A. Laws and Guiding Principles
Under Argentine labour laws, the rendering of services by an individual to a third party gives rise to the legal presumption of the existence of a labour relationship, unless otherwise proven. This presumption will also apply even if non-labour arrangements are put in place (such as commercial contractor agreements or invoices). In other words, if an independent contractor files a claim in a labour court in Argentina, the company will have the burden to prove that no labour relationship existed between the parties.
B. The Legal Consequences of a Re-Characterisation
There are three possible alternatives to regularise the labour situation with independent contractors.
- i. Acknowledge Labour Relationship for Entire Period that Contractor Provided Services
Under this alternative, the company would acknowledge before the tax authorities, the existence of an unregistered labour relationship with the independent contractor from the date he/she began providing services to the company.
The company would have to pay social security contributions in respect of all payments made to the contractor throughout the last ten years, as well as income tax withholdings for the last five years – seven in practice. As explained above, social security contributions are equal to 44% of the payments made to contractors (27% as contributions made by the employer and 17% as withholdings borne by employees). Also, income tax withholdings range from 5% to 35% of the employee’s gross income, depending upon the amount of the employee’s gross income.
In addition, the company would have to pay fines equal to 6% of the unpaid social security contributions and 16% of the omitted income tax, as well as interest at a 36% annual rate in local currency.
In practice, such registration lacks retroactive effect and only allows taxpayers to file tax returns for future taxable events. Therefore, with respect to omitted taxes and social security obligations regarding payments made to the contractor before the date that he was registered as an employee of the company, the company would have to file tax returns for pre-registration taxable years, and the tax authorities would have to authorise the company to register with retroactive effect.
In the event the tax authorities reject the company’s request to register with retroactive effect, there is a high risk that they will assess the social security and tax liabilities for the five-year period of the tax statute of limitations (if this were to happen, the fines would increase to potentially 50% to 100% of the omitted tax).
In the event the tax authorities authorise the retroactive effect of the registration, this alternative mitigates the labour, social security and tax liabilities.
Lastly, the company would have to register the independent contractor as an employee before the tax authorities and in its labour ledger, acknowledging the contractor’s seniority in accordance with the time period he has provided services for the company as an independent contractor. The seniority acknowledged to the contractor would have to be considered henceforth, for the purpose of any eventual severance compensation payable to the contractor in the future, as well as vacations and other labour rights provided for by said labour laws.
In addition to the foregoing costs, although this alternative would substantially reduce the tax and social security exposure, it would not fully disregard the labour exposure. This is because the contractor would still be entitled to claim the existence of other violations of Argentine labour law during the period he acted as an independent contractor (i.e., non-payment of annual leave or 13th salary for the last two years) and when, eventually, he were to consider himself dismissed on a constructive basis and claim payment of severance compensation and labour fines. In this particular case, the contractor would be entitled to file this claim at any time up to two years since the date of his actual registration as an employee.
In order to mitigate this labour exposure, companies may explore the payment of salary differences (annual leave and 13th salary) for the last two years to the contractor, by executing a settlement agreement with the contractor in accordance with the terms and conditions set forth under alternative c) herein below, without acknowledging any facts or rights whatsoever in favour of the contractor.
- ii. Register Contractor as Employee Without Acknowledging Prior Labour Relationship
In this case, the company would register the contractor as an employee, although it would not acknowledge the existence of the contractors’ seniority (the seniority as such would be allotted based on the time period in which he provided services to the company as an independent contractor).
This alternative would entail the neutralisation of the liability resulting from taxes and social security obligations, payable as from the registration of the labour relationship, and would also interrupt the accrual of the labour fine equal to 25% of all payments made to the contractor while he/she was an unregistered employee. However, this alternative would not eliminate the tax, social security or labour liabilities described above, for the period during which the contractor provided services for the company as an independent contractor. Therefore, the contractor would still be entitled to consider himself dismissed on a constructive basis at any time during the relationship and up to two years after its termination, and claim payment of severance compensation and labour fines. Likewise, the tax authorities would be entitled to seek payment of all unpaid taxes and social security obligations.
Should the contractor bring a labour court claim against the company, it would be possible for the company to settle the claim at any time prior to the final judgment having been rendered by the labour court – a court claim takes no less than three years – by executing a labour settlement agreement in accordance with the terms and conditions set forth under alternative c) herein below, without acknowledging any facts or rights whatsoever in favour of the contractor. We have no knowledge of the tax authorities having raised any investigations or claims in respect of labour settlement agreements entered into under similar circumstances.
- iii. Termination of Relationship with Contractor and Execution of Settlement Agreement
Under this alternative, the company would terminate the relationship with the contractor and execute a labour settlement agreement with the contractor to neutralise the labour liabilities. The contractor would no longer have to work for, or render services to, the company in order to avoid the creation of any new labour liability – unless the settlement agreement would only entail payment of the 13th salary and vacation differences as explained herein in alternative a) beforehand.
Argentina’s labour law provides that any labour settlement agreement shall only be valid if it is approved by a labour court or the Ministry of Labour. Any such agreement duly approved by a labour court or the Ministry of Labour is binding and final, having the effect of res judicata, not only with respect to any claim of severance compensation and salary differences, but also with respect to any possible claim for labour fines. In order to obtain the approval of the Ministry of Labour for a settlement related to the termination of an employment relationship, the settlement agreement must include a payment to the employee in exchange of the release, that cannot be less than 80% of the seniority compensation provided by local labour laws (equal to the highest monthly salary multiplied by years of service).
The company would execute the labour settlement agreement and the contractor would have to be assisted by counsel (of his/her choice).
Any labour settlement agreement that does not fulfill these legal requirements (or if the contractor continues working for the company, either as an employee or as an independent contractor) would not prevent the contractor from bringing a labour claim in the future, even after executing the settlement agreement and collecting the settlement amount. In this case, any settlement payment would be taken on account of, and detracted from, an eventual adverse ruling against the company (settlement amounts will not be adjusted by inflation nor would they accrue any interest) and both periods of time (before and after execution of the settlement agreement) will be considered for purposes of calculating severance compensation, labour fines and other amounts ultimately awarded to the employee.
Therefore, with a view to eliminating the labour liability, any labour settlement agreement would have to be executed before the Ministry of Labour or a labour court, and payment of the settlement amount would have to be subject to prior approval of the agreement as well as to the fact that the contractor shall no longer perform services for the company.
Although this alternative would not eliminate the social security and tax exposure described above (the labour settlement agreement would be entered into without acknowledging any facts or rights whatsoever in favour of the contractor), we have no knowledge of the tax authorities having raised any investigations or claims with respect to said labour settlement agreements entered into under similar circumstances.
C. Judicial Remedies Available to Persons Seeking ‘Employee’ Status
The contractor would be entitled to formally demand registration as an employee as from the date he/she began providing services for the company, while further demanding payment of salary differences (annual leave and 13th salary) for the last two years, and contributions to the social security system for all payments made to him/her throughout the last ten years of the employment relationship, under the caveat of considering themselves dismissed on a constructive basis, if the situation would arise wherein the company should fail to comply.
As a result of the contractor considering himself dismissed on a constructive basis, he would be entitled to claim payment of: (i) severance compensation for termination of the relationship, which broadly speaking would be equal to the highest monthly payment received by the contractor during the last 12-month period, multiplied by the number of years – or fraction of three months – worked (including the period of time that he has acted as an independent contractor) plus one or two monthly salaries on account of compensation in lieu of prior notice; and (ii) labour fines provided in favour of the employee in case the contractor brings a court action and a labour court rules in his favour, considering that there was an unregistered labour relationship.
The most significant (four) applicable labour fines are equal to: (a) 100% of the severance compensation, the fine for which results from the defective registration of the labour relationship; (b) 50% of the severance compensation, the fine for which results from having forced the employee to resort to court; (c) 25% of all payments made to the contractor during the period when he/she was not registered as an employee, the fine for which results from the non-registration of salaries; and (d) three highest monthly salaries, the fine for which results from not delivering proper labour certificates.
D. Legal or Administrative Penalties or Damages for the Employers in the Event of Re-characterisation
Under Argentine labour laws, every payment made to an employee is subject to social security contributions and income tax withholdings. Therefore, there is a risk that the tax authorities may also claim: (i) social security payments with respect to payments made to the contractor during the last ten years; and (ii) income tax withholdings for the last five years (i.e., the general statute of limitations for tax obligations is five years, although in practice it goes back in time seven years). In addition, provided that the social security amounts unpaid reach the thresholds set forth under the Argentine Tax Criminal Law, certain officers of the company could be subject to tax criminal liability.