Back to BlogThe hidden cost of non-compliance when hiring in Latin America (and how an EoR solves it)
Latin America offers a wealth of opportunities for global businesses, boasting a skilled workforce and expanding markets. However, the region’s diverse and evolving labour laws also present significant challenges to hiring compliance.
Its informality rate of 47.6% in 2024 means nearly half of the workforce operated outside formal employment structures—increasing the risk of non-compliance for employers.
Employer of Record (EoR) solutions provide a strategic approach to mitigate such challenges. Overall, EoRs offer a safe, swift, and scalable means to ensure hiring compliance across Latin America by managing legal employment responsibilities.
Understanding hiring compliance in Latin America
Non-compliance can result in substantial financial penalties, reputational damage, and operational delays. However, 41% of companies in the region still reported losing business opportunities to competitors engaging in various illegal practices. This shows that non-compliance is still rampant in the region.
What is compliance in hiring?
Hiring compliance means meeting all legal requirements when employing workers, from issuing proper contracts and classifying workers correctly to managing payroll taxes, benefits, and adhering to labour laws. In the LATAM region, specifically, this includes obligations such as minimum wage, paid leave, working hours, and severance pay.
Why does compliance vary widely across the region?
Labour laws differ widely across LATAM, making compliance a country-by-country challenge. Key differences include:
- Brazil: Requires 13-month salary, severance (FGTS), and formal employment under CLT laws.
- Mexico: Limits outsourcing and mandates employer responsibility for tax and benefits.
- Colombia: Requires dual registration with pension and health systems, as well as strict termination rules.
- Argentina: Enforces union agreements, frequent wage updates, and costly severance.
- Chile: Requires electronic contracts and offers severance based on legal tenure.
With no regional standard, companies face a complex and shifting legal landscape, making local expertise essential for hiring compliance.
The hidden costs of getting compliance wrong
Failing to ensure proper hiring compliance in LATAM can quietly, yet significantly, drain business resources—time, energy, and finances.
While some risks may appear manageable at first glance, the long-term consequences (legal, financial, and reputational) can be far more damaging than anticipated. Below, we outline the most common and costly compliance pitfalls.
1. Misclassification and retroactive penalties
Improperly classifying workers as independent contractors rather than employees can trigger significant liabilities, often applied retroactively. Consequences include mandatory reclassification by authorities, which may result in mandated employment status and backdated benefits. Additionally, there are corresponding fines and penalties for non-payment of social security, health, and pension contributions.
Hiring parties remain obligated to pay owed benefits, including paid leave, bonuses, and severance for the full period of misclassification. Finally, there may be legal disputes that may lead to court-ordered compensation or reinstatement.
2. Payroll and tax missteps
Incorrect payroll processing and tax filing are common when employers operate without local expertise. Frequent errors include:
- Late or incorrect tax submissions, leading to interest charges and government fines.
- Failure to comply with statutory bonuses, such as the 13-month pay required in Brazil and other countries.
- Underpayment of social security or pension contributions, resulting in penalties and required back-payments.
- Overlooking mandatory local benefits, such as transport stipends or meal vouchers.
When these errors are called out by authorities, the situation hassles employers and contractors. On the other hand, working with experienced EoRs completely removes the burden of making these mistakes.
3. Disruption, remediation, and reputational fallout
Beyond direct costs, enforcement actions and compliance failures can cause widespread disruption and long-term damage.
For example, there will be operational delays from audits, legal proceedings, or forced changes in workforce structure. These delays can cause a chain reaction—resulting in loss of business opportunities due to reputational damage or failed vendor due diligence.
Other consequences are costly remediation (including legal fees, compensation agreements, and the need to restructure teams) and erosion of employee trust, particularly in markets where job security and benefits are highly valued.
Case in point: The Mexican labour law shift
Mexico’s 2021 labour reform marked a major shift in the country’s employment framework, particularly around outsourcing. The introduction of the Registro de Prestadoras de Servicios Especializados u Obras (REPSE) registry now requires companies offering specialised services to register and adhere to strict compliance rules.
Key impacts of the reform:
- The form banned outsourcing of core business functions. Only genuinely specialised services may be outsourced, and providers must be officially registered with REPSE.
- Companies using non-registered service providers may be held jointly liable for all associated labour, tax, and social security obligations.
- Payments to unregistered providers are non-deductible for tax purposes, exposing businesses to financial risk.
EoR as a strategic solution
In response, many companies have turned to EoR solutions to maintain hiring compliance while continuing operations in Mexico. An EoR serves as the legal employer, assuming responsibility for payroll, statutory benefits, tax remittances, and local labour law compliance.
- With an EoR, companies can ensure compliance at no hassle. EoRs remain up to date with local employment laws and practices, which reduces the risk of violations.
- Thus, risks are minimised as EoRs basically shield companies from fines and liabilities by handling legal employer obligations.
- Additionally, EORs streamline cross-border hiring, allowing businesses to scale quickly without setting up local entities.
Mexico’s reform highlights how quickly labour laws can change, highlighting the high stakes of non-compliance. EoR solutions provide a reliable, adaptable path forward.
How EoR solves the compliance puzzle
Hiring across LATAM comes with a patchwork of legal obligations, local customs, and administrative demands. It can be daunting, and often, business owners being drowned in compliance and administrative tasks.
EoR services offer a clear, compliant, and scalable solution by providing companies with ready-made infrastructure to legally hire and manage talent in any LATAM country, without needing to set up local entities.
What is an Employer of Record (EoR)?
An Employer of Record (EoR) is a third-party service provider that legally employs workers on behalf of another company. While your business manages day-to-day tasks, the EoR assumes responsibility for employment compliance—including contracts, payroll, tax filing, and benefits administration, ensuring all are fully aligned with local laws.
How EoRs ensure local compliance
EoRs navigate the legal and regulatory landscape of each country, ensuring full hiring compliance by managing:
- Locally compliant contracts, tailored to country-specific labour laws and updated accordingly as legislation changes.
- Accurate payroll processing, including statutory bonuses, tax withholdings, and national contributions.
- Mandatory benefits management, such as social security, pensions, health insurance, and paid leave.
- Proper worker classification, helping avoid misclassification penalties and reclassification audits.
- Onboarding and offboarding procedures, aligned with local requirements to minimise legal exposure.
Operational and legal relief for internal teams
EoRs offer critical support for internal teams by offloading the complexities of what is compliance in hiring:
- HR and legal teams are freed from having to research and monitor labour law changes across multiple jurisdictions.
- Avoid missteps that can result from unfamiliarity with local regulations or administrative practices.
- Faster market entry with reduced operational burden, enabling businesses to focus on growth, not red tape.
- Lower risk exposure, with the EoR absorbing employer liability in the target market.
In short, an EoR acts as both compliance shield and strategic enabler, helping businesses build LATAM teams confidently and compliantly.
Comparing the cost of compliance vs. non-compliance
When entering Latin American markets, some companies hesitate at the cost of compliant hiring support. But the true cost lies in getting it wrong. Using an EoE may involve upfront investment, but it’s a fraction of what non-compliance can ultimately cost. Here’s how the numbers stack up:
What is included in the cost of compliance with an EoR?
- Predictable monthly fee per worker
- No need to set up a local entity or hire local legal or payroll teams
- Fast market entry and reduced time-to-productivity
- Risk mitigation built into the service
- All contracts, benefits, and taxes handled accurately from day one
What is the true cost of non-compliance?
- Fines and penalties for misclassification or late tax payments can pile up as these are often backdated with interest
- Retroactive benefit liabilities, including unpaid bonuses, leave, and severance
- Legal fees and remediation costs from audits or labour disputes
- Delays in hiring or operations due to regulatory issues
- Reputational damage, which may affect partnerships, funding, or market trust
When to use an EoR in Latin America
For many companies, the real strategic value lies in knowing when to engage an EoR to navigate it. EoRs are especially useful in scenarios where speed, flexibility,m and compliance are essential. Here are common business cases where EoRs are not just helpful, but crucial.
1. Market entry without a local entity
When expanding into a Latin American country for the first time, setting up a legal entity can take months and significant investment. An EoR allows businesses to hire locally and start operations in weeks—without the overhead or red tape. They can get started right away and hit the ground running.
2. Lean or scaling teams
Startups, scale-ups, or multinationals piloting operations in LATAM may not have the internal resources to manage complex compliance requirements. EoRs provide immediate infrastructure, helping lean teams stay compliant while focusing on growth.
3. Exploratory or short-term hiring
Whether testing a new market or hiring for a time-bound project, an EoR enables businesses to bring on local talent legally, without long-term commitment or administrative burden.
4. Risk management during change
In periods of corporate restructuring, post-acquisition transitions, or shifting legal landscapes (as seen in Mexico’s labour reforms), EoRs offer stability and ensure uninterrupted compliance.
5. Bridging until entity setup
Even when a company plans to establish a legal entity, using an EoR as an interim solution ensures hiring compliance and business continuity while the setup is finished.
Avoid costly mistakes in LATAM hiring with the right EoR
LATAM offers vast growth potential, but it comes with complex and shifting compliance requirements. Getting hiring compliance wrong can lead to fines, liabilities, and lost time. Even minor missteps can disrupt operations and damage your reputation.
With CXC Global’s EoR services, you can hire across LATAM quickly and legally, without setting up local entities or navigating every regulation yourself. Whether you’re testing a new market or scaling long term, CXC is ready to go the extra mile.
We provide the local expertise and compliant infrastructure you need to expand with confidence—contact us today!
