Stock Options and Labor Risks in Costa Rica

Joaquín Soto, Senior Counsel at ARIAS Costa Rica, expert in employment law, share this article on Stock Options in Costa Rica: the fine line between executive incentives and salary, and their evolution in labor case law.

The Costa Rican labor market has changed profoundly in recent years. The country has consolidated itself as a destination for multinationals in technology, life sciences, finance, and advanced manufacturing, which has led to the adoption of increasingly sophisticated executive compensation plans. Among these, stock option plans, retention bonuses, RSUs (restricted stock units), and other forms of variable compensation linked to global corporate performance are now common elements of executive remuneration packages.

Faced with these increasingly sophisticated and globalized benefits, the courts have had to answer questions for which the Labor Code had no answer: Do the benefits of a stock options plan form part of an employee's salary? Should they be included when calculating statutory severance and other labor rights? What happens if the executive is dismissed before completing the vesting period?

The following sections outline how this type of compensation package has evolved in Costa Rica and what line the Labor Courts have followed.

Overview of executive compensation plans in Costa Rica

In Costa Rica, executive compensation is typically structured across several tiers.

Among these tiers, the most relevant and widely used incentives in multinational executives' compensation plans can be grouped into four broad categories, which are often combined into a single remuneration package:

• Fixed compensation. This is the base salary, the fixed and ordinary remuneration of the executive. It is common for salaries in managerial and specialized positions to be set in US dollars. The case law of Costa Rican courts has validated the practice of paying salaries in a currency other than the national currency, recognizing the freedom to agree on labor obligations in foreign currency when both parties so agree.
• Performance bonuses. This type of benefit is structured as a payment made on previously agreed-upon intervals, linked to the fulfillment of individual or corporate targets. It is probably the most widely used salary supplement among executives. Its legal treatment depends on whether the bonus is habitual and permanent, in which case the courts integrate it into the ordinary salary for the purpose of calculating statutory benefits and other labor rights.
• Various benefits such as life and health insurance, supplementary pension plans, savings plans and company vehicles, tuition for children, housing, and others. High-value non-monetary benefits such as private health insurance, pension plans, discretionary-use vehicles, club memberships, and similar perks are a normal part of executive remuneration packages. Their labor treatment depends on whether they have ascertainable economic value and a regular character, as the courts will include them as salary in kind if they do.
• Stock option plans. Under this type of incentive, the company (employer) allows the beneficiary (employee) to purchase shares of the company at a predetermined price (the strike price) after a vesting period. In Costa Rica they are typically implemented through parent companies or foreign affiliates that grant options directly to the local executive, without the Costa Rican employer entity necessarily being the grantor. The goal is for the executive to think like a shareholder and remain with the organization over the long term.
• RSUs (restricted stock units) and other deferred capital instruments. Unlike options, RSUs do not give the right to purchase shares but to receive them free of charge upon the fulfillment of certain time or performance conditions, which, like stock option plans, are designed to retain the executive within the company for a significant period of time.

The legal issue arises when benefits are regularly included in the compensation package, communicated as part of the appeal of the position, or granted on a repeated basis. In those cases, the discussion ceases to be purely corporate or financial and begins to carry direct labor law consequences.

The central question is simple, but its effects can be costly: Is that benefit genuinely discretionary and non-salary in nature, or has it become a retributive economic advantage for the employee that must be included in the basis for calculating labor rights?

For that reason, we will examine below the legal framework governing compensation plans in general before focusing on the specific case of stock option plans and the treatment that both labor legislation and the Labor Courts have given them.

Legal framework applicable to compensation plans

Every benefit granted to an employee must be analyzed in advance to identify its nature within the employment relationship.

Costa Rican labor law is based on a broad notion of remuneration.

Two basic concepts are therefore of critical relevance to this analysis: salary and salary in kind.

Article 162 of the Labor Code defines salary as "the remuneration that the employer must pay the worker by virtue of the employment contract."

Case law interprets this as any benefit of economic value that the worker receives as consideration for their services, provided there is a correlation with the employment relationship.

For its part, Article 166 of the Labor Code recognizes salary in kind, stating that remuneration of a salary nature may also include that which "... the worker or their family receives in food, housing, clothing, and other items intended for their immediate personal consumption."

This conceptualization of salary in kind is relevant when analyzing executive compensation packages with high-value non-monetary components, since depending on their classification, this could have significant legal consequences.

An incorrectly classified labor incentive would have repercussions on the payment of labor rights, social security contributions, and income tax.

The Second Chamber (Sala Segunda) of the Supreme Court of Justice has complemented these concepts in its interpretations through the principle of primacy of reality, making it clear that in determining whether a benefit has a salary nature, what matters is not the label given by the parties, but its economic reality.

Therefore, in a dispute over whether a benefit has a salary nature, with the burden falling on the employer to clarify its nature and conditions, it is essential to have documentation and consistent practices that allow this to be demonstrated.

This takes on particular relevance in compensation plans that include benefits such as stock option plans.

Why stock options matter in Costa Rica?

According to data from the Export Promotion Agency (PROCOMER), by 2024 more than 600 companies were operating under the Free Trade Zone regime in Costa Rica, with dozens more joining every year. This is just one indicator of how relevant this issue is, not only at the investment level but also in terms of human capital in the country.

Costa Rica has proven highly competitive in areas such as medical device manufacturing, semiconductors, software, and financial services, meaning that competition for specialized talent is intense, competing both among local employers and with remote job offers from foreign companies. For this reason, stock option plans and RSUs are essential talent retention tools, aligning the executive's incentives with long-term corporate performance and creating a natural retention mechanism through cliff vesting or gradual vesting.

For the executive, this is significant. A large portion of their total compensation may come from instruments whose value depends on stock market prices and whose exercise conditions are defined by a plan approved by senior management abroad.

In this context, it has been the courts that have had to apply and interpret legislation conceived for different realities decades ago, in order to align the legal framework with a globalized and competitive environment.

Absence of specific regulation for stock options and their treatment in case law

Costa Rican labor legislation contains no specific rules for stock option plans or other equity-based compensation instruments. While the debate around this topic has been more limited than in other countries, it is undeniably relevant today.

Faced with this gap, the courts have developed jurisprudential criteria that have set the standard for the classification of stock option plan benefits.

The evolution of the jurisprudential treatment of this type of plan has been cautious on the part of the Second Chamber.

As early as the year 2000, the Chamber was already analyzing the first litigated cases involving additional benefits granted to an employee under which, given a set of conditions, the worker could acquire shares of the employer company.

From that moment, the court applied the principle of primacy of reality without hesitation.

By 2008, in Vote No. 94-2008, the Second Chamber issued the following criterion defining the non-salary character it attributed to stock option plans:

"... Regarding the option to purchase shares, these have generally been denied salary character — much less salary in kind — insofar as they represent a gain generated through stock market activity and not as a product of the intellectual or physical effort deployed by the worker. Among the circumstances for which salary status has been denied are: a) the reward is potential, possible and not certain; b) it may generate losses or gains; c) there is no regularity; d) it is variable according to market supply and demand; e) the gain is variable; f) it is not necessarily of a subsistence character; g) it is convertible; and h) through them one speculates in order to profit ..."

In this way, the characteristics weighed by the Chamber to determine the nature of the benefit were gradually taking shape.

This inclination to deny salary status to these plans was maintained over the years.

Through Vote No. 502 of 2011, the Chamber once again made clear that stock option plans are non-salary in nature. On that occasion the Chamber reiterated what was stated in Vote 94-2008, expressly referencing it, and additionally noted that in that particular case the plan consisted of an expectation of transfer of a percentage of shares, and therefore had no salary nature.

The case law distinguished two types of benefits: those that the worker can reasonably expect as habitual consideration for their work, which do integrate into salary, and those that depend on factors external to the worker's performance, such as the stock market price of the shares.

This was relevant to stock option plans, where the Second Chamber acknowledged that the value of the benefit at the time the option is exercised depends on the market price of the share, something entirely external to the employment relationship and to the employer's will.

By 2016, the Second Chamber maintained its jurisprudential line.

Through Vote No. 856-2016, the court, as it had done in 2011, again cited the criterion set out in Vote 94-2008, maintaining that stock option plans are benefits of a non-salary character. It reiterated that these carry "... a potential, possible and uncertain reward, that there is no regularity, and that the losses or gains they may generate depend on market supply and demand, and that through them one speculates with the intent to profit ..."

It additionally emphasized that they constitute "... an expectation of obtaining a stake when a maturation period arrives ..."

In light of the foregoing, vesting or maturation periods, as well as their adequate documentation, take on great importance when structuring these benefits.

The various court rulings provided companies with clarity on which elements to build into the terms of stock option plans to reduce the risk of options being added to the salary base.

In a recent ruling, the Second Chamber, through Vote No. 2086-2025, while not reviewing a traditional stock option plan, analyzed a restricted stock unit (RSU) plan.

The Chamber established that this type of plan does not generate enforceable rights for the worker if the vesting conditions and other contractually agreed conditions have not been met, even where the termination of the employment relationship occurs with employer liability. In doing so, the Chamber made clear that the determinative factor in these cases is the terms and conditions previously accepted by the worker, which provides companies with solid legal backing when their plans are properly documented.

This ruling confirms that equity-based compensation plans with conditional clauses are legally sustainable in Costa Rica, provided they are clearly drafted and formally accepted by the employee.

Notwithstanding the Chamber's consistent line over the years, this should not be read as an absolute rule.

The fact that certain stock option plans have not been considered salary in specific cases does not mean that any equity-based compensation plan is automatically excluded from the salary base. The analysis will continue on a case-by-case basis. The courts will review the structure of the plan, business practices, communications to the employee, the frequency of grants, the relationship to performance, and other factors.

For this reason, the primary mistake would be to assume that merely labeling a benefit a "stock option," "RSU," or "equity award" is sufficient to exclude it from being considered salary in nature.

Recommendations for structuring compensation plans in Costa Rica

Precise contractual documentation

The first step in any risk management strategy on this issue is contractual documentation.

All documentation, including job offers, employment contracts, internal policies, and award letters, must clearly explain whether the benefit is conditional, the vesting mechanism, the cancellation conditions upon termination of the employment relationship, and other relevant terms.

Plan design with awareness of local law

Multinational companies implementing global plans must consider local implications when designing vesting acceleration terms, cliff periods, and exercise conditions following dismissal.

The conditions that apply in one jurisdiction can have serious implications if applied in the same way in another country, as their treatment may be fundamentally different.

Therefore, prior to implementation in a given country, it is important to review the implications for labor rights, social security contributions, and taxes.

Structural separation between ordinary salary and equity-based compensation

It is advisable to maintain a clear and documented separation between fixed and ordinary variable compensation components, which will always form part of the basis for calculating statutory benefits and other labor rights, and the capital-based instruments whose value depends on the stock market.

Conclusions

Stock option plans and other equity-based compensation schemes are valuable tools for attracting and retaining executive talent in Costa Rica. Their corporate utility is evident: they allow for the alignment of incentives, foster long-term relationships, and tie the executive to the company's value. However, their implementation demands caution and precision.

While the jurisprudential line over the years has consistently held that stock option plans do not have salary status, this should not be taken for granted from the outset.

The sustained trend of Costa Rica's Labor Courts demonstrates that when conducting their analysis, the courts do not stop at the name of the benefit. They analyze its economic reality, its function within the employment relationship, and the manner in which it was granted.

Therefore, the determination of whether stock option plans have a salary nature or not will always depend on the specific characteristics of the plan.

In an increasingly competitive market, high-level executive compensation will continue to grow. The difference between a strategic tool and a labor liability will depend on its design, documentation, and execution.

The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, and does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.