Formalization as a Path to Growth: The Importance of documenting Labor Contracts in Guatemalan Entrepreneurship  

Alegalis - In the context of entrepreneurship in Guatemala, labor formalization is often a neglected stage, despite its strategic importance. Although many entrepreneurs opt for verbal contracts when initiating labor relations because they are more agile and economical, this can be risky in the long run.

The use of written contracts provides legal certainty, makes it possible to clearly delimit rights and obligations, and facilitates the calculation of severance pay in the event of dismissal. In addition, Guatemalan labor law is governed by the principle of indubio pro operario, which reverses the burden of proof in favor of the worker, making the written contract an essential defense tool for the employer. Failure to comply with formal obligations, such as registering contracts with the Ministry of Labor and affiliating workers to the IGSS, may result in legal sanctions. Therefore, it is recommended that entrepreneurs properly document labor relations from the beginning and seek specialized legal advice to avoid conflicts and future sanctions.

Within the context of entrepreneurship in Guatemala, entrepreneurs commonly face financial, logistical and many other obstacles in order to start and consolidate their respective businesses. One of the main initial challenges of all entrepreneurship is formalization.

This is usually done by creating a solid legal structure for the business. However, in many occasions it is overlooked the fact that, with the incorporation of a corporation, the different steps of the formalization of a business do not end. One of the most commonly overlooked in the initial stages is compliance with the labor regulations dictated by the Guatemalan Labor Code.

The Guatemalan Labor Code indicates that labor relations can be formalized through verbal contracts or written contracts. And in the great majority of occasions, entrepreneurs, in their beginnings, decide to use the figure of the verbal contract to formalize these relations with their first collaborators, due to the fact that it can be less costly and less time-consuming.

However, the fact of having a written labor contract within a plurality of circumstances provides great clarity and legal certainty, mainly for the entrepreneur, who in such relationship acts as employer.

In fact, such legal certainty may also translate into the saving of a future cost, even if it is not easily perceptible at the beginning. The reality is that employment relationships are uncertain. The entrepreneur may think that a relationship will be of very long duration and, along the way, realize that there are certain characteristics of the worker that are incompatible with the functions to be performed or that provide a conflictive aspect in the work environment.

Based on the above, there will be situations where liquidating a worker may be the best for the enterprise, and it is at that moment where the cost savings mentioned above are reflected. By having a written and duly registered employment contract, it is possible to clearly define the rights and obligations of both parties. Likewise, it is possible to obtain certainty regarding the salary prescribed by the employee, the moment in which the labor relationship as such began, being these factors fundamental to calculate the severance indemnity to be granted to the employee.

In addition to the above, it is also important to highlight that within labor law there is a legal principle of utmost importance, known as indubio pro operario (in case of doubt, in favor of the worker), and it is based on this principle that everything indicated by the worker is presumed to be true, generating a reversal in the burden of proof, so that, unlike civil or commercial proceedings, it is the employer who must prove that the factual propositions mentioned by the worker are not true. The proof par excellence for this purpose is the written contract. It is also important to point out that registering individual employment contracts with the Ministry of Labor and Social Security is one of the main formal obligations required by labor law and, consequently, failure to comply with these formal obligations could lead to different penalties. The same occurs with the registration of the employee with the Guatemalan Social Security Institute, which also has other practical consequences considering that based on this the deductions established by law must be made.

In conclusion, without prejudice that it may mean a delay in some of the hiring of the labor force of the enterprise and an additional cost that at the beginning of the long path of the entrepreneur may be relevant, it is of utmost importance to make the necessary formalizations with the corresponding workers, since this not only provides legal security to the employer, which may mean cost savings in the future, but also presupposes compliance with the formal obligations dictated by the labor law in Guatemala, which serves as a preventive means to avoid fines and other sanctions established by law. For this purpose, it is also recommended to always rely on legal advisors so that they can give comprehensive recommendations regarding these particular points.

Author: José Dougherty

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