Most companies building engineering teams in Latin America nail the upfront math. They compare salaries, calculate employer taxes, budget for benefits and equipment. Then someone leaves, and a $20,000-40,000 severance invoice arrives.
Severance obligations in LatAm aren't footnotes. They're substantial liabilities that require dedicated reserves and careful planning. A senior engineer earning $70,000 annually in Mexico triggers $60,000+ in termination costs after five years. Brazil's FGTS system adds a 40% penalty on accumulated deposits. Colombia charges daily penalties if you miss payment deadlines.
This guide breaks down the actual severance formulas, payment timing requirements, and budgeting frameworks you need to model exit costs accurately. For complete employment cost breakdowns including salaries, taxes, and benefits across LatAm markets, see our comprehensive cost benchmark guide.
LatAm severance benchmarks at a glance (2026)
For a senior engineer earning $70,000 annually with five years of tenure, termination without cause costs:
- Mexico: ~$60,000 (three months' salary plus 20 days per year plus seniority premium)
- Brazil: ~$26,000 plus 40% penalty on accumulated FGTS deposits ($11,200-14,000)
- Colombia: ~$27,000 (30 days first year, 20 days per subsequent year)
- Argentina: ~$35,000-41,000 (one month per year of service, post-2024 reforms)
- Chile: ~$20,600 (one month per year, capped at 90 UF base salary)
- Peru: ~$43,700 (1.5 months per year, 12-month cap)
Payment timing requirements:
- Mexico and Colombia: immediate payment (same day or next business day)
- Brazil: first business day after notice period ends
- Chile and Argentina: upon signing settlement agreement
- Delay penalties: Mexico and Colombia charge one full day of salary per day late; Brazil adds one month's salary penalty
Recommended severance reserve accrual:
- Mexico and Brazil: 5-6% of monthly payroll
- Colombia: 4-5% of monthly payroll
- Chile and Argentina: 3-4% of monthly payroll
Why severance costs require dedicated planning
The math compounds quickly. If you hire 10 engineers at $70,000 each and plan for three-year engagements, you're looking at roughly $150,000-250,000 in eventual severance obligations depending on country mix and actual tenure.
Severance liabilities typically represent 15-30% of total employment costs when calculated across multi-year engagements. That percentage climbs as tenure increases, since most countries use years-of-service multipliers. An engineer who stays four years costs significantly more to separate than one who leaves after 18 months.
The retention advantage that makes LatAm attractive creates corresponding financial obligations. Companies with 98% retention rates still need robust severance reserves, because even planned departures trigger statutory payments.
Statutory severance components most companies overlook
Base salary comparisons dominate hiring conversations. But severance formulas in LatAm include multiple layers that only surface at termination.
These aren't edge cases. They're standard statutory requirements that apply to every termination without documented cause. Most companies discover them when an EOR sends an invoice for termination costs that exceed three months of the employee's salary.
How severance affects workforce planning decisions
Accurate severance modeling changes how you structure teams and allocate headcount across countries. When you understand that Mexico carries 2-3x higher termination costs than Chile, you might adjust your country allocation for roles with higher expected turnover.
Severance obligations also affect hiring decisions at the margin. If you're choosing between a $65,000 engineer and a $75,000 engineer, the higher-paid candidate creates proportionally higher severance liabilities in most countries. Over a four-year engagement, that $10,000 salary difference compounds to $15,000-20,000 in additional severance exposure.
For complete analysis of how severance fits into total cost of ownership models, including acquisition costs, ongoing employment expenses, and exit costs, see our full LatAm cost benchmarks. To understand current salary ranges across experience levels, review our 2025 Latin America software developer salary guide.
Country-by-country severance requirements & cost breakdown
Severance formulas vary dramatically across LatAm countries. Some use simple per-year multipliers. Others layer multiple components—base severance, notice pay, fund penalties, and delay charges. The examples below use a consistent scenario: a senior engineer with five years of tenure earning $70,000 annually ($5,833 monthly, $269 daily).
How severance is calculated in Mexico
Five-year engineer calculation:
- Three months' salary: $17,500
- 20 days per year for five years (100 days at $269/day): $26,900
- Seniority premium (12 days per year, 60 days total): $16,140
- Total statutory severance: $60,540
In practice, integrated salary calculations often push the total higher. Severance payments in Mexico are among the highest in LatAm, making it one of the most expensive markets for terminations.
Tenure comparison for $70,000 engineer:
- 1 year: ~$23,000
- 2 years: ~$28,000
- 3 years: ~$38,000
- 5 years: ~$60,000
- 7 years: ~$82,000
Mexico requires immediate payment. Severance must be paid on termination day or the next business day. Delays trigger daily penalties that compound quickly—an employer who misses the deadline by 10 days adds $2,690 in penalties.
Brazil FGTS system & 40% termination penalty explained
Brazil's termination costs come in layers. The FGTS (Fundo de Garantia por Tempo de Serviço) system requires employers to deposit 8% of gross salary monthly into a government-managed fund. When you terminate without cause, you pay a 40% penalty on the total accumulated FGTS balance.
Five-year engineer calculation:
- Monthly FGTS deposits: $467 ($5,833 × 8%)
- Total FGTS deposits over 60 months: $28,000
- 40% termination penalty on accumulated balance: $11,200
- Accrued salary and proportional benefits: ~$6,300
- Unused vacation plus one-third bonus (15 days): ~$3,400
- Proportional 13th salary: ~$2,917
- Notice pay (45 days for five-year employee): $8,750
- Total termination cost: ~$32,567
Note: The $28,000 in FGTS deposits were already paid monthly during employment. The additional termination cost is $32,567.
Tenure comparison for $70,000 engineer:
- 1 year: ~$12,000 (plus $5,600 FGTS already paid)
- 2 years: ~$17,000 (plus $11,200 FGTS already paid)
- 3 years: ~$23,000 (plus $16,800 FGTS already paid)
- 5 years: ~$33,000 (plus $28,000 FGTS already paid)
- 7 years: ~$42,000 (plus $39,200 FGTS already paid)
Payment must occur on the first business day after the notice period ends. Miss that deadline and you owe an additional month's salary as a penalty—$5,833 more. Brazil's employee-friendly courts make litigation expensive, so most employers pay exactly on time.
Mutual separation option: If employer and employee agree to termination, the 40% FGTS penalty reduces to 20%, saving $5,600 on a five-year engineer.
Colombia severance formula and payment requirements
Colombia calculates severance as 30 days' salary for the first year and 20 days for each subsequent year. The formula applies to employees earning less than 10 times the minimum monthly wage (most engineers qualify).
Five-year engineer calculation:
- 30 days for year one: $5,833
- 20 days for years two through five (80 days at $269/day): $21,520
- Total severance: $27,353
Notice periods aren't statutorily required for indefinite contracts, but most companies provide 30 days' notice or payment in lieu to maintain goodwill, adding another $5,833 to the total cost.
Tenure comparison for $70,000 engineer:
- 1 year: ~$5,800
- 2 years: ~$11,200
- 3 years: ~$16,600
- 5 years: ~$27,400
- 7 years: ~$38,200
Colombia adds a critical enforcement mechanism. Employers who delay severance payment owe one full day of salary for each day of delay. A 15-day delay adds $4,035 in penalties. Payment must happen immediately upon termination.
Argentina severance calculation (post-2024 reforms)
Argentina uses a straightforward formula: one month's salary for each year of service. For a five-year engineer earning $5,833 monthly, that's $29,165 in base severance.
Five-year engineer calculation:
- One month per year for five years: $29,165
- Notice pay (one month for under five years): $5,833
- Total termination cost: $35,000
Tenure comparison for $70,000 engineer:
- 1 year: ~$11,700
- 2 years: ~$17,500
- 3 years: ~$23,300
- 5 years: ~$35,000
- 7 years: ~$46,700
As of 2024 labor law reforms, Argentina's landscape changed significantly. The reforms removed fines for delayed severance payments and eliminated extra costs for deficient registration. The probationary period extended from three to six months, giving employers more time to evaluate fit before full severance obligations kick in.
Notice periods vary by tenure. Employees with less than five years get one month of notice; those with more than five years get two months. Payment in lieu of notice is common.
Argentina's 2024 reforms reduced termination costs by 15-25% compared to 2023, making it more attractive for companies concerned about exit liabilities.
Chile capped severance structure
Chile provides one month's salary per year of service, capped at 11 months maximum. The calculation uses a capped base salary of 90 UF (Unidades de Fomento, Chile's inflation-indexed unit), currently about $3,435.
Five-year engineer calculation (with cap):
- Standard calculation: 5 months at $5,833 = $29,165
- With 90 UF cap: 5 months at $3,435 = $17,175
- Notice pay (also capped): $3,435
- Total termination cost: $20,610
For high earners, this cap creates significant savings. An engineer earning $5,833 monthly would normally owe $29,165 for five years of service, but the 90 UF cap reduces total severance to approximately $20,610.
Tenure comparison for $70,000 engineer (with 90 UF cap):
- 1 year: ~$6,900
- 2 years: ~$10,300
- 3 years: ~$13,700
- 5 years: ~$20,600
- 7 years: ~$27,500
- 11+ years: ~$41,200 (maximum)
Payment must occur when you sign the finiquito (settlement agreement) before a notary or labor inspector. Delays trigger inflation-adjusted interest that compounds daily. Most companies pay immediately to avoid complications.
Peru & other LatAm markets
Peru offers 1.5 monthly salaries per year of service, capped at 12 months. For a five-year engineer, that's 7.5 months of salary ($43,748).
Five-year engineer calculation:
- 1.5 months per year for five years: 7.5 months
- 7.5 months at $5,833: $43,748
- Total severance: $43,748
Tenure comparison for $70,000 engineer:
- 1 year: ~$8,750
- 2 years: ~$17,500
- 3 years: ~$26,250
- 5 years: ~$43,750
- 8+ years: ~$70,000 (12-month cap)
Uruguay, Ecuador, and Costa Rica follow similar patterns—years-of-service multipliers with varying caps and calculation methods. The key difference is enforcement. Countries with strong labor courts and employee-friendly precedents (Brazil, Mexico, Colombia) make litigation expensive and unpredictable.
For strategic guidance on selecting the right countries for your team, see our analysis of the best Latin American countries to hire software engineers in 2026.
Factors that increase or decrease severance obligations
Statutory formulas provide baselines, but actual termination costs vary based on tenure, salary level, termination type, and procedural compliance. Understanding these variables helps you model realistic scenarios.
Tenure multiplier effects
Most LatAm countries use years-of-service multipliers, creating a step function where costs accelerate after year three. An engineer who leaves after 18 months costs roughly one-third of what the same engineer costs after five years.
In Mexico, the 20-days-per-year component means a five-year employee costs 2.5 times more than a two-year employee (100 days versus 40 days). In Colombia, the difference is even starker—30 days for year one versus 110 days for five years.
Severance cost acceleration example ($70,000 engineer in Mexico):
- Year 1: $23,000 (baseline)
- Year 2: $28,000 (22% increase)
- Year 3: $38,000 (36% increase from year 2)
- Year 5: $60,000 (58% increase from year 3)
- Year 7: $82,000 (37% increase from year 5)
This creates a retention paradox. Higher retention rates reduce recruiting and onboarding costs but increase severance liabilities. Companies with 90%+ retention need larger severance reserves than those with 70% retention and higher turnover.
Salary level & cap considerations
Chile's 90 UF cap and similar structures in other countries mean high earners pay proportionally less in severance. An engineer earning $120,000 annually in Chile pays the same severance as one earning $70,000—both hit the cap.
Chile severance comparison (5-year tenure):
- $50,000 salary: ~$15,000 severance (30% of annual salary)
- $70,000 salary: ~$20,600 severance (29% of annual salary)
- $100,000 salary: ~$20,600 severance (21% of annual salary)
- $150,000 salary: ~$20,600 severance (14% of annual salary)
This creates strategic opportunities. If you're hiring senior architects or principal engineers at $100,000+ salaries, Chile's capped structure reduces your termination risk significantly. For mid-level engineers at $60,000-80,000, the cap matters less.
Brazil's FGTS system works the opposite way—no caps, so higher salaries mean proportionally higher termination costs. The 8% monthly deposit on a $120,000 salary ($800/month) creates a much larger FGTS balance than on a $70,000 salary, and the 40% penalty scales accordingly.
Termination for cause vs termination without cause
Termination for cause eliminates severance obligations in most LatAm countries, but the bar for proving cause is extremely high. Brazilian labor courts are extremely employee-friendly and tend to favor employees. Most employees terminated with cause challenge the decision in court and often win.
Documented cause requires evidence of serious misconduct—theft, violence, repeated insubordination, or criminal activity. Poor performance, cultural misfit, or business restructuring don't qualify. You need written warnings, improvement plans, documented incidents, and witness statements.
Requirements for cause termination:
- Multiple written warnings with specific performance gaps
- Documented improvement plans with measurable goals
- Evidence of policy violations or misconduct
- Witness statements where applicable
- Legal review before termination
The litigation risk often exceeds the severance cost. A wrongful termination case in Brazil can take 18-36 months and result in reinstatement orders or severance multipliers of 2-3x the statutory amount. Most companies pay standard severance rather than risk a for-cause termination.
Notice period requirements by country
Notice periods add a separate cost layer that varies by country and tenure. Brazil requires 30 days' notice plus three days per year of service, capped at 90 days. A five-year employee gets 45 days.
Notice period requirements:
- Brazil: 30 days + 3 days per year (max 90 days)
- Chile: 30 days
- Colombia: 30 days for fixed-term contracts; not required for indefinite
- Argentina: 15 days (probation), 1 month (<5 years), 2 months (5+ years)
- Mexico: Not required, but 15 days customary
- Peru: 30 days customary
You can provide working notice (employee continues working and receiving salary) or payment in lieu (immediate separation with notice pay). Working notice creates productivity and security risks—an employee who knows they're leaving may disengage or create issues. Payment in lieu costs more upfront but provides clean separation.
Notice pay calculation for $70,000 engineer:
- 30 days: $5,833
- 45 days (Brazil, 5-year employee): $8,750
- 60 days (Argentina, 5+ years): $11,666
- 90 days (Brazil maximum): $17,500
Payment timing rules & penalties for delay
For comprehensive guidance on maintaining compliance across all payroll and benefits obligations, see our payroll and benefits compliance guide for US startups in LatAm.
Immediate payment requirements (Mexico, Colombia)
Mexico mandates immediate payment upon termination. "Immediate" means the same day or next business day. The employer must settle all severance components, accrued wages, vacation pay, and aguinaldo proportional payments in one lump sum.
Mexico delay penalty calculation:
- Daily penalty: One full day of salary ($269 for $70,000 engineer)
- 10-day delay: $2,690 additional cost
- 30-day delay: $8,070 additional cost
- 60-day delay: $16,140 additional cost
Colombia follows similar rules. Payment must be made immediately, and delays trigger one full day of salary for each day late. The penalty structure creates strong incentives for compliance.
Practical implication: You need liquid reserves or immediate access to funds for terminations in these countries. An EOR that invoices you after termination and waits for payment before settling with the employee creates delay risk that you ultimately pay for.
Brazil's strict settlement deadlines
Brazil requires payment on the first business day after the notice period ends. If you provide working notice, payment is due the day after the employee's last working day. If you pay in lieu of notice, payment is due immediately.
Brazil delay penalty:
- Automatic penalty: One full month's salary ($5,833 for $70,000 engineer)
- No grace period or discretion
- Penalty applies regardless of reason for delay
The penalty isn't negotiable or discretionary—it's automatic and enforceable. Brazil also requires a formal termination process involving labor authorities or union representatives in some cases. The administrative requirements create opportunities for procedural errors that delay payment and trigger penalties.
Interest accrual & legal consequences
Argentina and Chile apply inflation adjustments to delayed severance payments. Chile's delays trigger interest based on inflation indices that compound daily. In high-inflation environments, a 30-day delay can add 3-5% to your severance obligation.
Litigation cost multipliers:
- Legal fees: $5,000-15,000 for contested termination
- Court costs and administrative fees: $2,000-5,000
- Potential damages awards: 1.5-3x statutory severance
- Timeline: 12-36 months to resolution
Litigation costs compound delays significantly. An employee who doesn't receive timely severance can file a labor claim. Courts tend to favor employees in most LatAm jurisdictions, making litigation expensive and unpredictable.
The smart approach: treat severance payment deadlines as hard requirements, not targets. Build processes that ensure compliance, maintain liquid reserves, and work with EOR partners who understand local timing requirements.
EOR severance management: who pays and how
Employer of Record platforms handle the legal and administrative aspects of employment, but the economic cost of severance flows through to you. Understanding the liability allocation and reserve practices helps you avoid surprises.
For a detailed explanation of how EOR contracts allocate responsibilities and liabilities, see our guide on how Employer of Record contracts work in Latin America.
Legal employer vs economic responsibility
When you use an EOR, the EOR is the legal employer under local law. The EOR signs the employment contract, appears on payslips, and bears statutory employer obligations including severance payments.
But your service agreement with the EOR typically allocates economic responsibility to you. When an employee terminates, the EOR calculates and pays the severance, then invoices you for the full amount plus any administrative fees.
Typical EOR severance flow:
- You notify EOR of termination decision
- EOR calculates statutory severance and notice requirements
- EOR processes termination and pays employee
- EOR invoices you for severance + administrative fees (typically 3-8%)
- You reimburse EOR within agreed payment terms
This creates a timing issue. If the EOR pays severance immediately (as required in Mexico and Colombia) but invoices you after the fact, you need to fund the payment quickly. Some EORs advance the payment and invoice you; others require you to fund a reserve account before they process termination.
Severance reserve practices by EOR providers
EOR platforms handle severance reserves in three ways:
Monthly accrual model:
- You pay 3-5% extra each month
- EOR holds funds in segregated account
- EOR uses accrued reserves to pay severance when termination occurs
- Provides budget predictability but increases monthly costs
As-incurred invoicing:
- You pay standard monthly fees during employment
- EOR invoices full severance cost when someone leaves
- Reduces monthly costs but creates cash flow volatility
- Requires you to maintain liquid reserves
Hybrid approach:
- Partial monthly accruals for predictable components (Brazil FGTS deposits)
- As-incurred invoicing for variable components (Mexico tenure-based severance)
- Balances predictability with cash flow management
Questions to ask your EOR:
- How do you handle severance reserves?
- What are your payment timing requirements?
- Do you advance severance payments or require pre-funding?
- What administrative fees apply to terminations?
- How do you ensure compliance with local payment deadlines?
Ask your EOR provider how they handle severance reserves before you hire your first employee. Monthly accrual models provide budget predictability but increase your ongoing costs. As-incurred models reduce monthly expenses but require you to maintain liquid reserves for potential terminations.
Compliance risk & joint liability considerations
The EOR model works when you maintain clear boundaries. The EOR manages employment, payroll, benefits, and compliance. You manage work assignments, performance, and business decisions.
Co-employment risk factors:
- Directly controlling work schedules and time off
- Conducting performance reviews without EOR involvement
- Directly supervising employees on daily tasks
- Making unilateral employment decisions
- Using company email addresses and systems without proper structure
Joint liability means you can't rely on the EOR to shield you from severance claims, penalties, or litigation. You become directly responsible for unpaid amounts, and employees can pursue claims against you instead of (or in addition to) the EOR.
Maintaining clear boundaries:
- Route all employment administration through the EOR
- Document the EOR relationship in writing
- Provide work direction without controlling employment terms
- Let EOR handle performance documentation and termination procedures
- Use proper communication channels for employment matters
Practical framework: budgeting for severance across team lifecycle
Financial planning for distributed teams requires modeling three scenarios: best case (low attrition, long tenure), base case (normal attrition, mixed tenure), and worst case (high attrition or mass restructuring). Here's how to build realistic models.
Calculating worst-case severance scenarios
Start with the worst case: terminating your entire team without cause after two to three years. This establishes your maximum liability and helps you understand the risk you're taking on.
10-engineer team, 3-year tenure, $70,000 each:
- Mexico (2 engineers): $38,000 each = $76,000
- Brazil (2 engineers): $23,000 each = $46,000
- Colombia (2 engineers): $16,600 each = $33,200
- Chile (2 engineers): $13,700 each = $27,400
- Argentina (2 engineers): $23,300 each = $46,600
- Total worst-case liability: $229,200
That's 10.9% of the $2.1 million in base salaries you paid over three years.
Same team, 5-year tenure:
- Mexico: $60,000 each = $120,000
- Brazil: $33,000 each = $66,000
- Colombia: $27,400 each = $54,800
- Chile: $20,600 each = $41,200
- Argentina: $35,000 each = $70,000
- Total worst-case liability: $352,000
That's 16.8% of the $3.5 million in base salaries paid over five years.
Now model base case: 20% annual attrition with rolling replacements. Each year, two engineers leave and you hire two new ones. Your severance costs are lower because departing employees have mixed tenure—some leave after one year, others after three years.
Base case annual severance (20% attrition, mixed tenure):
- Year 1: 2 departures at 1-year tenure = $24,000
- Year 2: 2 departures at 1.5-year average tenure = $30,000
- Year 3: 2 departures at 2-year average tenure = $36,000
- Three-year total: $90,000
Monthly accrual approach: 3-5% reserve recommendation
The monthly accrual method smooths severance costs over the employment lifecycle. Instead of facing a $27,000 invoice when an engineer leaves after three years, you set aside $600-750 per month during their employment.
Recommended accrual rates by country:
- Mexico: 5-6% of monthly payroll
- Brazil: 5-6% of monthly payroll (covers FGTS + termination costs)
- Colombia: 4-5% of monthly payroll
- Argentina: 3-4% of monthly payroll
- Chile: 3-4% of monthly payroll
- Peru: 5-6% of monthly payroll
For a $70,000 engineer ($5,833 monthly), accrual amounts:
- 3% accrual: $175/month = $2,100/year
- 4% accrual: $233/month = $2,800/year
- 5% accrual: $292/month = $3,500/year
- 6% accrual: $350/month = $4,200/year
10-engineer team annual severance accrual:
- Conservative (5% average): $35,000/year
- Moderate (4% average): $28,000/year
- Aggressive (3% average): $21,000/year
Build the accrual into your budget from day one. That's real money that needs to sit in reserves, not available for other uses. Some companies self-insure by maintaining a segregated reserve account. Others use EOR providers that handle accruals automatically.
Country mix optimization for severance management
Brazil and Mexico carry the highest termination costs, while Chile and Argentina (post-2024 reforms) offer lower liabilities. Strategic country allocation can reduce your overall severance exposure.
Severance cost ranking (5-year tenure, $70,000 engineer):
- Mexico: $60,000 (highest)
- Peru: $43,700
- Argentina: $35,000
- Brazil: $33,000 (plus $28,000 FGTS already paid)
- Colombia: $27,400
- Chile: $20,600 (lowest, due to cap)
Strategic country allocation example (20-engineer team):
- High-retention roles (senior engineers, tech leads): Mexico, Brazil (accept higher severance for better retention)
- Growth/experimental roles: Chile, Argentina (lower severance exposure for higher-risk hires)
- Balanced allocation: Colombia (moderate severance, strong talent pool)
Sample allocation:
- 6 engineers in Mexico/Brazil (30%)
- 8 engineers in Colombia (40%)
- 6 engineers in Chile/Argentina (30%)
- Blended severance rate: 4.2% of monthly payroll
- Annual accrual for 20 engineers: $58,800
But don't let severance costs drive all hiring decisions. Talent quality, timezone alignment, cultural fit, and retention rates matter more than severance savings. A team in Chile that turns over at 30% annually costs more in recruiting and lost productivity than a team in Mexico with 95% retention, even accounting for higher severance.
Use country mix as a tiebreaker, not a primary decision factor. If you're choosing between two equally strong talent markets, the one with lower severance obligations wins.
For broader strategic guidance on country selection, see our analysis of top South American countries for hiring developers.
Severance reserve tracking and reporting
Build severance liability tracking into your financial reporting from day one. This creates visibility and prevents budget surprises.
Monthly severance reserve report template:
- Current headcount by country
- Average tenure by country
- Accrued severance reserve balance
- Estimated current severance liability (if all employees terminated today)
- Reserve coverage ratio (accrued reserves / estimated liability)
- Monthly accrual amount by country
Target metrics:
- Reserve coverage ratio: 60-80% (you'll never be 100% covered due to timing)
- Monthly accrual as % of payroll: 3-5% depending on country mix
- Average reserve per employee: $4,000-8,000 depending on tenure
Review severance reserves quarterly as part of workforce planning. Adjust accrual rates if your country mix changes or if average tenure increases significantly.
All-in cost example: 10 senior engineers over 3 years
Understanding total cost of ownership requires modeling all employment expenses including severance reserves. Here's a complete breakdown for a 10-engineer team over three years.
Annual costs per engineer ($70,000 base salary):
- Base salary: $70,000
- Employer taxes (15-25%): $10,500-17,500
- Benefits (health, equipment, workspace): $6,000-9,000
- Severance accrual (4% of salary): $2,800
- Total annual cost per engineer: $89,300-99,300
10-engineer team, 3-year total:
- Base salaries: $2,100,000
- Employer taxes: $315,000-525,000
- Benefits: $180,000-270,000
- Severance accruals: $84,000
- Total 3-year employment cost: $2,679,000-2,979,000
When engineers leave, you draw from the severance reserve rather than facing unexpected invoices. The accrual model creates predictable budgeting and eliminates cash flow surprises.
For companies offering equity compensation to remote engineers, see our guide on how startups structure equity for remote engineers hired through an EOR to understand total compensation packages.
Minimizing termination risk & cost exposure
You can't eliminate severance obligations in LatAm, but you can reduce them through strategic approaches that maintain compliance and workforce quality.
Performance management & documentation for cause terminations
Termination for cause eliminates severance, but the evidentiary bar is high. You need documented misconduct—written warnings, improvement plans, witness statements, and evidence of policy violations.
Performance management timeline for potential cause termination:
- Days 1-90: Regular check-ins, informal feedback, early identification of gaps
- Day 90: Formal performance review, documented concerns if present
- Days 91-120: Performance improvement plan (PIP) with specific, measurable goals
- Days 121-180: Weekly PIP check-ins, documented progress or lack thereof
- Day 180: Final review, decision point
Start performance management early. If an engineer isn't meeting expectations after 90 days, document the gaps and create a formal improvement plan. Provide specific, measurable goals and regular check-ins. If performance doesn't improve after 60-90 days of documented coaching, you have a foundation for potential cause termination.
Documentation requirements:
- Written performance expectations shared at hire
- Regular performance reviews (at least quarterly)
- Specific examples of performance gaps or misconduct
- Written warnings with employee acknowledgment
- Improvement plans with measurable goals and timelines
- Evidence of support provided (training, resources, coaching)
But remember: courts in Brazil, Mexico, and most LatAm countries favor employees. Even with strong documentation, employees often win wrongful termination cases. The litigation risk and cost frequently exceed the severance you're trying to avoid.
Cost-benefit analysis of cause termination:
- Severance saved: $15,000-60,000 depending on tenure and country
- Litigation risk: 60-80% chance employee wins in court
- Legal fees: $5,000-15,000
- Potential damages: 1.5-3x statutory severance
- Timeline: 12-36 months
- Management time: 50-100 hours
Use performance management to improve outcomes, not primarily to build cause termination cases. If someone isn't working out, paying standard severance and moving on is usually cheaper and faster than fighting a wrongful termination claim.
Fixed-term contracts vs indefinite employment
Some LatAm countries allow fixed-term employment contracts for specific project work or temporary needs. Fixed-term contracts can reduce severance exposure if the contract expires naturally.
Fixed-term contract considerations:
- Colombia: Premature termination requires paying salary for remainder of contract term (often exceeds standard severance)
- Brazil: Fixed-term termination without cause requires 50% of remaining pay
- Mexico: Limited use cases; must have genuine temporary business need
- Chile: Allowed for specific projects; premature termination triggers standard severance
- Argentina: Requires business justification; repeated renewals reclassified as indefinite
But premature termination of fixed-term contracts still triggers penalties. In Colombia, terminating a two-year contract after one year requires paying 12 months of salary—far more than standard severance.
Fixed-term contracts also require business justification. You can't use them simply to avoid severance obligations. Labor authorities scrutinize repeated fixed-term contracts with the same employee, often reclassifying them as indefinite employment.
Appropriate use cases for fixed-term contracts:
- Specific projects with defined end dates (6-18 months)
- Seasonal work or temporary demand spikes
- Replacement for employees on leave
- Pilot programs or experimental initiatives
Use fixed-term contracts for genuinely temporary needs. For ongoing engineering roles, indefinite contracts are the appropriate structure and carry lower risk.
Mutual separation agreements
Negotiated exits can reduce severance costs by 20-50% in exchange for employee waivers and releases. An engineer facing termination might accept 60-70% of statutory severance in exchange for immediate payment, positive references, and avoiding the stigma of termination.
Brazil mutual separation benefits:
- FGTS penalty reduces from 40% to 20%
- For five-year engineer: saves $5,600 on $28,000 FGTS balance
- Employee can withdraw 80% of FGTS balance (vs 100% in unilateral termination)
- Both parties avoid litigation risk
Mutual separation negotiation framework:
- Employer offers 60-80% of statutory severance
- Immediate payment (no delays or installments)
- Positive reference letter
- Extended benefits continuation (1-3 months)
- Outplacement support or career coaching
Requirements for valid mutual separation:
- Genuine negotiation and employee consent
- Voluntary agreement, not coercion
- Documented in writing with legal review
- Often requires labor authority approval
- Employee must understand rights being waived
Mutual separation requires genuine negotiation and employee consent. You can't coerce someone into accepting reduced severance. The agreement must be voluntary, documented, and often requires approval from labor authorities or legal counsel.
Use mutual separation when both parties benefit—an employee who's ready to move on and an employer who wants to reduce costs. Don't use it to pressure employees into accepting less than their legal entitlements.
When mutual separation makes sense:
- Employee has expressed interest in leaving
- Performance issues exist but don't meet cause threshold
- Organizational restructuring affects multiple roles
- Employee has another opportunity lined up
- Both parties want clean, fast separation
Key takeaways: modeling true severance costs per LatAm engineer
Severance obligations are real costs that belong in your financial models from day one. Here's how to build accurate projections:
Severance as percentage of total employment cost:
- Three-year engagement: 8-12% of total cost
- Five-year engagement: 12-18% of total cost
- Varies significantly by country mix and actual tenure
Monthly accrual recommendations:
- Set aside 3-5% of monthly payroll in severance reserves
- Mexico and Brazil: 5-6% accrual rate
- Colombia: 4-5% accrual rate
- Chile and Argentina: 3-4% accrual rate
Worst-case scenario planning:
- Model terminating entire team after 2-3 years
- For 10 engineers at $70,000: $150,000-250,000 liability
- Maintain reserves covering 60-80% of estimated liability
Country-specific considerations:
- Mexico: highest severance costs, immediate payment required
- Brazil: FGTS system adds complexity, strict payment deadlines
- Colombia: moderate costs, severe delay penalties
- Chile: capped structure benefits high earners
- Argentina: post-2024 reforms reduced costs 15-25%
Payment timing is critical:
- Mexico and Colombia: same-day or next-business-day payment
- Brazil: first business day after notice period
- Delays trigger automatic penalties (one day to one month of salary)
- Maintain liquid reserves for immediate payment capability
EOR considerations:
- Understand reserve practices (monthly accrual vs as-incurred)
- Clarify payment timing and funding requirements
- Maintain clear boundaries to avoid co-employment risk
- Budget for EOR administrative fees on terminations (3-8%)
Strategic approaches:
- Use performance management to improve outcomes, not build cause cases
- Consider country mix optimization for roles with higher turnover risk
- Explore mutual separation for negotiated exits (20-50% savings)
- Track severance reserves monthly as part of workforce planning
For complete employment cost analysis including base salaries, employer taxes, benefits, equipment, and ongoing operational expenses across LatAm markets, see our comprehensive cost benchmark guide.
Understanding the strategic advantages of nearshore hiring beyond just cost savings? Read our analysis on nearshoring vs offshoring and how time zone overlap impacts global hiring.
Ready to build a high-performing LatAm engineering team with transparent, predictable costs? Howdy handles recruiting, compliance, payroll, and long-term retention so you can focus on building great products. We manage severance obligations, maintain proper reserves, and ensure compliance with local payment requirements. Book a demo to see how we help companies scale distributed teams with 98% retention and full cost transparency.