Argentina’s $10m severance battle: Milei’s labour law overhaul vs union resistance in senate

President Javier Milei of Argentina is pushing for sweeping labour law reforms to make the country more business-friendly. Amidst high inflation and a deep recession, Milei aims to overhaul hiring and firing rules, challenging entrenched union influence. The proposed changes, facing opposition from unions, include allowing businesses to create special severance funds for predictable payouts and extending probationary periods for new hires. This move is crucial in a nation where rigid labour laws have long hindered formal job creation, leading to a significant informal sector.

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By Patrick Gillespie

A onetime Citibank employee who earned a $130,000 salary working in New York stands to collect a $10 million severance award, thanks to Argentina’s pro-labor laws.

The case, which has been wending its way through the courts for more than a decade, crystallizes why Argentine President Javier Milei is vying to revamp the rules around hiring and firing, even as his country battles inflation of almost 290% a year and a deepening recession.

Tucked into a 230-article omnibus bill, Milei’s proposals are facing their biggest test in the Senate this month after passing the lower house of Congress in late April. Meanwhile, unions have mobilized to oppose the changes. On May 9 they paralyzed the country via a 24-hour general strike — the second since Milei took office in December.

Argentine President Milei. Photographer: Kobi Wolf/Bloomberg

The World Economic Forum ranked Argentina 139th out of 141 nations on hiring and firing practices, reflecting the country’s prohibitive severance costs and high payroll taxes. Workers’ rights are enshrined in the constitution, and aggrieved employees don’t hesitate to seek redress through the courts, where they’re likely to find sympathetic judges.

This state of affairs points to the outsize role trade unions have played in Argentina’s politics going back to the time of Juan Domingo Perón, the army general who in the 1940s harnessed the discontents of blue-collar workers to propel himself to the presidency. Unions remain a bedrock of support for the Peronists, who’ve ruled the country for much of the past 70 years.

“Improving labor laws here is long overdue,” says Dario Judzik, dean of the school of government at the University of Torcuato Di Tella in Buenos Aires. “They’re rigid and outdated.” Still, there’s a good chance that, with the economy in dire straits, some of the changes Milei is seeking will trigger a jump in layoffs, at least in the near term.

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Alejandro De Nevares is in position to collect a huge windfall under the current system. Over his 16-year career at Citibank, the Argentine banker worked his way up from the auto loans department in Buenos Aires to a job in New York as head of institutional sales for Latin America. He was terminated in 2007, for reasons that remain unknown, and offered the equivalent of approximately 14 months of salary as severance. He rejected that offer and took Citibank to court in Argentina, even though, as reported by Bloomberg Law, he’d previously waived his right to do just that.

Under Argentina’s rules, stock options and bonuses can be counted toward severance. So even while De Nevares’ highest monthly salary at Citibank was less than $11,000, a judge ruled in 2009 that his total compensation topped $68,000 per month. The court also ruled the banker’s contract had been improperly registered, a finding that automatically doubles any severance award.

Suddenly, Citibank was on the hook for $3.9 million, a sum that’s since ballooned to more than $10 million because of the 6% interest applied by the judge. The company attempted to get the case moved to the US, but when that failed it continued to battle De Nevares in Argentina. The case is now before the country’s Supreme Court. There’s no timetable for when the justices will render their verdict.

De Nevares and his lawyer, Juan Manuel Arias, both declined to comment, as did a spokeswoman for Citigroup, the parent company of Citibank.

A libertarian who’s vowed to make Argentina more pro-business, Milei initially attempted to enact changes to severance rules and other labor laws as part of a sweeping “mega decree” packed with measures to liberalize the economy. But a three-judge panel ruling on a lawsuit filed by the leading union confederation deemed the president had overstepped his authority, and it suspended the provisions.

A somewhat watered-down package of labor rule changes cleared the lower house of Congress on April 30, thanks to votes from the centrist Unión Cívica Radical, which merged its own proposals with those of the administration. But the real fight will be in the Senate, where Milei’s two-year-old party holds just seven of 72 seats.

While employment in Argentina is technically at-will—meaning companies can terminate employees at any time and for any reason, provided they give proper notice and pay the mandated severance—there’s plenty of minutiae to trip companies up. For instance, a business faces an automatic fine if it doesn’t give 60 days’ notice to an employee who’s logged more than five years at the company.

Economists have long argued Argentina’s labor code is so tilted toward workers that it incentivizes businesses to pay their staff under the table. Since mid-2020 almost 80% of the new jobs created in the country are in the vast informal sector, compared with 65% in Mexico and 49% in Brazil, according to a 2023 annual report from the International Labour Organization.

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Diego Kelly, a partner at Argentina’s largest law firm, Marval O’Farrell Mairal, points to the penalties that companies incur when they’re found to have registered contracts improperly as a key obstacle to hiring. “Instead of encouraging registration, they’ve created a lot of tools to incentivize litigation because the fines are very onerous,” Kelly says. This is one of the targets of Milei’s reforms. (De Nevares’ case wouldn’t be affected.)

Employers as well as employees stand to benefit from a measure that would allow businesses to create a special severance fund—money a worker could tap either over the course of their employment or upon termination. Labor experts say the additional expense for companies would be well worth it if it meant their severance costs were predictable and the size of the awards couldn’t be disputed in court.

Union officials argue that, with the country in the middle of a recession, businesses will take advantage of the changes in labor laws to cut payrolls. Surveys of companies in the construction and manufacturing sectors already show that a larger proportion expect to reduce head count, rather than expand it, this year.

Among the measures Milei and his allies are pushing is one that would allow businesses with five employees or fewer to extend the probationary period for new hires from three months to a year. Workers at hotels, restaurants and in other seasonal industries would have to wait as long as eight months before being made permanent, exposing them to the risk of continued layoffs.

Testifying before a Senate subcommittee on Monday, Hector Daer, who leads the CGT—Argentina’s largest labor group—criticized the proposals, saying, “We’re not only sending workers into informality, but we’re creating a legal umbrella for informality.”