EY: Argentina – Aspects of the Labour & Social Security Reform

A labour and social security reform bill has been recently sent to the Argentine Congress. In general, proposed amendments represent material changes to current regulations and introduce new concepts. Although the government has the support of the main labour unions, the bill will surely be amended after the discussions and debates to be held at committee level and in the chambers.

The purpose of this article is to mention the most significant aspects of the imminent reform for the business sector.

The bill establishes an amnesty programme for taxpayers who disclose hidden labour relationships. Employers disclosing unregistered or poorly registered labour relationships shall benefit from the following legal effects:

1. Termination of criminal persecution and a release from penalties and fines.
2. Remission of principal and interest due from social security contributions, except for those due to the statutory health care organisation and the workers compensation insurance company.
3. Deregistration from the local list of employers with labour penalties, including labour and/or social security infringers.

In order to have access to these benefits, labour relationships should be registered within 360 calendar days from the effective date of the administrative order.

“As from the first half of 2018, a salary threshold is set whereby private and public nongovernment employers shall be exempt from paying social security taxes.”

Employers registering labour relationships within the first 180 days from the effective date of the administrative order shall be remitted 100% of the principal, interest, fines, and punitive interest due, while those doing so after 180 calendar days shall be remitted 70% of those charges.

According to the bill, if the existence of any unregistered or unduly registered personnel is verified after applying for this amnesty, the benefits granted shall be forfeited and the employers shall be required to pay the remitted debt proportionately, plus interest and the penalties imposed by current regulations.

According to current labour regulations, employers failing to register their employees are subject to a numbers of fines. At present, depending on the type of infringement, those fines are equal to 25% of compensation accrued from the date of the infringement. Upon imposing these fines, labour judges adjust the accrued compensation to the value of the compensation at the time of litigation, which causes fines to be very significant. At present, these fines are collected by the employee.

With the reform, the federal government proposes setting those penalties at 50% of the adjustable minimum sustenance salary effective in each period that was not registered and/or was unduly registered. In addition, the fines would now collected by the social security agencies instead of the employee.

The bill also proposes abrogating the regulations imposing fines to employers in favour of the employee if the latter has to bring a legal action to collect the compensation claimed or if, after the employee demands the employer to amend his/her labour relationship, the employer dismisses the employee.

As from the first half of 2018, a salary threshold is set whereby private and public nongovernment employers shall be exempt from paying social security taxes. The salary threshold shall be adjusted once a year until it reaches ARS 12,000 in 2022 ($680).

There are currently two payroll tax rates that the companies may use to calculate their social security contributions, depending on the activity and the total amount of annual sales: 21% and 17%.

Through this reform, the government proposes unifying the rate of employer contributions from 2018 through 2022, setting as from that period a general 19.5% rate for all employers.

The current social security payroll tax rate is the same for all employers, regardless of whether they are self-employed professionals with staff in charge, SMEs, or large corporations.

In order to reduce the tax burden of the owners of microenterprises, the reform allows independent workers relying on the cooperation of up to four independent workers to apply for a special unified system establishing for the latter the individual contribution of a monthly payment for social security system and statutory health care organisation purposes. This means that the owners of microenterprises shall no longer pay social security taxes by applying a rate defined for that purpose; instead, they will pay a monthly fee to meet those obligations.

Dismissals

Under current regulations, the items entailing the largest impact in case of unjustified dismissals are:

• Severance pay based on years of service: pay equal to one month’s worth of salary for every year of service or period exceeding three months.
• Severance pay in lieu of prior notice: pay equal to two months’ worth of salary when the worker’s years of service exceed five and one month’s worth of salary when they are shorter than 5 (five).

Through the reform, business associations and labour unions entering into collective bargaining agreements shall be able to create a sector-based employment termination fund in order to replace the length-of-service severance pay and the severance pay in lieu of prior notice.
In order to create that fund, employers are required to make a monthly contribution that will be obtained from a percentage to be calculated on the basis of the worker’s monthly pay.

As indicated at the beginning, the bill will surely be subject to several changes in future congressional debates. However, there is clear position by the executive to promote employment and registered labour, reducing labour costs and labour-related litigation, as well as promote productivity-based employment and increase competitiveness.

About the Authors

Sergio Caveggia is a tax partner currently in charge of the Transaction Tax Area in Argentina. He joined EY Argentina in 1994 and has developed strong expertise over 23 years in international taxation and mergers and acquisition matters. Mr Caveggia is highly experienced in acquisition structures for inbound and outbound investments, buy side, sell side, and restructuring services within the transaction tax area.

Flavia Cimalando is a senior manager within the Transaction Tax practice of EY Argentina. She joined EY in 2010. Mrs Manteiga has thirteen years’ experience in labour, human resources, and social security issues. As social security manager, she has performed several due diligence processes in connection with numerous business transactions. She actively participates in social security audits for large number of companies in several industries. Mrs Manteiga has developed strong expertise in social security and labour advisory services in due diligence for local and international companies.

Laura Escande is a Manager within the Transaction Tax Area of EY Argentina. She joined EY in 2011. Mrs. Escande has more than 10 years´ experience in labor, human resources and social security issues. As Social Security Manager, she has performed several due diligence processes in connection with different business transactions. She actively participates in labor and social security audits for transactions in several industries.