Ultimate Guide to Hire in Costa Rica

Costa Rica has emerged as a preferred destination for companies aiming to expand their remote teams and access a highly skilled workforce. Renowned for its stable economy, strategic location, and robust digital infrastructure, Costa Rica offers numerous advantages for businesses seeking to hire and operate in Latin America.

This guide covers all the essential aspects to hire in Costa Rica, including different hiring methods, labor laws, payroll, taxes, and compliance. Whether you’re a startup looking to hire your first Costa Rican contractor or a larger company aiming to establish a local presence, this guide will help you navigate Costa Rica’s hiring landscape effectively.

Key Stats About Costa Rica

• Language: Spanish (English proficiency is high, especially in business and tech sectors)
• Time Zone: GMT-6 (similar to Central Standard Time, no Daylight Saving Time)
• Currency: Costa Rican Colón (CRC)
• Population: Approximately 5.1 million
• Major Cities for Talent: San José, Heredia, Alajuela, Cartago
• Internet Penetration: Over 85%, with widespread high-speed internet in urban and suburban areas
• Labor Force: Approximately 2.4 million, with a growing focus on tech, shared services, and bilingual customer support
• Education: High literacy rate (97%) with around 25,000 STEM graduates annually

Why Hire in Costa Rica?

Costa Rica has become one of Latin America’s leading markets for hiring skilled professionals. Here’s why it stands out as an ideal location for businesses seeking remote talent:

Growing Economy

Costa Rica boasts a stable and diverse economy, with a GDP of approximately $68 billion in 2023. The country is known for its emphasis on sustainable development, and its economy is driven by sectors such as technology, tourism, and advanced manufacturing. This stability creates a favorable environment for foreign investment and supports a growing job market, making it easier for businesses to find and retain top talent.

Skilled Workforce

With a labor force of over 2.4 million, Costa Rica has a highly educated and skilled talent pool. The country emphasizes education, and its universities produce thousands of graduates each year in fields like engineering, computer science, and information technology. Key cities like San José and Heredia are home to thriving tech communities, offering companies access to skilled professionals in software development, data analytics, customer support, and digital marketing.

Government Support

Costa Rica’s government has implemented various policies to foster a business-friendly environment, including Free Trade Zones (FTZs) that offer tax incentives and simplified regulatory processes for foreign companies. Initiatives like the “Costa Rica Green and Digital” strategy focus on boosting the country’s digital infrastructure, making it an attractive destination for tech companies and remote work operations.

Cultural Compatibility

Costa Rican work culture aligns closely with North American and European business standards. Known for their professionalism, collaboration, and customer service orientation, Costa Rican professionals excel in remote team environments. Additionally, many Costa Ricans have a high level of English proficiency, particularly in tech and customer support sectors, which facilitates seamless communication with international teams. The country’s GMT-6 time zone also allows for real-time collaboration with U.S. and Canadian teams.

3 Ways to Hire in Costa Rica

When it comes to hiring talent in Costa Rica, businesses have three main options: engaging contractors, utilizing Employer of Record (EOR) services, or forming a local legal entity. Each approach has its own set of advantages, compliance requirements, and cost considerations. Here’s a breakdown of these options:

1. Hiring Contractors in Costa Rica

Hiring contractors in Costa Rica is often the simplest way to quickly bring on talent, especially for short-term or project-based work. Contractors operate as self-employed individuals, managing their own taxes and benefits.

Pros:

• Flexibility: Ideal for short-term projects or roles with variable workloads.
• Cost-Effective: No obligation to provide benefits such as health insurance, pensions, or paid time off.
• Simplicity: Minimal paperwork and no need for a local legal entity.

Cons:

• Compliance Risks: Misclassifying employees as contractors can result in legal and financial penalties.
• Limited Control: Less control over contractors compared to full-time employees.
• Lack of Benefits: May not attract top talent seeking more stability and benefits.

Key Considerations: When hiring contractors, it’s crucial to have a detailed contract outlining the scope of work, payment terms, and confidentiality clauses. Companies must also ensure compliance with Costa Rican regulations that differentiate contractors from employees to avoid potential misclassification issues.

2. Employer of Record (EOR) Services in Costa Rica

An Employer of Record (EOR) acts as the legal employer of your Costa Rican staff, allowing you to hire full-time employees without needing to set up a legal entity in Costa Rica. The EOR manages payroll, taxes, benefits, and compliance on your behalf.

Pros:

• Compliance: The EOR ensures adherence to local labor laws, taxes, and benefits regulations.
• Quick Onboarding: Allows for fast hiring without navigating complex legal and administrative processes.
• Reduced Administrative Burden: The EOR manages all HR, payroll, and benefits administration.

Cons:

• Service Fees: EOR services charge a monthly fee per employee, which can add to operational costs.
• Less Direct Control: The EOR is the legal employer, so some decisions must go through them.

Key Considerations: Using an EOR is an excellent choice if you want to test the Costa Rican market or hire a small number of employees. It offers flexibility and compliance without the need for local incorporation.

3. Entity Formation in Costa Rica

Setting up a local entity in Costa Rica provides complete control over hiring employees directly and managing operations. This approach is ideal for companies planning a long-term presence in the country.

Pros:

• Full Control: Directly manage hiring, payroll, benefits, and employment terms.
• Brand Presence: Establish a stronger local brand and presence in the Costa Rican market.
• Long-Term Strategy: Suitable for businesses looking to scale operations and hire a larger workforce.

Cons:

• Time-Consuming: Establishing an entity can take several months and requires compliance with legal, tax, and registration processes.
• Higher Costs: Upfront costs for registration, legal fees, and ongoing compliance.
• Complexity: Requires navigating Costa Rica’s legal and regulatory environment, including tax filings and labor laws.

Key Considerations: Forming an entity is a strategic move for companies committed to a long-term investment in Costa Rica. You’ll need to register the business, obtain a Tax Identification Number (TIN), and comply with ongoing financial reporting and tax obligations.

Labor Laws and Employment Contracts in Costa Rica

Understanding Costa Rica’s labor laws and regulations is crucial when hiring employees to ensure compliance and maintain a positive employer-employee relationship. This section covers the key elements of labor laws and what to include in employment contracts when hiring in Costa Rica.

Types of Employment Contracts

Costa Rican labor law recognizes several types of employment contracts. The most common ones are:

• Fixed-Term Contract: This contract has a specific duration, which can range from a few months to a few years. It can be renewed, but it should clearly state the duration and the purpose of the temporary work.
• Indefinite-Term Contract: This is the most common and stable form of employment, with no set end date. It provides job security and is preferred for long-term hires.
• Temporary or Casual Contract: Suitable for short-term projects or seasonal work. This contract must outline the specific task or project for which the employee is being hired.

Key Considerations: Contracts must be in writing and include details such as job description, salary, benefits, working hours, and termination conditions. Fixed-term contracts require special attention to their duration and renewal terms to comply with Costa Rican labor laws.

Employee Rights and Benefits

Costa Rican labor laws provide employees with various rights and benefits that employers must adhere to:

• Working Hours: The standard workweek in Costa Rica is 48 hours, typically spread over six days, with eight hours per day. Overtime must be paid at a rate of 1.5 times the regular hourly rate.
• Paid Leave: Employees are entitled to two weeks of paid vacation for every 50 weeks of continuous work. Additionally, Costa Rica observes 11 public holidays, during which employees are typically entitled to time off.
• Maternity and Paternity Leave: Female employees are entitled to four months of paid maternity leave (one month before and three months after childbirth). Fathers are entitled to one day of paid paternity leave.

Paid Leave

Employees in Costa Rica are entitled to two weeks of paid vacation for every 50 weeks of work. Additionally, there are 11 public holidays. Here is a list of Costa Rica’s public holidays:

• January 1 – New Year’s Day (Año Nuevo)
• April 11 – Juan Santamaría Day (Día de Juan Santamaría)
• Holy Thursday – Variable date in March/April (Jueves Santo)
• Good Friday – Variable date in March/April (Viernes Santo)
• May 1 – Labor Day (Día del Trabajo)
• July 25 – Annexation of Guanacaste Day (Anexión de Guanacaste)
• August 2 – Virgin of Los Angeles Day (Día de la Virgen de los Ángeles)
• August 15 – Mother’s Day (Día de la Madre)
• September 15 – Independence Day (Día de la Independencia)
• December 1 – Abolition of the Army Day (Día de la Abolición del Ejército)
• December 25 – Christmas Day (Navidad)

Employers should consider these holidays when planning work schedules and employee time off, as they are an essential part of labor compliance in Costa Rica.

Health and Pension Contributions Breakdown:

• Health Insurance Contribution:
  • Employer’s Contribution: 9.25% of the employee’s monthly salary.
  • Employee’s Contribution: 5.5% of the employee’s monthly salary.
• Pension Contribution:
  • Employer’s Contribution: 5.08% of the employee’s monthly salary.
  • Employee’s Contribution: 4.33% of the employee’s monthly salary.
• Workmen’s Compensation Insurance (Riesgos del Trabajo):
  • Employer’s Contribution: Varies between 0.5% and 1.5% of the employee’s monthly salary, depending on the job’s risk level.

Total Employer Contributions (Approximate):

• Health: 9.25%
• Pension: 5.08%
• Workmen’s Compensation: Varies between 0.5% and 1.5%

Employers must ensure that these contributions are made regularly to comply with Costa Rican labor laws and maintain the legal status of employment contracts.

Termination and Severance in Costa Rica

Costa Rican labor law provides specific guidelines on employee termination and severance payments, which are important to understand for maintaining compliance and avoiding legal disputes.

Types of Termination

• Just Cause Termination: If an employee is terminated for just cause (e.g., gross misconduct, theft, or repeated poor performance), the employer must provide documented evidence. In such cases, the employee is not entitled to severance pay.
• Without Just Cause Termination: If an employer terminates an employee without just cause, they must provide severance pay (preaviso and cesantía) based on the employee’s tenure and salary, as outlined by Costa Rican labor laws.
• Resignation: When an employee resigns voluntarily, they are typically not entitled to severance pay. However, they are entitled to receive any accrued benefits, such as vacation days or bonuses.

Severance Pay (Cesantía) and Notice Period (Preaviso)

Costa Rican labor law distinguishes between two main types of payments upon termination:

• Notice Period (Preaviso): Employers must provide notice of termination or pay the equivalent salary instead of the notice period. The required notice period is:
  • 1 week for employees with 3 to 6 months of service.
  • 2 weeks for employees with 6 months to 1 year of service.
  • 1 month for employees with more than 1 year of service.
• Severance Pay (Cesantía): Severance pay is calculated based on the employee’s length of service:
  • 7 days of salary for employees with 3 to 6 months of service.
  • 14 days of salary for employees with 6 months to 1 year of service.
  • 19.5 days of salary for each year of service after the first year, up to a maximum of 8 years.

Key Considerations: Employers should keep thorough records of performance and adherence to employment contracts to support any potential claims of just cause. Additionally, accurate calculations of severance and notice payments are essential to ensure compliance with Costa Rican labor law.

Payroll, Benefits, and Compensation in Costa Rica

Once you’ve hired employees in Costa Rica, it is crucial to understand how to manage payroll and offer the appropriate benefits. Costa Rican labor laws define mandatory contributions, payroll structure, and employee benefits to ensure a compliant and fair compensation system.

Salary Structure

Costa Rican salaries typically consist of the following components:

• Base Salary: The fixed monthly salary agreed upon in the employment contract, which must meet or exceed the national minimum wage. As of 2024, the minimum wage in Costa Rica varies depending on the job category, with most categories requiring a minimum of approximately 330,000 CRC (around 620 USD) per month.
• 13th Month Bonus (Aguinaldo): Employers are required to provide a year-end bonus known as “Aguinaldo,” equivalent to one-twelfth of the total salary earned by the employee during the year. This bonus must be paid by December 20th each year.
• Allowances: Additional allowances (such as transportation or meal subsidies) may be required depending on the nature of the job and the employer’s policies.

Key Considerations: It’s important to clearly outline all salary components in the employment contract and ensure compliance with minimum wage laws and the 13th-month bonus payment.

Mandatory Benefits

Employers in Costa Rica are required to provide certain benefits to their employees, contributing to social security programs and ensuring workers’ welfare:

• Health Insurance: Employers must contribute 9.25% of an employee’s monthly salary to the social health system, while employees contribute an additional 5.5%. This ensures that employees have access to healthcare services through the Costa Rican Social Security Fund (CCSS).
• Pension: Employers contribute 5.08% of the employee’s monthly salary to the Costa Rican pension fund, while employees contribute 4.33%. These contributions support the country’s retirement system.
• Workmen’s Compensation Insurance: Employers are required to contribute between 0.5% and 1.5% of the employee’s salary for workplace accident insurance through the National Insurance Institute (INS).

Payment Cycles

In Costa Rica, salaries are typically paid on a monthly basis. However, some companies may choose to provide bi-monthly payments (every 15 days). The payment cycle and method should be clearly stated in the employment contract to avoid misunderstandings.

• Monthly Payment: Most employers follow this cycle, where employees receive their salary and benefits payments once a month.
• Bi-Monthly Payment: In some cases, companies divide the monthly salary into two payments, made mid-month and at the end of the month. This option can help employees manage their cash flow more effectively.

Key Considerations: Employers must ensure timely salary payments, adhere to the statutory minimums for contributions, and handle deductions accurately for social security, health, and pension funds. Non-compliance can result in penalties and affect the company’s reputation.

Navigating Taxes and Legal Compliance in Costa Rica

When hiring in Costa Rica, it’s vital to understand the country’s tax regulations and legal requirements to ensure compliance and avoid potential penalties. This section provides an overview of corporate taxes, employment-related taxes, and data protection laws that affect businesses operating in Costa Rica.

Corporate Taxes

Businesses operating in Costa Rica are subject to several types of taxes. Here’s a breakdown of the key corporate taxes you need to be aware of:

• Corporate Income Tax: Costa Rica has a progressive corporate income tax rate system for companies, with rates ranging from 10% to 30%, depending on the annual gross income. Companies earning up to 5 million CRC (around 9,400 USD) annually are taxed at 10%, while those with earnings above 106 million CRC (approximately 200,000 USD) are subject to the highest rate of 30%.
• Value-Added Tax (VAT): The general VAT rate in Costa Rica is 13%, applied to the sale of goods and services. Some items, such as basic food products, may be subject to reduced rates or exemptions.
• Municipal Tax: Local municipalities impose this tax on business activities within their jurisdiction. The rate varies depending on the location and type of business but is typically a small percentage of the company’s gross income.

Key Considerations: Companies must register for a Tax Identification Number (TIN) with the Costa Rican Ministry of Finance (Ministerio de Hacienda) to manage tax obligations. Accurate record-keeping and timely tax filings are crucial for compliance.

Employment Taxes and Withholdings

Employers in Costa Rica are responsible for withholding and remitting various taxes and social security contributions on behalf of their employees:

• Income Tax Withholding: Employers must withhold income tax from employee salaries based on Costa Rica’s progressive income tax rates, which range from 0% to 25%, depending on the employee’s income level. The withheld amount is then remitted to the tax authorities.
• Social Security Contributions: Employers contribute 9.25% of an employee’s salary for health insurance and 5.08% for pensions, while employees contribute 5.5% and 4.33% respectively. These contributions support the country’s healthcare and pension systems.
• Parafiscal Contributions: Additional contributions may be required for programs like the Family Allowance Fund (Fondo de Asignaciones Familiares – FODESAF), which supports social welfare initiatives.

Key Considerations: Accurate calculations and timely remittance of these taxes and contributions are essential. Failure to comply can result in penalties and legal issues for the company.

Data Protection and Privacy Regulations

Costa Rica has strict regulations for protecting employee data, particularly under the “Law on the Protection of Individuals Regarding the Processing of Their Personal Data” (Law No. 8968). Employers are required to handle employee information securely and responsibly.

• Data Consent: Employers must obtain explicit consent from employees before collecting, processing, or storing their personal information.
• Data Usage: Employee data can only be used for purposes explicitly stated in the consent form. Unauthorized use of personal data can lead to legal penalties.
• Data Security: Employers are responsible for implementing adequate security measures to protect employee data from unauthorized access, loss, or misuse.

Key Considerations: Companies should create a data privacy policy outlining how employee data will be collected, processed, and protected. It’s also advisable to include data protection clauses in employment contracts.

Company Formation and Setup in Costa Rica

For businesses looking to establish a long-term presence in Costa Rica and hire local employees directly, setting up a legal entity is an essential step. Here’s a comprehensive overview of the company formation process and the key considerations to keep in mind.

Types of Business Entities

Choosing the right legal structure is crucial when setting up a company in Costa Rica. The most common types of business entities for foreign investors are:

• Limited Liability Company (Sociedad de Responsabilidad Limitada – S.R.L.): Suitable for small to medium-sized businesses, this structure requires a minimum of two partners. Each partner’s liability is limited to their capital contributions.
• Corporation (Sociedad Anónima – S.A.): A more complex structure that is commonly used by larger companies. It requires at least two shareholders and offers limited liability protection. It is preferred for businesses planning to scale.
• Branch Office (Sucursal): A foreign company can establish a branch office in Costa Rica, allowing it to operate as a legal entity without forming a new corporation. The branch office must register with local authorities and comply with local regulations.

Key Considerations: The S.R.L. is often chosen for its simplicity and flexibility, while the S.A. is better suited for companies with more shareholders and a structured governance model.

Registration Process

Setting up a company in Costa Rica involves several steps, including registration with local authorities and obtaining the necessary documentation:

• Step 1: Choose a Company Name: Conduct a name search through the National Registry (Registro Nacional) to ensure the desired company name is available and not already in use.
• Step 2: Draft and Sign the Articles of Incorporation: The company’s articles of incorporation outline its operational structure, management, and governance policies. They must be drafted and signed before a notary.
• Step 3: Register with the National Registry: Submit the company’s incorporation documents, including the articles of incorporation, to the National Registry. Upon approval, the company is officially registered and receives a legal entity status.
• Step 4: Obtain a Corporate Identification Number: Register the company with the Costa Rican Ministry of Finance (Ministerio de Hacienda) to obtain a Tax Identification Number (TIN). This number is essential for tax filings and other legal transactions.
• Step 5: Open a Corporate Bank Account: To conduct business operations, you must open a corporate bank account with a local bank. Required documents typically include the company’s articles of incorporation, registration certificate, and TIN.

Key Considerations: The entire registration process can take several weeks to complete. Working with local legal or accounting firms can help navigate the complexities and ensure compliance with regulations.

Setting Up Corporate Banking

Once the company is registered, setting up a corporate bank account is crucial for managing finances, paying employees, and conducting business transactions.

• Required Documentation: Banks will generally require a copy of the company’s articles of incorporation, registration certificate, TIN, and identification documents of the legal representative.
• Choosing a Bank: Costa Rica has several reputable local and international banks, such as Banco Nacional, Banco de Costa Rica, and BAC Credomatic. Choose a bank that aligns with your business needs, considering factors like fees, online banking capabilities, and foreign exchange services.

Key Considerations: Having a local corporate bank account is also necessary for making payroll payments, managing expenses, and fulfilling tax obligations in Costa Rica.