One of the first steps towards the formalization and growth of any microenterprise is insuring its first employee—but for many entrepreneurs in Costa Rica, current regulations prohibit this basic achievement.
According to the Institute of Statistics and Census (INEC), Costa Rica was home to 454,650 microenterprises in January 2022. In 95.4% of these, “the producer works alone, with their partners, or with people who help them occasionally or on an unpaid basis.” Only the remaining 4.6% were companies with formal employees.
That is the reality of our company, El Colectivo 506, and many of the other small businesses in our Emprendedores 506 community. Our two founding members are the company’s only permanent workers; we can only occasionally hire other professionals .
The question is, do the two of us have an employment relationship with our own company?
Is our Sociedad Anonónima (S.A.), El Colectivo 506’s legal entity, an employer when only its founding members work?
Or, because we are founding members and shareholders of the company, can the two of us not be considered workers—nor our S.A., an employer?
There should only be one answer to these questions, but the reality is that in Costa Rica, it depends on who you ask. According to the Costa Rican Social Security Fund (la Caja), a shareholder, legal representative or partner cannot be an employee of their own legal entity, such as an S.A., because people cannot be subordinate to themselves. Sure enough, when we tried to register El Colectivo 506 as an employer with the Caja, the system indicated that it is not possible to register members or shareholders as employees.
So we backtracked. And according to the participants in a recent virtual “cafecito” in our WhatsApp community, Emprendedores 506, we are not alone. Many entrepreneurs in Costa Rica cannot register their company as an employer with the Caja because of this requirement.
This has consequences for the owner-employees, since they are not insured—but also for the government, since they do not have a real record of their micro-enterprises.
However, according to labor lawyer Viviana Sánchez Lanzony, the Caja could be off base in its criteria.
The employment relationship according to labor law
Viviana explains that for the connection between a entity and a worker to be considered an employment relationship, four components must be met:
- The “personal provision of the service.” That is, the service is provided by the person who was hired, with no subcontracting.
- The “periodic payment of a salary” as remuneration for this service, which is normally sustained over time.
- The “element of subordination.” The people who provide the service have to follow orders and instructions, can be supervised, and can even be sanctioned if they fail to comply with their obligations.
- And finally, alienation, or ajenidad. “This means that the worker does not take part in the risks of the company,” says Viviana, explaining that the salary of the worker will not be put at risk due to the consequences of the company’s financial decisions.
However, Viviana explains that when it comes to a owner-employee—as labor law calls these people who have shares and legal representation within their companies, and also provide personal services and receive a salary—the employment relationship does exist, but the nuances make this “a gray area”.
To explain this, Viviana starts with the most basic element.
“There are physical [natural] and legal persons,” she says. “The second [entities, or personas jurídicas] are entities that can make contracts, do business, hire people. They have many similarities to natural persons… they have rights and duties, and they also assume responsibilities for their actions and for their business.”
However, as we know, a legal entity needs a natural person to represent it and to carry out its actions. It is common for the legal representatives of companies to be both shareholders, and the people who carry out many of the daily tasks.
“Being the legal representative does not mean that a person assumes all the responsibilities of the company,” says Viviana. “That legal representative only acts on behalf of the company. The person is not infinitely linked to the legal entity, which can hire any natural person for work. You can hire your own shareholders and legal representatives… The legal person is distinct and separate from the physical person who represents it.”
That’s where that gray area that Viviana talks about begins to exist.
The gray area of the owner-employee
Viviana says that the Second Chamber of Costa Rica’s Supreme Court of Justice—a body that resolves conflicts related to labor law—has issued several rulings establishing that partners can be workers within the same company, as long as they meet a key condition: the owner-employee must have less than 49% of the shares of the company.
“If they have 51% of the shares, it is understood that they are the majority shareholder and can make the decisions,” says Viviana. She explains that in that situation, subordination ceases to exist.
The Second Chamber’s Resolution 2011-000285, from the year 2011, states that “the jurisprudence has considered that the owner-employee who has effective control of at least half of the social capital is configured as a self-employed worker.”
When the owner-employee has 49% of the shares or less, she cannot make all the decisions of the company, and could be fired by the rest of the shareholders, thus showing subordination.
When it comes to alienation, the area is even grayer.
“Because they also receive profits from the business, so they are no longer so alien, bringing this into question,” says Viviana. However, she says that when the owner-employee has a minority of the shares, the fact that the person provides a personal service to the company and can be penalized for not doing that job well increases their separateness from the company.
So, what do we do when the Caja says that partners cannot be employed?
The 2022 INEC report indicates that 57.7% of all microenterprises in Costa Rica “are not registered with any public entity.” What’s more, “67.0% do not have social security for the owner.” We cannot know how many of these uninsured workers are caused by the Caja guidelines on owner-employees, and how many of these entrepreneurs are simply seeking to reduce costs and increase their capital by putting off insuring a worker. What’s clear, though, is that this has an impact on social security and the future pension of these entrepreneurs.
Viviana says that “the Caja shouldn’t make these kinds of decisions. They are violating a fundamental [labor] right of people who do not have more than 50% of the shares.”
During the conversation with Viviana, we pondered the reality of other legal figures that carry out commercial activities and that make their workers shareholders.
“What about the shareholders of cooperatives?” Viviana asked. “They also work for the cooperative, so does that mean they don’t have any labor rights?”
Viviana says she believes that some other state institution should correct the Caja to include these gray areas. Based on her experience, one way to start this process is for an entrepreneur who has been denied insurance as a owner-employee who is not a majority shareholder to present his or her case to the Caja and ask for administrative criteria as to why it does not allow partners to appear before it as employees of their companies. If this does not lead to a change within the Caja, “then let a judge [of the Second Chamber] decide who is right.”
As for El Colectivo 506? We’ve learned that even though we are not majority stakeholders, we still cannot consider ourselves owner-employees because of something else we’re lacking. Our company still does not have the financial sustainability we’ll need to comply with the second component of our labor relationship: consistent payment of a salary.
However, if you are an entrepreneur who does meet the conditions to enter the gray zone of the owner-employee, tell us! Are you ready to enter into this conversation?
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