The Labor Ordinance Law and the cap on severance pay

The "Labor Ordinance Law" No 25,877 (see “New Labor Ordinance Law” in Marval News # 26 of March 31, 2004) derogated the questioned Law No 25,250 and its regulatory norms and approved new rules related to labor law on employment, promotion of employment, labor law on management-labor (trade union) law, and administration of labor. In relation to labor law on employment, Law No 25,877 modified certain institutions such as the trial period, advance notice, integration of the month of pay for dismissal and the severance pay schedule for discharge without cause.

Prior to Law No 25,877 two different severance pay schedules for discharge without cause coexisted, according to the date the worker was hired.

For workers taken on before October 3, 1998, article 245 of the Law of Employment Contract was applicable (T.O. 1986) and for workers taken on after that date, article 7 of the Law of Labor Reform No 25,013 was applied. Both norms established severance pay for arbitrary dismissal.

Article 245 of the Law of Employment Contract established severance pay equivalent to one month’s wages per year of service or fraction greater than three months, taking as a base the higher normal and customary monthly remuneration, received during the last year or during the time of rendering of services if less than one year. This severance pay may not be less than two months wages calculated on the basis of the described system.

For workers taken on after October 3, 1998, article 7 of Law No 25,013 established severance pay equivalent to one twelfth (1/12) of the higher normal and customary monthly remuneration received during the last year or during the time of rendering of services, if shorter for each month of service, or fraction greater than ten days. This severance pay could not be less than two twelfths (2/12) of the wages calculated on the basis of the described system.

Both norms established a cap on severance pay on the basis of the calculation to be used. This base may not be greater than three times the monthly amount of the sum that is the average of all remunerations provided for in the collective bargaining agreement applicable to the worker at the time of dismissal for a lawful or conventional day's work, excluding years of service.

Moreover, both norms contemplated the situation of those employees not covered by collective bargaining agreements. For those employees the cap applied was according to the collective bargaining agreements applicable to the company where the worker rendered services, or the more favorable agreement, in the event there was more than one. The Supreme Court ratified the constitutionality of these norms on several occasions.

At present, Law No 25,877 merges both systems into one, adopting the system established in article 245 of the Law of Employment Contract with the following amendments:

a) the greater normal and customary monthly remuneration "accrued" is established as base of calculation. In previous schedules norms referred to "received" wages. This slight but important change could produce immediate claims in future, because of the uncountable quantities of payments that companies give to employees during a year (for example, bonuses, prizes, stock options, etc.). After the change these benefits could start disputes about whether they are included or not in the base of calculation for severance pay;

b) minimum severance pay is reduced from two months to one month;

c) it is likewise established that for those workers excluded from the collective bargaining agreements the cap established shall be that of the agreement applicable to the company where the worker renders services or the more favorable agreement in the event there is more than one.

In that case, the law produces an amendment when referring to the workers as those "workers excluded from collective bargaining agreements", while the previous schedule referred to them as "workers not covered by collective bargaining agreements".

This amendment should not be interpreted differently to the interpretation applied to date, as the legislator intended every dependent worker to have a cap on severance pay. Nevertheless there are some authors that interpret that the change of the phrase "not covered" for "excluded" implying the exclusion of the cap on severance pay for personnel not represented in collective bargaining and not covered by labor union representation.

Reading the norm literally these authors inferred that the cap on severance pay is applicable only in relation to those workers that are expressly excluded from collective bargaining for any reason and they conclude that those workers not under bargaining agreements and likewise not explicitly excluded would therefore not be subject to a cap on severance pay on the base of calculation of old severance pay.

In our opinion, and in correspondence with the opinion of other authors, this interpretation is not correct for the following reasons:

* historically the intention of the legislator was to establish a cap on severance pay for all workers. If the legislator had intended to modify that principle, at least an explicit mention in the law’s elevation message of the Executive Power would have had to be included referring to a change of such importance for severance pay issues;

* it would not be reasonable and would be contrary to the principle of equality before the law to interpret that the intention of the legislator was to benefit some unconvened workers simply because they are explicitly excluded from the collective bargaining agreement;

* the Supreme Court of Justice has been unanimously upholding the constitutional nature of the cap on severance pay as established in article 245 of the Law of Employment Contract for those workers in a dependent relationship.

All in all, it is expected that the courts hearing labor matters will make a reasonable and coherent interpretation of Law No 25,877.