Indemnización por despido, meaning "dismissal indemnity" or "severance compensation," is the mandatory payment employers must make when terminating an employee without just cause. This is one of the most significant employment costs in Latin America and varies considerably by country.
Severance Formulas by Country
In Argentina, severance equals one month's salary per year of service (or fraction greater than 3 months), with a minimum of one month. In Mexico, the indemnización includes 3 months' salary plus 20 days per year of service. In Colombia, the formula varies by salary level: lower-paid workers receive 30 days for the first year plus 20 days per additional year, while higher-paid workers receive 20 days for the first year plus 15 days per additional year.
Just Cause Exceptions
Employers can avoid paying indemnización if they can prove termination was for just cause (despido con justa causa), such as serious misconduct, theft, or repeated absence. However, the burden of proof lies with the employer, and courts in Latin America tend to favor employees. Insufficient documentation of the cause frequently results in the employer being ordered to pay full severance.
EOR Relevance
EOR providers calculate indemnización based on each country's specific formula, taking into account seniority, salary components, and any applicable caps. They also advise on whether a proposed termination qualifies as just cause and manage the documentation required to support the termination decision.