improper handling of termination can lead to significant financial penalties, legal challenges, and reputational damage. This guide provides an overview of the key aspects of employment termination and severance in Ecuador, focusing on the requirements and procedures relevant for 2025.
Notice Period Requirements
In Ecuador, the requirement for a notice period depends on the type of contract and the reason for termination. For indefinite-term contracts, a specific notice period is generally mandated when the employer terminates the contract without cause.
- Termination Without Cause by Employer: For employees on indefinite contracts, the employer must provide 30 days' written notice of termination. This notice period allows the employee time to seek new employment.
- Termination With Cause or Mutual Agreement: If the termination is for a just cause recognized by law or by mutual agreement between the parties, a notice period is typically not required.
- Probationary Period: During the probationary period (usually the first 90 days), either party may terminate the contract without cause and without requiring a formal notice period, although it is good practice to provide written communication.
| Termination Scenario | Contract Type | Notice Period Requirement |
|---|---|---|
| Termination Without Cause by Employer | Indefinite Term | 30 days written notice |
| Termination With Cause by Employer | Any | Not typically required |
| Mutual Agreement | Any | Not typically required |
| Termination by Employee (Resignation) | Any | Not legally mandated, but customary to provide notice (e.g., 15 days) |
| Termination During Probationary Period | Indefinite Term | Not required |
Severance Pay Calculations and Entitlements
Severance pay, known as "indemnización por despido intempestivo" (indemnity for abrupt dismissal), is mandatory when an employer terminates an indefinite contract without just cause. The calculation is based on the employee's length of service and their last monthly salary.
The standard calculation for severance pay is:
- Up to 3 years of service: One month's salary for each year of service.
- More than 3 years of service: One month's salary for each year of service, plus a fraction of a year is considered a full year for calculation purposes.
There is also a minimum severance amount:
- Up to 3 years of service: A minimum of 3 months' salary.
- More than 3 years of service: The calculated amount based on years of service, with no specific minimum cap beyond the per-year calculation.
In addition to severance pay for termination without cause, employees are entitled to other final payments upon termination, regardless of the reason, including:
- Proportional part of the 13th month salary (Aguinaldo Navideño).
- Proportional part of the 14th month salary (Bonificación Escolar).
- Proportional part of accrued but unused vacation days.
- Proportional part of profit sharing (if applicable).
- Any other outstanding wages or benefits.
| Entitlement | Calculation Basis | Applicability |
|---|---|---|
| Severance Pay (Despido Intempestivo) | 1 month salary per year of service (min 3 months) | Termination without cause by employer |
| Proportional 13th Month Salary | (Months worked / 12) * Monthly Salary | All terminations |
| Proportional 14th Month Salary | (Months worked / 12) * Unified Basic Salary (SBU) | All terminations (different calculation basis) |
| Proportional Vacation Pay | (Days worked in year / 360) * 15 days * Daily Salary | All terminations |
| Proportional Profit Sharing | Based on company profits and employee's contribution | All terminations (if applicable) |
| Outstanding Wages and Benefits | Based on last payroll period and accrued benefits | All terminations |
Grounds for Termination With and Without Cause
Ecuadorian labor law distinguishes between termination with just cause (imputable to the employee) and termination without cause (employer's decision without employee fault).
Termination With Just Cause (Employer Initiated): The Labor Code lists specific grounds for lawful dismissal without severance pay. These include:
- Serious misconduct or indiscipline.
- Lack of professional competence or efficiency that significantly affects work performance.
- Repeated and unjustified absence or tardiness.
- Abandonment of work.
- Dishonesty, theft, or fraud.
- Serious damage to company property.
- Revealing confidential company information.
- Insubordination or refusal to follow legitimate instructions.
- Physical or verbal aggression towards the employer, colleagues, or clients.
- Being under the influence of alcohol or drugs during working hours.
For termination with cause to be valid, the employer must follow a specific legal procedure involving the labor authorities.
Termination Without Cause (Employer Initiated): This occurs when the employer decides to terminate the employment relationship for reasons not attributable to the employee's conduct or performance. In this case, the employer is legally obligated to pay the full severance indemnity as calculated above, in addition to other final entitlements.
Termination by Employee (Resignation): An employee can resign at any time. While not legally required, providing written notice (e.g., 15 days) is customary and professional. Resignation does not typically entitle the employee to severance pay for abrupt dismissal, but they are still entitled to proportional final payments (13th/14th month, vacation, etc.).
Termination by Mutual Agreement: The employer and employee can agree to terminate the contract. This agreement must be documented in writing and ratified before a labor inspector or notary public to be legally valid and prevent future claims. The terms of the separation, including any agreed-upon compensation, should be clearly stated.
Procedural Requirements for Lawful Termination
The procedure for termination varies depending on whether it is with or without cause.
Termination Without Cause:
- Written Notice: Provide the employee with a written notice of termination at least 30 days in advance (for indefinite contracts). Alternatively, the employer can choose to pay the "desahucio" which is an additional payment equivalent to 25% of the last monthly salary for each year of service, up to a maximum of 25 months, in lieu of the 30-day notice period. This payment is separate from the severance pay for abrupt dismissal.
- Calculation of Final Payments: Calculate all final entitlements, including severance pay (if applicable), proportional 13th and 14th month salaries, accrued vacation pay, and any other outstanding amounts.
- Payment: Pay the employee all final entitlements upon termination or within a very short period thereafter. Payment is typically made via bank transfer.
- Liquidation Agreement: Prepare a liquidation agreement detailing all amounts paid. This document should be signed by both the employer and employee. It is highly recommended to have this agreement ratified before a labor inspector to ensure its validity and prevent future claims.
- Update Ministry of Labor Records: The employer must update the employee's status in the Ministry of Labor's system.
Termination With Just Cause:
- Gather Evidence: Collect clear and documented evidence supporting the just cause for termination.
- Initiate Legal Process: The employer must file a request with the Ministry of Labor or a labor judge to authorize the termination based on the just cause.
- Hearing: A hearing will be scheduled where both parties present their case and evidence.
- Resolution: The labor authority or judge will issue a resolution authorizing or denying the termination based on just cause.
- Termination and Final Payments: If authorized, the employer can proceed with the termination. The employee is entitled to proportional final payments (13th/14th month, vacation, etc.) but not severance pay for abrupt dismissal.
- Update Ministry of Labor Records: Update the employee's status in the Ministry of Labor's system.
Employee Protections Against Wrongful Dismissal
Ecuadorian law provides strong protections for employees against wrongful dismissal. If an employer terminates an employee without just cause and fails to pay the required severance and other entitlements, the termination is considered wrongful.
In cases of wrongful dismissal, an employee can file a claim with the Ministry of Labor or a labor court. If the court finds the dismissal was indeed wrongful, the employer will be ordered to pay:
- The full severance pay for abrupt dismissal.
- All other proportional final entitlements.
- Potential additional compensation or penalties as determined by the court.
Common pitfalls for employers include:
- Failing to have a legally recognized just cause for termination.
- Not following the correct legal procedure for termination with cause.
- Incorrectly calculating or failing to pay severance and other final entitlements.
- Not obtaining a ratified liquidation agreement for termination without cause or mutual agreement.
- Terminating employees who have special protections (e.g., pregnant employees, union leaders) without following specific, stricter procedures.
Ensuring strict adherence to these procedures and calculations is vital for employers to manage workforce changes compliantly in Ecuador.
