The special fund for dismissal must be on the employer’s side

One of the labor institutions that discourage private registered salaried employment is severance pay. The general rule establishes that, in the event of dismissal without cause, the employer must pay one or two salaries of notice (depending on whether the seniority is less or more than 5 years) plus one salary for each year of seniority. If the employment relationship was improperly registered, a penalty is applied which consists in the doubling of the seniority indemnity.

In Argentina, the average firm size is 14 employees. This means that, for most companies, the dismissal of a worker with 12 or more years of seniority implies a severance payment higher than the monthly total payroll. If there were failures in the registration, the indemnity would be more than 2 times the total payroll. If there are doubts as to the nature of the dismissal (the employer understands that it is with cause and the employee without cause) and the resolution is through a labor lawsuit, the costs keep growing with interest and attorneys’ fees. It is not risky to say that a dismissal can bankrupt a microenterprise.

A salient aspect of labor terminations is that their frequency varies highly among companies. For example, according to data from the Ministry of Labor for the period 2004 – 2012, which was a period of high employment growth, it is observed that:

• Among large companies, each year on average 10% of the workforce was dismissed.
• Among medium-sized companies, the annual rate of dismissal was 15%. 
• Among micro-companies, the rate of dismissal was 29% per year.

These data show the high variability between companies according to their size. While in large companies 1 worker out of every 10 is laid off, in micro-companies 3 workers are out of every 10. Not all of these terminations are dismissals, as many are voluntary resignations. It is estimated that approximately 20% to 30% are dismissals. There are no public data that measure the same phenomenon by activity, but it is intuitively obvious that in the building sector labor turnover is higher than in manufacturing or in the financial sector, as examples.

A proposal is circulating to create a Severance Guarantee Insurance to finance the current severance pay. The proposal consists of creating a new employer’s contribution with a rate varying between 8.33% and 2% of the salary, depending on the average seniority of the company’s workers. With these funds, ANSES would pay workers who leave the companies –either due to dismissal or voluntary resignation– an amount equal to the current severance pay. This system is figuratively called the worker’s “backpack” in the sense that employers save the severance payment for each worker.

The proposal addresses a pertinent issue, but the design needs to be revised. The main weakness is that it overlooks the high variability in the severance rate. For companies with low dismissal rates, the change will imply an increase in labor costs since the employer’s contribution, even if it is minimal, will be greater than the cost of the few dismissals they make. Even for companies with high turnover, which will probably pay the highest employer’s contribution of the scheme, it will probably generate higher costs since they currently do not pay severance payments for voluntary dismissals. In addition to these problems, the mechanism will surely result in a deficit for the ANSES, generating more fiscal deficit.  

An alternative scheme is to put the “backpack” on the employer’s head. It could be implemented by establishing that the employer maintains the obligation to pay the severance payment, as at present, but if the amount exceeds, for example, 4 salaries, the surplus will be charged to the current National Employment Fund. In this way, the Fund will operate as an insurance with a deductible. Dismissal discouragement is maintained when seniority is low and the impact on companies that preserve their workers is moderated because a ceiling is placed on the cost of severance pay to be borne by them.