Latin America's Changing Employment Landscape

Latin America is poised to be the next region to experience growth on the scale of that seen in China, but companies must understand the various countries’ complicated labor laws in order to be profitable and successful.

Latin America is a place of unparalleled opportunity. Even so, every business would be well-advised to carefully navigate the land mines peppered through each jurisdiction’s labor law field. In many ways, Latin America’s labor and employment laws reflect the political history, traditions and values of the respective country and offer a landscape distinctly different from what businesses are accustomed to in the United States.

At the dawn of this century most South American countries enacted labor laws that disproportionately protect employees, making these laws a permanent part of the labor law landscape. Accordingly, companies and foreign investors conducting business in the region face high risks, including arbitrary government expropriation of their assets.

Forming an Employment Relationship

Virtually every South American nation holds the doctrine that an employment relationship generally exists when an individual renders services under the subordination or dependence (legal, technical or otherwise economic) of another, in exchange for monetary compensation.

If a conflict exists between the worker’s performance and what the parties agreed to, labor courts typically disregard the contract language (if one exists, for example, identifying an independent contractor relationship) and base their decision on the actual performance, generally finding an employment relationship and disregarding the parties’ agreement. For instance, labor courts in Argentina, Brazil, Colombia and Venezuela generally treat the hiring of an independent contractor as the hiring of an employee.

Without an employment contract, an employment relationship will be presumed if the elements are present. When an employment relationship exists, whether by contract or through a finding by a labor court, the employee is automatically entitled to all employment benefits available under the law, and the contracting party is required to incorporate the employee into its payroll and carry out all employment-related obligations, retroactively and prospectively for that employee.

While the employment relationship presumption may trump what may appear to be a perfect contract, employers should, nonetheless, take proactive steps to determine whether liability may be imposed retroactively due to what the relevant labor authorities may consider to be independent contractor misclassification.

Compensation: Minimum Wage and Benefits

Most South American countries mandate a minimum wage and require an annual salary increase across the board.

Generally, the annual minimum-wage increase is based on an inflation rate that the government determines. Therefore, when adjusting salaries, companies should be mindful of the jurisdiction’s minimum-wage rate requirements.

Generally, benefits are fairly favorable to employees and can be very costly to employers. Most jurisdictions mandate overtime pay, paid holidays, weekly rest, and a Christmas bonus, along with paid vacation days, which may range from 15 to 35 continuous days.

The number of paid vacation days usually depends on the employee’s seniority.

Profit-sharing benefits are also common in the region. In Chile a company must distribute 30 percent of its annual profits to its employees. In Venezuela the required contribution is 15 percent, based on the company’s annual net income. Peru’s profit-sharing system sets percentage levels based on the company’s industry.

Employers should be mindful that some jurisdictions strictly interpret the concept of equal pay for equal work. Thus, in Colombia, if an employer decides to give someone extra pay based on performance, it may create grounds for another employee in the same position to claim the same amount in compensation.

While other countries may not be as rigid as Colombia in requiring that equal pay for equal work apply to all workers, in most Latin American countries, any changes in compensation—even a one-time bonus—may trigger additional employer obligations and change employees’ overall compensation package, including the amount of vacation days, vacation bonus, profit-sharing contribution and severance payments.

Since businesses are not required to provide compensation beyond what is mandated by law, they should grant additional pay with caution, making sure to find out the compensation requirements of the jurisdictions in which they operate before altering employees’ compensation. Furthermore, if the employment relationship is governed by a collective bargaining agreement, the company should check for any agreement provisions that restrict its ability to unilaterally award extra pay.

Terminations and the Ensuing Consequences

None of the countries in South America follows the at-will employment doctrine. However, with the exception of Venezuela, most allow employers to pay a severance package as indemnity for termination.

In Venezuela employers can discharge someone only with cause and with prior government authorization. The government’s labor inspectors seldom authorize a termination, so employers typically are compelled to negotiate it to prompt the employee’s voluntary resignation. Given these constraints, businesses are advised to seek legal counsel before dismissing an employee in Venezuela.

In Brazil, as in most other Latin American countries, a collective bargaining agreement generally affords greater employee protections from termination than what are provided under the law, thereby significantly restricting employers’ ability to discharge employees even with cause.

Some Latin American nations require that a settlement agreement and/or release of claims be properly ratified by a competent labor board or inspecting officer for the agreement to be enforceable. However, a release of claims may prove to be futile in Brazil, where labor rights may not be waived. Consequently, labor litigation in the country is unparalleled, allowing multiple suits by the same employee, against the same employer and for the same underlying termination, regardless of whether the worker had already received valuable consideration in exchange for a release of claims.

Employers, therefore, would be well-advised to seek assistance from competent legal counsel before terminating an employment relationship anywhere in Latin America or compelling an employee to resign voluntarily by offering consideration in exchange for a release of claims.

Outsourcing

The treatment of outsourcing varies by country. While outsourcing is permissible or not regulated in some countries, it is prohibited or highly regulated in others.

In Venezuela, for example, the new Organic Law of Labor and Workers, effective May 2013, prohibits any form of outsourcing aimed at committing fraud or circumventing the labor laws. While hiring contractors is not prohibited per se, the contracted services must be performed using the contractors’ (the service providers) own means and employees. Nonetheless, the contractor and the customer may be held jointly liable for all employment-related obligations if the service is deemed “inherent” or “connected” to the customer’s main activity. Companies that fail to comply with the outsourcing regulation risk government penalties, including imprisonment and asset seizure.

In contrast, Colombia not only permits outsourcing but imposes obligations on the outsourcing company to render the services with technical and administrative autonomy. Once a contractor enters into an agreement to provide services to another company (the beneficiary of the services), the contractor is deemed to be the actual and unique employer of the individuals who perform the services. Accordingly, the contractor is responsible for all employment obligations relative to its employees.

Businesses should keep in mind that the general presumption in the region is that an employment relationship exists unless clearly established otherwise. Therefore, even where outsourcing is not highly regulated, employers should avoid creating relationships of dependence or subordination—such as when services are performed by individuals in high managerial positions or positions of confidence and trust—to prevent claims of joint employment.

Labor Relations

Argentina and Brazil require employers to join a union as soon as the company’s articles of incorporation are filed and even before hiring staff or opening for business. In those nations, companies essentially lack the freedom to determine their employees’ compensation and benefits, as the compensation package is typically determined by the agreements negotiated with the union.

Many union organizations in South America engage in coercive practices, demanding payment from workers in exchange for jobs, and a chief complaint from employers is that the government does not effectively protect them from this corruption. Given the corrupt practices, union-related disputes in Colombia, Venezuela and Brazil are common and have proved to be dangerous and, at times, deadly.

Before joining a union, employers should speak with expert legal counsel to identify the unions that operate within the industry related to the employer’s core business. Employers should rely, too, on local legal counsel for any union-related dispute, whether the dispute was initiated by the workforce or the union.

Final Thoughts for Employers in Latin America

In the famous words of Mahatma Gandhi, “Leadership at one time meant muscles, but today it means getting along with people.” If a show of strength was ever an answer for employers, it certainly is not the answer now, given the current landscape in Latin America. Thus, employers are encouraged to seek innovative ways to bring their business operations into full compliance with the local laws while yielding the necessary profits to make their venture a thriving proposition in this promising, albeit challenging, environment.

Republished with permission. © 2013 Littler Mendelson. All rights reserved.

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