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What global businesses need to know about payroll in El Salvador
Did you know that El Salvador’s formal currency, the colon, hasn’t been in circulation since 2004? And that Bitcoin became legal tender in the country in 2021, joining the United States dollar?
In reality, Bitcoin is rarely used in Salvadoran life, but the alignment of this central American country with the dollar means its economy enjoys a degree of stability. The United States also accounts for 40% of El Salvador’s exports, including coffee, sugar, ethanol, iron, steel and textiles. This stability, combined with relatively low wages compared to more developed economies, means that this country of just under seven million people is a solid choice for international expansion.
There is plenty you need to know about El Salvador from a payroll and employment perspective, including the role of collective bargaining, and a number of different regulations according to the size of your workforce. Read on to discover all the basics of running payroll in El Salvador.
Getting Started
The two major types of business in El Salvador are General Partnership and Limited Liability, with LLCs being the most popular choice. And the good news is that it is relatively easy to set up a business there, compared with many other Latin American companies.
The first step is to draft a Deed of Incorporation with a local notary public before registering at the Registry of Commerce. This gives you the chance to draft company by-laws, obtain a company tax ID, and complete the registration. A local corporate bank account is required to do business in El Salvador, which typically takes one to two weeks to open. Some banks will allow companies to establish their account from abroad.
Companies also need to register with the local city hall and renew their license with the Registry of Commerce every year. Additional bureaus for company registration include the Internal Tax Office, Pension Fund Administrator, Ministry of Labor, and the Salvadoran Social Security Institute.
Employment Considerations
Written employee contracts stating the basic terms of work are required for all employees, though witnesses can be relied on in the absence of these contracts. Although collective bargaining is practiced in El Salvador, unions’ powers appear to be rather limited and it can be difficult to unite workers to push for specific demands. However, unions continue to work at a slow but steady pace to achieve better conditions for workers.
El Salvador’s standard working week is 44 hours, with five eight-hour shifts, plus an extra half-day on a Saturday. However, many employees choose to work longer shifts during the week to free up more time at the weekend. Overtime is paid at 200% of normal rate, and there is no maximum cap on the amount of overtime that can be worked (except for younger employees). Collective agreements can influence overtime rates for certain companies and industries.
Notice periods are not legally mandated in El Salvador, although they are usually mutually agreed upon in employment contracts or through collective bargaining. Probationary periods are limited to a maximum of 30 days.
Compensation, Bonuses & Severance
Unlike many countries, the national minimum wage rates in El Salvador have remained static since 2021. As of 2024, the main rate for commercial, service and industry workers was $365 per month(approx. £290, €335). Lower rates apply in the textiles industry, sugar and coffee harvesting, and in agriculture and fishing.
However, one thing El Salvador does have in common with many other Latin American countries is the payment of a Christmas bonus, which should be made around December 20. The amount paid starts at 15 days’ salary for employees with at least one year of service, rising to 19 days’ salary with at least three years of service, and 21 days with at least ten years. Employers may also set up profit sharing with their employees, though it is not required.
Standard severance pay is 30 days’ salary per year of service.
Tax and Social Security
Corporation tax is 30%, and is reduced to 25% for smaller businesses that turn over less than $150,000 (approx. £118,000, €138,000). VAT is 13%.
There are three main social security contributions in El Salvador:
- Social security: 7.5% employer, 3% employee (if an employee earns more than $1000 per month, this is capped at $51.49 employer, $30 employee)
- Pension: 7.75% employer, 7.25% employee
- Training and education (INSAFORP): 1% employer
Holidays and Leave
Once an employee has a year of service, they are entitled to 15 days of paid leave, for which they are paid at 130% of their normal rate. The holiday year starts and finishes on December 12 each year, and any unused holiday is lost. Employees are also paid at their normal rate for the 11 days of public holiday each year.
Maternity leave is 16 weeks, six before the birth and ten after it. Social security covers maternity pay at 75% of normal salary, as well as three days of paternity leave (within 15 days post-birth) at full pay. As of July 2024, all businesses employing more than 100 people will have to provide childcare services for employees’ children.
Sick pay is 75% of salary, with employers covering the first three days, and social security picking up the tab thereafter. Paid sick leave entitlement per year starts at 20 days for new employees, rising to 40 days after five months of service, and 60 days after a year.
In Summary
El Salvador’s ties to the United States dollar give its economy a certain amount of stability that some Latin American countries can only aspire to. However, it does have a fair amount of complexity to deal with from a payroll perspective, and the speaking and understanding of English in the country can be limited. That’s why it’s vital to ensure you have all the expertise you need ahead of a Salvadoran expansion, including local Spanish-speaking legal professionals, and a global payroll partner.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.