Terminating employment is never something to be taken lightly, but doing so in a country other than the US can bring its own unique headaches. As Danielle Urban, a partner in the Denver office of Fisher & Phillips LLP, noted: “The US model of employment-at-will is uncommon in the rest of the world.” Urban specializes in foreign HR and employment law issues.
So what’s the deal in Latin America? Labor law across the region differs considerably, but there are some similarities across borders. Responses to layoffs differ widely as well, although there is always negative publicity. IBM Argentina’s 2012 layoffs resulted in threats of union action, a cry repeated in 2014 when Alliance@IBM compiled reports of more than 3,300 layoffs in IBM offices abroad, including 1,500 reportedly let go in Brazil and 600 in Argentina. In contrast a US printing company that closed a plant and laid off workers in Argentina in 2014 was accused of terrorism by the government. Caution is key in ensuring that layoffs are done in the best possible way.
Check the Contract and Statute
According to Urban, although employment law in Latin America varies widely, in general employment is contract-based. “Prudent employers should check employee contracts before taking any action, and should also consult any collective bargaining agreements that may be in place and would govern terminations and layoffs,” she said.
She warned that government regulations may place other responsibilities on those wanting to terminate employment. For example, some countries in Latin America, such as Colombia, require permission or notification with the government prior to implementing employee layoffs over a certain size. In the Dominican Republic, the Labour Department must be notified within 48 hours of the dismissal.
In some countries, government programs to reduce layoffs are in existence. Brazil introduced a new employee protection program, Programa de Proteção ao Empregado (PPE), in July, “to allow eligible companies to temporarily reduce working time in order to reduce labor costs and retain staff in lieu of layoffs or collective dismissals,” according to Towers Watson.
In a report on the new program, Towers Watson noted: “Under Brazilian law, dismissal of employees is generally very expensive, and reductions in wages, even on a voluntary basis, can be very difficult. Allowing companies to reduce labor costs in return for retaining staff should therefore inject some welcome flexibility in labor cost and workforce management.”
Mass Layoffs Are Different
Mass layoffs fall into their own category in much of Latin America. “Most Latin American countries have statutes governing mass layoffs – with ‘mass layoff’ being defined differently in each country – and employers should check the statutes before beginning any layoff plan,” she said.
For example, Urban said, layoffs in Peru are strictly governed by statute, and salaries must be paid during the period of time the layoff is being implemented. Layoffs may be legally implemented only if they comply with specific requirements and the reason for layoff fits into one of four specific categories, namely force majeure; economic, technological or structural reasons; the company’s dissolution and liquidation; or the company’s reorganisation under insolvency laws.
Other countries, such as Chile, may not have specific rules regarding mass layoffs, but nevertheless have laws regulating employee terminations that may apply.
Notice Served, Payment Given
Requirements again differ from country to country, but Urban noted that many Latin American countries require some length of notice period, either through statute, or as part of the employment contract, or both.
In addition, said Urban, most Latin American countries require some amount of severance to be paid, which might be set by statute or employment agreement, but may often reflect length of service and/or age of the employee(s) being let go.
In Peru, an employee of more than three months may only be terminated for fair reasons, including serious offences, criminal fraud convictions , or disability justified by the judicial or administrative authority for the type of work carried out by the employee.
Six calendar days’ notice must be given before dismissal, except in cases of serious offences, and written notice of the reasons for dismissal must also be provided.
According to José Antonio Olaechea, Partner at Estudio Olaechea in Peru, “employees with ongoing employment contracts who are unfairly dismissed can claim compensation of one and a half times their monthly pay for each year of service. Employees with fixed-term contracts who are unfairly dismissed can claim compensation of one and a half times their monthly pay for each month of service outstanding under the agreement.”
Definitions of fair dismissal or just cause differ across countries. An employee displaying “lack of dedication to his/ her job” may be dismissed under just cause in the Dominican Republic, according to Luis Rafael Pellerano and Mariángela Pellerano of Pellerano & Herrera. In countries such as Ecuador, the process of visto bueno must be conducted by the Inspector del Trabajo (the local labor authority) to verify just cause in termination.
Ensure There Are Clearly Defined Terms
Ensuring that terms are clearly defined at the start on an employment arrangement can save a great deal of problems later on. It is also vital to spell out exactly which party is responsible for what, in case of later layoffs.
“The concept of ‘independent contractor’ may be unknown in Latin America, or tightly regulated,” Urban said. “Employers should take care when entering into, and particularly when terminating, such arrangements. Outsourcing may also be strictly regulated, and in many countries, such as Argentina or Brazil, may be governed by statute. The outsourcing entity could be considered the direct employer, and may be on the hook for severance and other employee benefit.”
It is true all of what the article is telling, what I’d like to add is that the concept of Independent Contractor is not recognized, but they do recognize the Sole Proprietor figure which is done in very small scale that could not be the scope of this 4 elements, because outsourcing will not contemplate this type of trades, like an individual person doing plumbing, carpenter, painter, etc. as a massive work force.
In term of outsourcing versus own employees there are many more things that USA entities need to be aware of when sending their operations department to expand activities in the LatAm area, I’m going to list a couple of them in the opinion of an senior accountant international who sees the two scenarios in this area.
Subsidiaries that own or contract employees under the subsidiary’s name are responsible for all payroll liabilities involve in this type of business transactions with no other kind of fees like over headcount fees, management resources fee or Outsourcing fees, but subsidiaries’ employees must manage all the logistic of hiring, safekeeping HR records, pay back the local government tax authorities all of the employees withholding and employer payroll tax portion in a monthly basis.
At the same time the subsidiary keep the funds (If headquarter agrees) in their banking checking account for the accrued payroll tax liabilities like Vacations, XIII Month Bonus, Severance, Lieu of Notice and Benefits which must be pay once the labor relationship end, but only when the employee is terminated by the employer, not when the employee resign.
When the employee resigns in most countries – If not all of them – by law the only items employer will need to pay is prorated vacations and prorated XIII month bonus (obviously any wages owed at the separation day)
Outsourcing or having employees under third party which is what USA entities are more interested in doing than scenario 1, due to the fact that an agency will do all the activities in scenario 1 for a modest normal fee, but here it is the tricky part if the operations manager does not make the right contract with the outsourcing agency. First of all Outsourced or own employee USA entity is responsible for the payroll no matter what.
The outsourcing agency will charge back to the USA entity all the legal items involve in a scenario 1, plus the outsourcing fee agreed in the contract, including the accrued portion that by law must be pay to employees according to the payment such, weekly, biweekly or semimonthly. The outsourcing agency will keep the funds until needed to pay the obligations in scenario 1, but whose money is it for the one who resign and are not entitled to receive the accrued portion of such liabilities?
Let’s see an example where 1 employee had accrued severance and lieu of notice for 5 years and resign, and the contract does not have a clause of how to treat this funds that USA entity has been funding in the last 5 years, worst case not 1 employee but rather 100.