A Severance and Unemployment Insurance Fund Should be Created

Lawyer. Employment advisor of companies and chambers of business. Academic Counselor for Libertad y Progreso.

Today humankind is trying to gradually overcome the biggest crisis in recent history, against an invisible enemy that has caused significant unprecedented social, economic and labor damages, and taken a heavy toll on human lives. 

The Americas are devastated due to a lack of preparation and resources that all countries have experienced when hit by the Pandemic, and even today it is still unknown whether curative medicine and effective vaccines will help an exhausted army of physicians and health professionals, researchers and scientists who have become heroes in such a global battle. 

The core countries have collapsed in such a way that big international corporations have set priorities that do not include peripheral countries such as Argentina.

In other words, we are alone and it is time to let go of dialectics, antagonisms and discussions, and stop saying we are worried. In fact, it is time to start taking matters seriously and build the future that calls for structural reforms with specific actions without further delay. 

In 2020 we’ve had a significant labor reform based on employment restrictions as a result of the lockdown.

During the mandatory, preventative, social quarantine, in addition to double severance pay in case of employment termination under Emergency Executive Order No. 34/2019, a ban has been imposed on layoffs due to lack of work, reduction in operations, force majeure and termination without case, together with paid suspension under Section 223 bis of the Employment Contract Act, the Emergency Aid Program for Employment and Production, and deadline extension or forgiveness for social security taxes, which should be undone now to let private companies run their business in a context of general recession and widespread uncertainty about the near future. 

In order to gradually overcome the employment restrictions due to lockdown, it would be crucial to lift the ban on suspension and layoff for force majeure, for economic reasons or as a result of Covid-19, as the New Normal eventually becomes the final normal. This process will take the entire year 2021.

It is high time to create the National Fund for Severance and Unemployment Insurance without imposing a new payroll tax, but readjusting the existing conditions, now aimed at a new scheme.

The National Fund for Severance and Unemployment Insurance would be financed by the current contributions to the National Employment Fund and by a portion of the family allowances system, in total by 3% gross wages without increasing the so-called payroll taxes. Consequently, there would not be an additional cost. According to actuarial tables, in Argentina staff turnover averages 12% of the active population in the last ten years, two thirds of terminated employees are entitled to severance pay. 

Therefore, this Fund would be used to cover severance pay in this group, and not for the entire population. Unlike the construction sector, this scheme would not be an individual account but a common fund, a solidarity fund to be managed by an official bank investing deposits at the highest market rate possible to preserve value. Right now the average length of service is less than ten years. This managing entity could act as a trust within Banco de la Nación Argentina. 

Let’s see the mechanics:

  1. Any employee who starts working as from the date of enactment of the Act that creates the Fund would receive 100% severance pay under Section 245 of the Employment Contract Act in case of termination without cause from this Fund, but notice and final pay would be paid by Employers.
  2. On the first anniversary of the Act that creates the Fund, those employees who started working one year before the effective date of this Act would be added, and so on and so forth until going back ten years;
  3. Insurance would not cover employees with more than ten years’ length of service before the effective date of the Act that creates the Fund; 
  4. The Act may create a supplemental fund for registered employees with more than ten years’ seniority before the effective date of the Act.
  5. A supplemental savings fund may be created where employees and employers may participate equally, in addition to severance pay, in order to have a supplemental aid fund for unemployment insurance in an individual account in the name of employees, which would be adjusted for inflation and managed by the Bank. The amounts saved would become available upon termination, as well.
  6. In the event that the Fund pays a portion of severance pay, the unpaid balance would have to be paid by Employers. 

With a scheme like this, most employees would be covered for a term of five years, based on the current average length of service, the annual staff turnover rate, and employees who are entitled to severance pay. 

In other forms of termination, like termination by mutual agreement under Section 241 (Employment Contract Act), the Fund could be used to pay the amount for severance pay for termination without cause under certain factual and formal eligibility conditions.  

Recovery from our long-lasting situation will require unique structural changes, and this may be one of those changes that will add value to our model of industrial relations, ensuring that all employees will receive their severance pay for termination without cause, and for other forms of termination, with a coverage that may seem like a bridge towards their next hiring in a context of diversity and multiple job opportunities that will be offered by the market of the future.

Article by Julián A. de Diego published in El Cronista on September 29, 2020