Settling Employee Conflicts in SECLO

I sometimes think the employee/employer relationship in Argentina is set-up to deliberately generate conflicts. As an employer, you will find that it is only a matter of time until these labor conflicts rear their ugly head. When they do occur, the best option is to resolve them quickly, removing the employee and ensuring that the employee's legal options are limited.

As any employer in Argentina will tell you, labor conflicts are expensive. I know Argentines who have purchased apartments with the money they have won in labor disputes. Worse yet, every employee knows that the labor court judges are on their side and that employees win well over 90% of labor lawsuits.

After deciding to remove an employee, if you can come to an arrangement with him or her, a good option to use is the Labor Ministry's SECLO (Servicio de Conciliación Laboral Obligatoria) service. You will need to put the agreement in writing, fill out a form to request a date, and go personally with the employee to the Labor Ministry at Callao 110. Both the employee and the employer should be represented by council. In practice, two lawyers from the employer should be used to avoid complications. If you allow the employee to bring his own lawyer, you're just opening a door to further claims.

At the end of this process, the Labor Ministry will endorse the signed agreement and it becomes equivalent to a court judgment. The employer is obligated to pay the amount agreed upon and the employee gives up his or her right to any future legal remedies against the employer. It is important to note that the employer never admits to any kind of guilt or responsibility in these agreements, so they cannot be used as proof for other claims by third parties (i.e. the tax office, social security agency, other employees, etc).

Settling Employee Conflicts in SECLO

Independent Contractors vs. Employees

We have a question that comes today about hiring employees vs. independent contractors.

Reader's Question
Can a US company that does not have a legal presence in Argentina hire an independent contractor (argentinian national or other national) to do work in Argentina on behalf of a global contract. Client’s client wants some temporary work performed in Argentina. Can client craft an IC contract or insist that the Argentinian national become a sole proprietor and not end up as a defacto employee. This could be occasional work, eg auditing.

I am aware some countries are very strict about IC arrangements and therefore deem IC’s employees and then end up resulting in permanent establishments for tax purposes. I am aware Argentina is fairly pro labor.

How to Set-up an Independent Contractor Arrangement in Argentina
The proper way to setup this arrangement would be to ask the worker to register either as a monotributista or in the regimen general (depending on how much he will be charging). After that, he'll need to register as an exporter with the customs office (since he will be performing services for export). This second step wouldn't be necessary if the company had a presence in Argentina.

Each time he needs to receive a payment, he will issue you an invoice with an "E" (for export) at the top. These invoices are numbered starting at 00000001. You can then wire transfer the funds to his account and he can collect the funds by presenting his copy of the "E" invoice to his bank.

Independent Contractors vs. Employees
Even though you may ask him to sign an independent contractor contract, in Argentina, labor rights cannot be renounced willingly by an employee. The labor courts can very well rule that your arrangement is a simulated independent contractor arrangement and that it was being used to cover up the employee/employer relationship. This is something that happens frequently in Argentina due to the fact that it is extremely costly to maintain employees on the payroll (due to social security charges).

How does the court determine if the employee is actually an independent contractor? The same way they do in the United States. They look to see whether you were the only employer of this person (i.e. checking the invoices). If you are receiving sequentially numbered invoices from the worker, you know that you are the only employer and you're putting yourself at risk. If you are paying monthly invoices that always have the same amount, it looks like a wage instead of pay for a specific work product. They also look to see where the work was performed, who provided the materials to complete the work, whether the worker was directed in his work, or whether he worked independently and was paid for a finished product.

Incentives For The Worker to Be Classified as an Employee
It will almost always be in the worker's interest to be classified as an employee rather than an independent contractor since the company will be responsible for providing a health plan and paying the social security charges.

There's also another important point. An employee in Argentina is entitled to mandatory severance pay when he is fired or laid off. An independent contractor is not entitled to anything when the contract ends.

If your company had a presence in the country and assets in Argentina, the worker could very well sue at the end of the contract and try and get the courts to declare that he was an employee. He would be demanding the company then make all the back payments for his social security plus pay him the required severance pay.

Practical Advice
Practically, I don't see this happening due to the fact that no employment lawyer here is going to take on a lawsuit against a foreign company with no presence or assets in the country. I just don't see it happening. My recommendations to the company would be to ensure that the invoices it receives are not sequential, that it structures the pay to be on a per job basis instead of a monthly basis (and for different amounts), and that the worker sign a contract with jurisdiction for all disputes being your jurisdiction rather than Argentina. If there ever was a dispute by the employee in Argentina you may be able to get the courts here to throw out a claim due to the jurisdiction clause.

Independent Contractors vs. Employees

Hiring Argentine Employees

In Argentina, taking on an employee is serious commitment. You can't hire and fire employees from one day to the next as you can in the United States, Australia, New Zealand, and other countries that have freer employment markets. In addition to punishing social security taxes, Argentine employees have a series of government-mandated perks, benefits, and severance that raises the overall non-wage costs of employing them. Add that to the fact that all non-professional Argentine workers are automatically union members and covered by collective bargaining agreements and you will see why any prudent businessperson will think twice before hiring.

In fact, the World Bank ranks Argentina 130th out of 181 total economies worldwide for labor market flexibility. Entrepreneurs coming from the United States will be in for plenty of nasty surprises, given that the United States is the freest labor market in the world (ranked #1 by the World Bank). Investors from Europe and other socialist democracies will be more familiar with the kinds of restrictions that Argentina places on its businesses and the benefits that are provided for workers.

Argentina Employee Benefits

• Mandatory paid vacation
• Paid sick leave
• Paid maternity leave plus unpaid leave after the paid maternity period
  
• Days off with pay for "life events" such as the birth of a child, death in the family, etc.
• Mandatory severance pay if an employee is downsized or fired without just cause
  
• Overtime pay / double overtime pay
• Thirty days advance notice before termination
  

Things Employers Can't Do In Argentina

• Reduce an employee's wage, even in times of hardship for the company
• Hire workers on fixed-term contracts, unless they can prove the work is not permanent (i.e. seasonal work)
• Employ minors for night work
• Suspend workers for more than 30 days in a year (75 days if the causes are due to force majeure)
• Pay workers in cash or by check (except in special cases, all salaries must be deposited in an employee's bank account and it is the responsibility of the employer to open the account on the employee's behalf)
• Fire the union delegate during or 12 months after his or her term (which of course leads to extreme abuses by the union delegate, including unjustified absences from work, extreme laziness and sloppiness in the performance of their duties, etc.)

Things To Expect

• Random announcements from the government and labor unions, raising salaries unilaterally and without regard to your business' situation
• Employees who expect constant raises based on seniority and cost of living adjustments, without regard to their individual performance

Larger Companies Should Also Expect

• Union agitation
  
• Annual audits by unions
• Labor inspections by the government
  

Trial Period
After hiring an employee, the employer has a three month grace period to determine whether or not an employee will incorporated definitively. During this period, the employer may fire the employee without cause and without paying required severance pay. Employers must use this time effectively to determine not only whether the employee is performing adequately, but to verify that the position itself is actually needed. Due to the extreme costs of downsizing, in Argentina it is usually better to have a department or sector slightly overworked and with a slight worker shortage than to maintain a sector with more workers than needed.

Personal Thoughts
In my own personal experience and from what I have seen in most Argentine businesses, adding additional employees is typically a last resort after every other solution has been tried (i.e. reorganizing the workload, overtime, temporary staffing, etc).

Coming from a country with the world's most dynamic and flexible labor market, I can't help but make the observation that the Argentine system not only contributes to high unemployment, it also causes companies to grow slower and less aggressively. Nevertheless, most Argentine workers (like most Europeans) would not choose to give up their job protections and benefits for the sake of a more dynamic labor market. Workers guard their labor rights jealously and don't be surprised if you have Argentine workers telling you what they are entitled to.

Hiring Argentine Employees