Opinion on the Labor Reform Proposed by Javier Milei

A closer look by Julián Cosso Partner at CYT Abogados

I. INTRODUCTION

In the past few weeks, following the P.A.S.O. (Open, Simultaneous, and Mandatory Primaries) elections and with the emergence of Javier Milei as a significant figure in the upcoming presidential elections, the topic of labor reform has once again surfaced for debate. This is due to the proposals put forth by the libertarian economist as part of his political platform.

Many newspapers and news outlets have outlined broad, high-impact premises such as "eliminating unjustified severance pay," "limiting union mandates," and "labor flexibility," among others, without delving too deeply into the explanation or, in any case, the reasoning behind these proposals. Indeed, within the news coverage related to labor flexibility, there is a crucial aspect that deserves attention, analysis, and discussion: the unemployment fund (or labor termination fund, as we will refer to it more specifically). This fund is presented as an alternative to the current system of protection against arbitrary dismissal and can be advocated for both by workers and employers.

II. CAN LABOR LAW BE COMPLETELY REFORMED?

As evident in Milei's discourse, the proposed changes in labor matters would essentially entail a fresh start for all legislation that has governed labor rights in Argentina since the constitutional reform of 1994, which incorporated international human rights treaties (as per Article 75, section 22). It is worth noting that the protection afforded by Article 14(bis) of the National Constitution aligns with the concept of social constitutionalism and is deeply ingrained in our country's legal system. Changing it would require amending the Constitution itself, which, given the current political climate, seems unfeasible.

Therefore, as a preliminary conclusion due to the brevity of these lines, we can assert that the guarantees established in Article 14(bis) of the Constitution cannot be altered. However, what could be changed are the laws that regulate and give concrete form to one or more of these guarantees.

Among these guarantees, one is particularly important due to its social significance and has been addressed by Milei (as well as by the entire political class when discussing this topic) because it entails significant labor costs. We are referring to protection against arbitrary dismissal. This is where a change could occur: in the legal regulation of protection against arbitrary dismissal. Currently, this guarantee is embodied in Article 245 of the Labor Contract Law ("LCT," hereinafter), which protects workers against unjustified dismissal by obliging the employer to pay them a predetermined severance.

In this context, when Milei proposes an "unemployment fund," he is indirectly advocating for a modification of the legal mechanism through which protection has historically been provided, namely Article 245 of the LCT.

III. IS THE PREDETERMINED SEVERANCE PAY OF ARTICLE 245 LCT COSTLY?

Milei's argument for the proposed change is based on the premise of the "high cost" of the current system in practice.

The predetermined severance pay functions as a mathematical rule that allows for the easy and quick calculation of the labor costs associated with termination, thus avoiding disputes over the amount of compensation. The legal rate relies on three pre-established variables: the worker's seniority in years, the worker's monthly salary, and the maximums applicable based on the relevant collective bargaining agreement or industry.

This raises the question of whether this severance pay is excessive or not. In support of the existing formula, Grisolía[2] argues: "The conceptual error lies in not confining, as necessary, the severance pay for arbitrary dismissal to that provided in Article 245 of the L.C.T., and not wanting to understand that the other components added are the result of additional employer breaches, which must be paid when the employer decides to do so, either due to failure to fulfill a duty imposed by the law -such as not giving notice, leading to the substitute compensation and the integration of the month of dismissal- or for engaging in specifically penalized conduct -such as dismissal due to maternity, marriage, etc." According to this view, the severance pay under Article 245 L.C.T is neither high nor inappropriate but constitutes a reasonable compensation since its amount is based on two factors inherent to the terminated employment contract: the worker's remuneration and seniority in the job. It cannot be considered excessive or disproportionate since it is doubly capped, not only by the maximum but also by the interpretation of the base salary to be considered: the higher, monthly, normal, and habitual remuneration.

On the other hand, there are voices, such as Javier Milei's, who argue that Article 245 should be abolished and replaced by other mechanisms, such as the labor termination fund provided for in Law No. 22,250. In this regard, they highlight the high cost of letting go of a worker with significant seniority, who is presumably also an older and often less productive employee, emphasizing that parting ways with such a worker or replacing them with a younger, more dynamic, and more productive one entails a high cost for the employer.

However, it is important to note that major business associations and chambers propose modifying the system, as the current effect of severance pay on employment is doubly detrimental: it increases the cost of dismissal and, consequently, the cost of hiring. Thus, both job creation and destruction are reduced. Similarly, there are analyses showing that restrictions on dismissals may or may not reduce unemployment, but in all cases, the impact is very limited (Cahuc, 2001), and there are negative consequences when labor protection is extreme (including severance pay) on employment levels and job creation, as companies anticipate and foresee that they will have to pay higher costs for layoffs, which leads to a reduction in hiring workers.

IV. THE PROPOSED LABOR TERMINATION FUND

Despite the various names it may be given, the general idea of the system consists of a common labor termination fund that replaces the severance pay established by Article 245 of the L.C.T. According to its defenders and proponents, this institute seeks to provide predictability and alleviate the burden on employers when ending an employment relationship, without harming the worker who, in the end, receives a sum of money very similar to what they would receive from the employer under the provisions of Article 245 LCT when losing their job.

The current indemnification system is the legal regulation of the constitutional guarantee of protection against arbitrary dismissal provided for in Article 14(bis) of the National Constitution. It involves legal payments that enable the worker to subsist when unexpectedly dismissed from their job. The labor termination fund system differs in that, under this scheme, employers make monthly contributions to this fund, administered by some organization. The fund consists of individual accounts for each worker, where the sums contributed by the employer on a monthly basis accumulate. The worker can access this money when their employment contract is terminated. Some proposals even suggest that the worker can withdraw the accumulated sums from their individual account not only in the case of unjustified dismissal but also if the termination of the employment contract occurs by mutual agreement of the parties, as provided for in Article 241 of the L.C.T.

The labor termination fund for construction workers, as mentioned by Milei, is indeed an excellent alternative that deserves examination and consideration when seeking a different solution to the severance pay of Article 245, L.C.T. Specifically, the proposal should involve extending the current model applicable to construction workers to become the general regime for all workers in the country. We base this recommendation on its operational efficiency: employers are required to deposit mandatory contributions into the unemployment fund from the start of the employment relationship. Funds are deposited monthly, generating interest in the workers' bank accounts and are not subject to garnishment. When the employment relationship ends, the employer must make the fund available to the worker, providing them with a card to withdraw it from the bank.

This mechanism offers advantages over severance pay because severance pay, being a one-time payment, is generally a substantial sum that can be difficult for many companies and employers to pay (especially in the case of small and medium-sized enterprises or sole proprietors). This can incentivize companies to avoid or delay payment, often through legal processes that can take several years in our country. There are also no legal requirements for companies to maintain sufficient liquid or net reserves to support or guarantee the payment of severance pay obligations, which can lead to liquidity problems if there are many simultaneous unjustified dismissals or if changes need to be made in the workforce. In contrast, unemployment funds do not generate such problems since they are financed on a monthly basis, providing certainty for employers.

V. CONCLUSIONS REGARDING THE PRACTICAL IMPLICATIONS OF THE FUND AND ITS PRECEDENTS IN ARGENTINA

It should be noted that Milei's proposal is not new in our country. In fact, in 2018, various aspects of labor reform, including the creation of a labor termination fund, were proposed through a bill from the National Executive Power submitted to Congress.

One of the criticisms raised at the time was that the monthly contribution by the employer, a crucial parameter for determining the amounts to which dismissed workers would be entitled, was not specified. This was a fundamental error, as it did not allow for a quantitative comparison with the current L.C.T. severance scheme. Nevertheless, the bill did indicate that the monthly contribution would be calculated as a percentage of the worker's monthly remuneration, including basic conventional salary and additional remunerative and non-remunerative benefits specified in the Collective Bargaining Agreement of the industry, including any sums and general increases, both remunerative and non-remunerative, determined by the public authority. Therefore, if the rate were calculated in such a way that it ensured that the worker would receive an amount equal to one month's salary for each year of seniority, we would be talking about the same amount as provided for in the Article 245 L.C.T regime. This would render any objections to the quantification in favor of the worker and in line with the protection against arbitrary dismissal unfounded.

On the other hand, questions arise regarding what happens when a worker is dismissed prematurely, with cause stated. Similarly, no one has considered the situation of a company that, due to economic difficulties, must reduce its workforce and how the Fund responds to the payment of severance amounts in such cases. Faced with these questions, the inevitable response would be to establish that when the accumulated Fund is insufficient to cover the established benefits, the employer must increase it with additional contributions to ensure that each worker has access to the amount of money established in case of dismissal. However, if the parameter of one month's remuneration per year of seniority is maintained, it would entail a contribution of 8.3% of gross remuneration, which is more expensive for companies than the current L.C.T. severance pay system.

Indeed, the debate is not just about the advantages or conveniences of transitioning from the current system to the labor termination fund. It must be considered with a significant dose of pragmatism since our labor law, as mentioned, is deeply rooted, and any proposed change must offer substantial benefits to justify the change in law. Without a doubt, it is possible to change the mechanism of Article 245 LCT to a less costly one, such as the construction industry regime, while ensuring the worker's protection under Article 14(bis) of the National Constitution on one hand and providing companies with a set of rules that offer greater certainty on the other.

The proposed changes do not conflict with Article 14(bis) of the National Constitution because if the goal is to provide financial compensation, the labor termination fund fulfills that purpose. Additionally, the protection regime remains subject to legislative discretion, so the worker is not left without recourse if Article 245 L.C.T is amended, and their rights are not violated.