Notes On The Nicaraguan Labor Code

By Pat Werner

March 1, 2015

Recent news that the minimum wage for all workers has just been raised makes it clear that the Labor Code affects us all.  The Labor Code (LC), is law 205, enacted on October 30, 1996, and became effective on January 1,1997. It continued some continuing practices, such as the Aguinaldo, noted below, and also contained some new items that have affected labor relations ever since. It should be noted that the LC is a bit different than Americans may be used to, and it contains provisions that are similar to some provisions in some European countries.  Being a foreigner does not serve as an exemption to the law, nor does being a tourist serve as an exemption to the law.   It applies to everyone.

The LC´s 407 provisions are comprehensive, and are governed by 13 fundamental principles.

Principle eight bears quoting:

¨In the case of conflict or doubt regarding the application or interpretation of the norms of work, conventions,  or regulations, the disposition of the case will prevail that is most favorable to the worker. ¨ ( translation of writer).

Moreover, the appeal process does not proceed to the Nicaraguan Supreme Court, but ends at the Labor  Court of Appeals. Recent changes in labor court procedures has speeded up dispositions and appeals to the appellate level of the Labor Court.  As with so many elements, following the letter and spirit of the LC, and not relying on an appellate positive resolution, is the best way to live with the law.

LC provides that the law takes effect after a worker has been employed for 30 days; before that time a worker can be fired with no effects  attaching such as the Aguinaldo or prestaciones, or seniority and related rights.  After the 30 day period has passed and the worker continues to work, certain rights attach to the worker that must be honored.

  1. The rights that accrue cannot be renounced by the employee by contract or by any way. If the worker agrees to forgo any of his or her rights, the worker can still claim those rights, and the fact of the renunciation may be used to beat the employer over the head in Labor Court.
  2. The worker is entitled to be enrolled in INSS, or the Nicaraguan social security system. The worker makes a contribution, as does the employer. Failure to do so can result in a hefty fine for the employer.  More importantly, if the worker is hurt on the job and there is no INSS coverage, the employer may have to pay medical bills and other costs and claims.
  3. The employer must pay at least the minimum wage, no exceptions.
  4. The worker is entitled to accruing seniority and vacation time or pay, called the prestaciones,  no exceptions. Seniority accrues at the rate of one month payment for every year worked; this accrual ends at six years, with five months total accrual. In practice this means that when a person leaves employment, or is fired, with one small exception, noted below, they are entitled to receive their accrued seniority within 10 days of ending the work relationship, with an exception that should not be counted upon by most employers. Firing an employee under Article 45 has the same effect of the employee quitting employment: the employee is entitled to receive his or her seniority, called the liquidacion and Aguinaldo.
  1. In the event that an employer wants to fire an employee for stealing or threatening the safety of the employer, that firing,which may obviate the paying of some or all of the liquidacion, must depend on notifying the corresponding labor inspector and getting approval to act under Article 48. This is a process that can get ponderous and awkward. Unless the case is serious, it might make sense to just pay off the employee.  Taking a position based upon principle rather than practicality may be a really dumb idea.
  2. Payment of the Aguinaldo. The Aguinaldo was invented by Somoza Debayle in 1978 to sort of punish the Criollo class that was not supporting him. Honduras has two Aguinaldos to pay per year, while Nicaragua only pays one.  In effect the Aguinaldo has served as an economic stimulus at the end of the year, and almost all people look forward to receiving the Aguinaldo.  The Aguinaldo itself is the duty of the employer to pay to the employee, between December 1 and December 10, of each year, one month´s salary payment, or proportional amount if the employee has worked less than one calendar year.  In the event that the Aguinaldo is not paid, the fine is draconian. The fine is one day´s salary for every day the payment is late after December 10.

Hypothetical  Case: a worker with $5,000 owing from an employer, comprised of both Aguinaldo and liquidación, filed a claim with the Labor Court and began litigating.  The employer did not pay, in part, because of the principle of the matter.   The case dragged on for 1200 days, and a final judgment in the Court of Appeals was rendered in favor of the worker in the amount of $130,000. The penalty and interest and Aguinaldo penalties accrued while the case was litigated. The final judgment was unappealable.

The Aguinaldo fine is a stinger that must be avoided at all costs.

  1. Paid vacation under the LC is two weeks per six months. In the event that the employee does not take vacation the employer can pay the employee for the accrued vacation.  In the event that accrued vacation exceeds 20 days the Labor Ministry may get involved and do something unpleasant, like a fine.
  2. One of the dodges that employers have used to avoid paying the prestaciones and Aguinaldo is the professional services contract. The idea is to call the work relationship professional services, and thereby not have to pay Aguinaldo and prestaciones. This is a lot cheaper for the employer. For example, to pay a worker under the LC $1.00 costs the employer about $1.42.  The professional services contract costs nothing more than the amount of the contract.

Here are the pitfalls. The Nicaraguan view of the professional services contract is similar to the view of the IRS to independent contractors versus salaried workers.  The question is whether the workers has fixed work hours, a fixed work place, is subject to supervision, or is based on an hourly rate rather than a piece rate, and related.  If any of these factors are present, the professional services contract will be held to be a contract under the LC.  If that is the case, then all accrued payments, prestaciones, and Aguinaldo and fines, become due and must be paid.

A friend of mine has made a good living litigating with universities and bi lingual schools who cut corners and claimed they were hiring teachers as professional services contracts.  They lost.  Just do not do this.

Horror Story: a local industry hired a lawyer to so some routine legal work.  The lawyer used his own office, worked at his own hours, and was not supervised by anyone.  When the work relationship ended, the lawyer sued the industry for his prestaciones and Aguinaldo.  The lawyer won.

Suggestions For Expats

On balance, the LC is a reasonable attempt to regulate the work relationship within the context of Central America.  Comparisons with the laws of any particular state in the United States are not fruitful as labor laws in many states are irrelevant and a bit anachronistic. The LC of other  Central American countries are actually more draconian, as was Mexico´s before the 1990s reforms.  One positive element of the LC is that it caps employer liability for any sort of ancillary lawsuit.  Once the liquidación and Aguinaldo are paid, there is no further liability for the employer.  Employing American citizens or dual citizens in a Nicaraguan business may not have that effect.

However, in a very preliminary case, an American judge accepted the argument that  an American, who was  employed by a Nicaraguan company, received pay and all benefits under the LC, could not then argue that he was entitled to American remedies under the Age Discrimination Act as he had elected to receive benefits under Nicaraguan law and was bound by that decision.  Lawyers who are interested in conflict of laws will find this a very fertile area of study and litigation.

  1. get a copy of the prospective employee´s cedula de identidad and keep it always. Always get a police report on antecedentes penales or past criminal record. The police routinely issue them and they are very helpful in knowing who and who you not should hire.
  2. When you pay each worker, get a written receipt each time, and keep those receipts long term. If you go to  Labor Court and try to rely on, he said she said,  you will lose.  The presumption in all proceeding is in favor of the worker.
  1. Keep track of vacations taken and paid for.
  2. Keep accurate records and receipts for all Aguinaldo paid.
  3. If you think an employee is stealing, best to pay off their liquidacion, unless the amount is substantial. You will almost certainly pay more in attorney fees lobbying with the Labor  Inspector not to pay the liquidacion than  paying the liquidacion.
  4. Never decide to litigate on the principle of the matter, unless you are prepared to lose.
  5. Never go to a Labor Court or Tribunal without a good lawyer who you can understand and never talk to the opposing lawyer without your lawyer present.
  6. Never cut corners with employees and the LC.

The positive side is that if you follow the LC and keep good written records, the LC will work for you. A worker can threaten to sue, sue, or do anything else, but if you have adequate proofs of compliance, you will prevail.  Keep that in mind.

DB-Good article by Pat. Keeping good records and receipts are so important down here. Still, it is easy to have problems with employees. A question that keeps coming up is if several people employ the same person for a few hours each, how do you handle INSS?