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Date: 17th May 2016

Honduras: New framework law on social insurance promises an increase in benefits for employees in Honduras

By Julia Sandoval, GUFA Law

The legislative branch of Honduras recently enacted the Framework Law on the Social Insurance System (the "Framework Law") in order to increase benefits available to employees. The Framework Law consists of five key areas: Welfare, Medical Assistance, Occupational Health, Pension Fund and Labour Insurance Reserve.

The first four key areas merely adjust existing policies and rules. For example, the Framework Law created two routes through which the employee and employer must contribute to the employee’s pension fund, rather than just one route of contribution under the old law. Previously, the pension fund consisted of a contribution at a rate of 3.5% of the minimum wage at that time. However, under the Framework Law, the rate of contribution has increased to 6.5%; contribution of 3.5% of the minimum wage (the collective input) out of which 2% must be paid by the employer, 1% by the employee and 0.5% by the State; plus 3% of the amount earned above minimum wage, if there is any (the individual input), which breaks down to 1.5% owed by the employer and 1.5% by the employee. Though it may appear as if there is an additional contribution, it is solely a readjustment of the former for the sake of aggregating to a suitable pension in case of retirement, disability or death of the employee.

However, the Labour Insurance Reserve is a new concept which aims to guarantee a severance payment for the employee even if he or she resigns. The Labour Insurance Reserve is borne by the employer, who must deposit it every month at a rate of 4% of the employee’s salary into an account held for this purpose. If the employee resigns or the employment relationship is otherwise terminated, the employee may withdraw the amount held in the account. However, if the employee is discharged without just cause and the Labour Insurance Reserve is less than the amount the Labour Code of Honduras says should be paid out in the case of unjust dismissal (which varies depending on how long the employment relationship lasted), the employer is obliged to "top up" the Labour Insurance Reserve so that it reaches that amount.

Comment

The Framework Law benefits both the employer and the employee by reducing the risk of employment disputes going to trial with the creation of the Labour Insurance Reserve and enabling employees to reap the benefits of their hard work on retirement with the improved pension fund rules.

Given the Framework Law is still in its infancy, the National Congress is working on improving the procedures and policies, and further updates are expected in due course.

© 2016 GUFA Law