/ Unemployment, Layoffs, and Severance Pay Reform: What Companies Need to Consider Today

Rising unemployment and the debate over a potential reform of the severance pay system based on years of service pose new challenges for companies. While many organizations are evaluating workforce adjustments, it is crucial to review current regulations and anticipate the impact that potential changes could have on the management of their labor relations.

Tomás Becerra Henríquez
Associate, Alessandri

What’s Current Today? The Risk of Misusing the Grounds for Termination

Article 161 of the Labor Code remains the primary basis for termination in restructuring processes. It does not require the employee’s consent and, when used properly, allows companies to address genuine business adjustments. However, its indiscriminate use is also a frequent source of litigation.

The courts require that the company’s need be objective and verifiable, not merely a formal assertion. A decline in sales, the closure of a business line, or an effective organizational restructuring can serve as grounds, but they must be properly documented and related to the affected position. If the justification is insufficient, the termination may be declared unjustified, resulting in a 30% statutory surcharge on severance pay based on years of service.

It is also necessary to consider the employee’s specific circumstances. The existence of legal immunity, a recent medical leave, the exercise of union rights, or a harassment complaint filed under the Karin Law can increase the risk that the dispute will not be limited to the justification for the termination and may lead to a constitutional protection action for the violation of fundamental rights.

In a labor market less conducive to rapid reemployment, it is reasonable to anticipate an increase in litigation. That is why, today, the decision to restructure is just as important as the way it is prepared and documented.

The Upcoming Debate: “In Any Event” Severance Pay

The Ministry of Labor and Social Security has indicated that it is studying a reform to the severance pay system based on years of service. Among the alternatives that have been discussed is the creation of a fund financed by an additional employer contribution of approximately 1.8%, which would be in addition to Unemployment Insurance and which the employee could collect regardless of the reason for termination, including resignation.

For now, this is a proposal under consideration and not a bill introduced in Congress. It has also been suggested that the potential system would apply only to new contracts. Consequently, key aspects—such as the contribution rate, the transition period, and how it would coexist with the current system—may still change.

Why does this matter to a board of directors or HR management?

In the short term, the current system remains unchanged. Terminations carried out today are still subject to the current rules and should not be planned on the assumption that severance pay will decrease in the near future.

In the medium term, if the reform moves forward as discussed, companies could shift from a one-time cost at the time of termination to a recurring monthly cost for new hires. Furthermore, for years, employees subject to two different regimes could coexist within the same organization.

This makes it advisable to begin modeling the impact on hiring budgets now and to review how reorganization decisions are documented. The goal is not to anticipate a law that does not yet exist, but to ensure that a potential change does not catch the company without the necessary information or contingency plans in place.

What to Review Now

• The documentation supporting the grounds for termination and its consistency with the termination letter.

• The criteria used to select the positions or employees affected by a restructuring.

• The existence of legal privileges, complaints, leaves of absence, or other prior records that could increase exposure to labor litigation.

• The impact of a potential additional contribution on new hires and workforce planning for 2027.

Companies with ongoing or planned restructuring processes for the remainder of 2026 should simultaneously review the soundness of the stated grounds and the impact that a potential regulatory change would have on their future costs.

Do you have an ongoing termination process or are you evaluating workforce adjustments? Our Labor Law team can review the documentation supporting the grounds for termination and the main areas of exposure before the decision is implemented.