If you are an entrepreneur in Nicaragua and among your short- or long-term projects is the acquisition of another company’s operations—whether through merger by absorption, the formation of a new entity, or a simple acquisition of assets and assignment of rights—or if you wish to hire your personnel through another company within your corporate group as part of a commercial or tax strategy, it is essential to understand the scope of the concept of “Employer Substitution” as provided under the Nicaraguan Labor Code.

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Normally, these types of transactions affect employment relationships. For instance, when an entrepreneur (A) acquires another company (B) whether they are natural or legal persons (B) commonly proceeds to terminate the employment of its personnel so that the acquiring party (A) may decide whether to rehire them or recruit new employees. Of course, this applies only when there is no sale of the employing entity’s shares.

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However, if the buyer wishes to retain the personnel of the acquired operations, terminating those contracts and signing new ones increases the cost of the transaction, making the payment of accrued labor liabilities (such as accumulated vacation and proportional thirteenth-month salary) immediately due, as well as creating new obligations, such as the seniority severance established in Article 45 of the Labor Code.

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In such cases, it becomes crucial to understand the concept of employer substitution, which allows for the transfer of the employer’s contractual position—from company (B) to the acquiring company (A), without the need to terminate existing contracts, and without increasing the sale price or reducing the transaction’s profitability for the seller. In this sense, the figure of employer substitution enables the maintenance of the same conditions established in the original employment contracts, under which all accrued employment benefits must be recognized by the new employer, without being immediately payable to the employee.

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Although Nicaraguan legislation does not define “employer substitution,” doctrine offers guidance. In this regard, Plá Rodríguez states that employer substitution constitutes a subjective novation of the employment contract; that is, a change in the employer’s position, the replacement of one employer by another (cited in Puntriano, 2020).

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1. The terms and conditions of the contract signed between the transferring employer (B) and the employee remain in force; therefore, the employee will continue to accrue employment benefits in accordance with the law. As stated in Judgment No. 77 of the Court of Appeals of Managua, in cases involving the transfer of an employee from one company to another and the substitution of the employer, the employee retains all labor rights.

2. The substituted or transferring employer (B) is jointly liable with the new acquiring employer (A) for a period of six months; that is, the employee may claim the obligations arising from the transferred employment relationship from either the former or the new employer.

3. After the six-month period has elapsed, responsibility for the obligations derived from the employment relationship will rest exclusively with the new employer.

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On the other hand, Nicaraguan legislation does not establish how the substitution of the employer should be formally executed. However, Puntriano (2020), recognizing the bilateral nature of employment contracts, suggests that this type of substitution should be carried out through an agreement among the transferor (B), the transferee (A), and the transferred party (the employee).

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This agreement may take the form of a personnel transfer contract, in which it is expressly stated and agreed that the terms and conditions of the original employment relationship will remain in effect, unaltered despite the substitution of the employer.

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Finally, it is worth noting that in practice, it is common to find cases where this substitution is supported solely by an agreement between the former employer (transferor) and the new employer (transferee), without expressly including the employee’s consent in the contract. Nevertheless, by continuing to provide services to the new employer, the employee implicitly expresses acceptance of the agreement between the employers.

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Notwithstanding the above, in order to mitigate risks that may lead to labor claims and to ensure the retention of key personnel essential for the continuity of acquired operations, it is advisable to execute a tripartite agreement involving all three parties, to be included as part of the acquisition terms and to clearly define the scope of the transfer.

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If you wish to gain a deeper understanding of this concept, as well as strategies to maximize the efficiency of such operations or other matters affecting your personnel, our advisory team at BMR is ready to provide solutions and protect your business. More than advisors, your business allies!