#CostaRica 🇨🇷 #BDS_Article: Is Your Company Closing? Understand Your Labor Obligations

The decision to close a company is never an easy one. Beyond economic or strategic reasons, there are numerous legal aspects that an employer must consider before making such a decision. One of the most important is the payment of severance and other compensations to employees, as the law clearly establishes specific rights for workers and corresponding obligations for employers.

Article 33 of the Labor Code, as amended by the Bankruptcy Act that entered into force on August 21, 2020, regulates how these payments should be handled when a company shuts down, whether voluntarily or mandatorily. However, in practice, it is not always easy to determine what must be paid, in what order, and within what timeframe.

What does closing a company mean for employers and employees?

When a business ceases operations, employees retain the right to receive certain compensations. Regardless of whether the closure is voluntary or mandatory, the company remains liable for making any payments due in case of a dismissal without fair cause, commonly referred to as a “dismissal with employer liability.”

These compensations include, in addition to any accrued vacation days and the proportional Christmas bonus (“aguinaldo”) up to the date of termination—which are non-waivable rights of all employees—the notice period, which is the payment corresponding to the advance notice that must be given to the employee upon termination; severance pay , which is granted when an employee is dismissed without been involved in a serious misconduct; and early termination compensation, applicable in the event of a fixed-term employment contract being ended by the company before its agreed-upon term.

However, every case is different. A company closing voluntarily is not in the same situation as one undergoing liquidation or bankruptcy proceedings. Depending on the specific circumstances, the applicable procedures may vary, and it is important to understand how labor-related payments must be handled in each scenario.

One of the first questions that arises when considering shutting down operations is: who gets paid first when a company is liquidated?

When a company undergoes liquidation or ceases operations, it must not only pay termination compensation to its employees but may also owe debts to banks, suppliers, and other entities.

The law grants a special and highly privileged status to labor-related claims, meaning that these payments take precedence over the vast majority of the employer’s other debts at the time of closure.

Nonetheless, there are exceptions, as some creditors may be entitled to payment before the employees. These include banks or financial institutions holding mortgage-backed loans, lenders with secured interests (pledges), and creditors with claims for child or spousal support (alimony).

This does not mean that workers are left at a disadvantage, but it is crucial to understand how payment priorities are established and which factors can influence the availability of funds to cover these compensations.

One of the greatest challenges during the liquidation of a company is the distribution of the available resources. Thus, the company must consider the time frame established by law to make termination payments to its employees.

Article 33 of the Labor Code provides that, once the competent authorities have recognized the labor debt, the employer has 30 days to make the corresponding payments. This deadline applies to outstanding wages, severance, and other labor entitlements.

But what happens if the company does not have enough money to make these payments within the established period? In such cases, the law allows the debt to remain outstanding and be paid as soon as funds become available. However, this does not mean that payment can be indefinitely postponed without consequences. It is essential to manage this process with transparency and within the legal framework to avoid future claims.

In conclusion, a properly managed cease of operations helps to prevent future issues. Mishandling labor obligations can lead to claims, lawsuits, and penalties that may further complicate the company’s shutdown. For this reason, when a company is facing this scenario, it is advisable to seek specialized legal counsel to ensure compliance with regulations and avoid future problems.

Having a clear understanding of how severance payments work, the applicable deadlines, and the priority of claims not only protects workers’ rights but also enables employers to manage this process in a more orderly and efficient manner.

María Adelaida Viana García

Lawyer, BDS Asesores