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High inflation causes concern for employment

Submitted By Firm: Marval, O'Farrell & Mairal

Contact(s): Enrique M. Stile

Author(s):

Enrique Stile- Javier E. Patrón

Date Published: 4/10/2012

Article Type: Legal Article

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Delivery expert knowledge to global counsel Employment & Labour - Argentina High inflation causes concern for employment Contributed by Marval O'Farrell & Mairal June 01 2011 Introduction Impact on blue-collar workers Impact on white-collar workers Comment Introduction Argentina is currently facing a period of high inflation that raises concerns for employment in the country. During the 1990s, the government could control the hyperinflation that ended with the resignation of the previous government and launched a period of economic stability through a policy of reduction of employment claims and rights. Inflation turned almost to deflation, there were no collective bargaining negotiations or salary adjustments, individual and collective conflicts were almost zero and the country started to lose competitiveness against cheaper economies, such as Brazil. Due to a lack of flexibility in economic policy, 2001 ended with default, devaluation, freezing of savings, turmoil in the streets, three presidents in one day and more than 21% unemployment. The new government needed to incentivise the economy and started with mandatory salary increases for all. After two years of mandatory salary increases, the government began to incentivise the unions to start negotiating salary increases for every activity. The economy recovered in the second half of 2002 and, since then, has been growing every year at very high rates. Unemployment has been reduced to 9%, mainly due to Keynesian policies that stimulate the economy, increase salaries, promote spending and encourage public construction. The situation has resulted in a hot economy and very high inflation which, according to certain studies, is approaching 30% this year. This has become a problem for both employers and employees, and often leads to a rupture of the good relationship between them, as employees constantly push for salary increases and employers try to keep costs low to avoid losing money or transferring salary costs to prices. Impact on blue-collar workers The impact of the situation on white-collar workers and blue-collar workers has been markedly different. Blue-collar workers are well represented by the unions and have obtained salary increases ranging from 24% to 35%. This has resulted in a high cost to employers, and the following tools and options have thus been introduced to reduce the economic impact: • increases granted in three instalments across the year; • one-off bonuses (these payments are not considered for vacation, annual bonus or severance payment); • with the ratification of the Labour Ministry, non-remunerative salary increases for periods of one year or until the next negotiation (these payments are not subject to income tax and social security withholdings and contributions, and are not considered for vacations, annual bonus, severance or any benefit derived from monthly salary); • meals or allowances for meals in excess of twice a day (this benefit is paid in cash and follows the same conditions as the non¬remunerative benefits mentioned above); • other non-remunerative or social benefits which could improve employees' quality of life; and • participation in a percentage of the revenues of the company. This last option has become the subject of debate in society - the unions are pushing for a law granting employees 10% of company revenues. Impact on white-collar workers White-collar workers have been more severely affected by the inflation. Their salaries have not been increasing at the same rates, and the gap between them and blue-collar workers has been narrowing. This has created a lack of motivation, leading to commitment issues and high staff turnover between companies. Due to low levels of unemployment (part of the 9% is in the informal market), it is difficult to recruit motivated and highly qualified professionals. White-collar workers have started to form unions and have become more conflictive at the moment of resigning, forcing constructive dismissals as they already have an offer letter from a new employer. The key issue for employers is therefore to motivate and incentivise white-collar workers to stay with the companies and be aligned with them. Stock option plans are no longer an option, as many employees have lost trust in them since the global economic crisis of 2008 and the dot.com crisis. Therefore, employers are using the following tools to motivate employees: • cash retention bonuses that are paid only if the employee remains in the company until a certain date (this is renewed each year and the amounts are increased); • a bonus for the accomplishment of goals, which is also paid if the employee remains with the company until payday, when a new bonus programme is launched; • forgivable loans at very low rates which employees must repay in advance if they are terminated or resign (bank interest rates for loans are very high); • pension plans; • payment of master's and postgraduate courses; • participation in the revenues of the company; and • other non-remunerative benefits (including company car, mobile phone, internet access, lounge areas at the company, casual clothing, flexible time or shorter Fridays). Some of these benefits have been claimed and considered of a remunerative nature; thus, their grant may create a liability or future risk. Comment To reduce individual conflicts in all terminations (even resignation), employers often attempt to negotiate the execution of a termination and release agreement with the Labour Ministry. These agreements have the effect of settled matter; thus, any claim related to the employment or its termination could be rejected. It is not possible to force employees to execute this kind of agreement and employers must offer amounts on top of statutory benefits to obtain employees' consent. For further information on this topic please contact Javier E Patron or Enrique M Stile at Marval OFarrell & Mairal by telephone (+54 11 4310 0100), fax (+54 11 4310 0200) or email (jep@marval.com.ar or ems@marval.com.ar). The Marval OFarrell & Mairal website can be accessed at www.marval.com.ar. The materials contained on this website are for general information purposes only and are subject to the disclaimer. ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com. Authors Javier E. Patrón Enrique M. Stile

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