In this article we will explain what a salary is in Nicaragua and we will analyze the legal implication of other types of payments or benefits made to the worker to determine the corresponding tax, labor and social security treatment.
Article 81 of the Nicaraguan Labor Code establishes that “salary is considered to be the remuneration paid by the employer to the worker under the employment contract or employment relationship.” Likewise, article 84 of said code establishes that “ordinary salary is that earned during the ordinary day, which includes the basic salary, incentives and commissions.” Another important article of the Nicaraguan Labor Code on salary is number 86 which stipulates that salary must be paid in legal tender; likewise, that in no case may payment be made with merchandise, vouchers, tokens or other representative signs that are intended to replace the currency.
From the aforementioned legal provisions, we can see that salary is the one paid by virtue of an employment relationship; therefore, payment made under another type of relationship (commercial, professional or general services) must be denominated differently (fees or consideration). In practice, a contract for professional or general services that uses – erroneously – the term salary to define the payment made to the person providing the service could bring the risk that said relationship will be considered as employment and not as services and receive, therefore, the legal treatment established by labor legislation.
The National Labor Appeal Tribunal (“TNLA”) has issued relevant considerations on salary. We mention them below:
(i) Payments or benefits in kind do not constitute salaries. Sentence No. 658/2015 of 12:30 PM on September 21, 2015 confirmed that the benefits given in kind to the worker, such as food or fuel, are not part of the salary, except in the case of domestic workers hired under the modality referred to in article 146 of the Nicaraguan Labor Code. This consideration of the TNLA is useful for those employers who usually give gifts to workers, such as a basic basket, food or any other gift—if the employer gives the amount of these gifts in cash, it will be considered salary; but if the employer buys them and gives them in kind to the workers, then it will not be considered salaries.
(ii) Any sum of money that the worker receives in a constant, effective, continuous, periodic manner and without being subject to accountability, will be considered a salary for all legal purposes, even if said payment is called something else. This was confirmed by Sentence No. 1187/2016 of 1:50 PM on September twenty-first, two thousand and sixteen. This same criterion has been used by the Nicaraguan Social Security Institute (INSS) to consider as salary the travel expenses that are paid to the worker in a constant, effective, continuous, periodic manner and without being subject to accountability, because even though Article 10 of the Regulations of the Social Security Law establishes that travel expenses are not subject to social security, INSS considers that when said expenses are paid as a simulation of salary, with the constancy and characteristics mentioned above, then they will be considered as salary and must be subject to social security coverage.
Additionally, we must keep in mind that any sum of money that is paid to the worker through a payroll, or that is not properly supported as reimbursement of expenses or travel expenses, runs the risk of being considered a bonus or incentive, which, in accordance with article 84 of the Nicaraguan Labor Code, are part of the worker´s salary.
From a tax point of view, the Tax Concertation Law establishes a broader consideration of what income is considered. Article 11 of said law establishes that labor income is income from all types of consideration, remuneration or income, whatever its denomination or nature, in money or kind, including salaries and other income received due to the worker´s position. Therefore, care must be taken and carefully review any payment that must be made to the worker or the benefits that are given to determine if they constitute income and, therefore, apply the corresponding tax withholding. Regarding the benefits granted in kind, although the TNLA has already confirmed that they are not part of the worker´s salary, the Tax Concertation Law does consider them as the worker´s income when said benefits are granted without being contained in a collective agreement (section 4 of the article 19 of the Tax Concertation Law).
We must also keep in mind that the payment made to a person who is hired with any other type of contract other than employment will be considered a salary for all legal purposes, as long as said relationship meets the characteristics of an employment relationship; that is, subordination and economic dependence. In relation to this case we can observe that INSS on many occasions requires the payment of employer-worker contributions even when the parties entered into a contract for
professional or general services, but this requirement is given because INSS considers that said relationship is about a true employment relationship, which generally happens when the contract executed contains elements that are typical of an employment contract (terms such as “salary”, “working hours”, “worker”, etc.) Therefore, it will always be recommended that said contracts are prepared with the assistance of an expert lawyer in this matter.
Finally, as can be seen, in order to avoid labor, tax and social security contingencies, it is recommended to consult with a legal advisor to determine how to pay any sum of money or grant any benefit to the worker.