Challenges for the labor market

Like many other countries in the region, Costa Rica has entered a process of demographic transition characterized by a decrease in its younger demographic groups. This is a consequence of two main factors (both of which are related to significant improvements in the health care system): a decrease in fertility rate and an increase in life expectancy. The described phenomenon has entailed significant changes in the economically active population (EAP), and it is estimated that by 2050, the EAP pyramid will be almost rectangular.

Such aging of the EAP requires the implementation of certain preemptive measures, both to guarantee that social security services will be able to withstand these changes and so that the jobs offered adjust to these new market requirements.

The higher life expectancy and better aging conditions have affected the social security (CCSS) pension system, which will become further impacted by a reduced number of contributing members and a higher number of pensioners.

That’s why the CCSS’s system has already taken measures for self-sustenance, such as raising the age of retirement, augmenting the contribution rate and limiting the amount of pension that the CCSS will grant. Additionally, given that there are several other pension systems within the country, several bills that seek both to streamline the conditions throughout the different systems and limit granted amounts have been discussed in Congress.

These changes have been taking place during the last decades; however, the CCSS authorities continue to insist in the need for further measures. For example, the age of retirement was increased to 65, with a requirement of 300 installments (around 25 years), but a need to elevate this age further (to 70 years) is still being analyzed. Also, the contribution rate has been raised progressively, and even reductions in the pension amount have been considered but not approved. Currently, the CCSS grants pensions of about 60% of the average salary of the last 20 years of work (up to a maximum of around US$2,500). Given that the amount the CCSS recognizes is not equivalent to 100% of the income employees used to receive, citizens of pension age start to reconsider retirement and opt to stay longer in their jobs to ensure both incomes (i.e., their salary and their pension). The above also affects the younger population, who struggle to find a job given that fewer positions are left available. Under this context, companies make some common mistakes when dealing with an aging workforce. For example, when an employer hires a worker that is already retired and receives a pension, the tendency is to treat the contract as if the pensioner was an independent contractor and not an employee of the company (in order to lower some costs). However, if the person renders his or her services under a subordinate relationship (which entails having a schedule and a fixed and periodical payment, among other characteristics), he or she is probably going to be deemed as an employee by the local authorities. The employer will be then be obliged to recognize all the benefits related to an employment relationship: e.g., vacation time, holiday bonus, social security contributions, plus fines and interests. Also, when an employee already fulfills the requirements to retire, some companies expect them to do so. Nonetheless, this is a personal decision and the employer cannot interfere or make deadlines for the worker. Urging employees to retire may be deemed as discriminatory on an age-related basis.

To avoid discrimination claims, it is important that the company has an objective reason to proceed in case it wishes to dismiss an employee that is close to retirement. As employers, companies need to have clear internal policies that regulate all these matters and duly inform their personnel in order to avoid any actions that may be seen as discriminatory.

By: Laura Navarrete | Manager Labor&Employent EY Law Costa Rica