According to the data distributed last September 27, by the Institute of Statistics and Census ("INDEC"), 4.8 million Argentine workers are not formally registered by their employers. Although the country’s average was reduced by 0.2%, (from 47.5% to 47.3%), in Buenos Aires this figure increased in relation to the first quarter of 2005, from 36,1% to 38,9%1. These figures are even higher if we include partial or defective registration cases.
Argentine labor law provides for different mechanisms to prevent unregistered employment, but the extension of liability to the managers and members of companies in the presence of unregistered payments led to a significant jurisprudence and case law discussion, particularly with regard to the construction of Sections 54 (3rd paragraph), 59 and 274 of the Argentine Commercial Companies Law No. 19550 ("LSC").
It is important to bear in mind the definition contained in the LSC itself. Section 54, 3rd paragraph, incorporated in 1983 by Law No. 22.903, provides for the "piercing of the corporate veil" in certain circumstances related to this matter. Shareholders may be subject to liability due to this issue, provided the factual conditions set forth in the rule are present. These conditions, contained in the law, are the following: a) corporate activity intended to attain non-corporate purposes; and b) that such acts imply a violation of the law, public order, and good faith or third-party rights.
In turn, Sections 59 and 274 refer to the possibility of extending the liability to managers acting on behalf of the infringing company. Pursuant to the foregoing sections, directors, managers and registered agents of companies are liable to the company, its members and third parties in the following scenarios: a) breach of duty; b) violation of the law, by-laws or internal regulations; or c) any other damage caused by willful misconduct, abuse of powers or serious fault. In both cases, the question resides in the possibility of extending liability for unregistered payments.
We can say that, at present, there are two opposite positions in labor jurisprudence: a "broad" one, that admits the extension of liability, and a "strict" one, which excludes this possibility in most cases.
The first position is held by the National Supreme Court ("CSJN"), duly expressed in the cases "Palomeque"2 and "Carballo"3. In the first case, the CSJN said that "the resolution that extended the judgment to the corporation’s directors and members for the lack of registration of a portion of the salary paid to an employee must be annulled, if it has not been evidenced that the company had incurred in such conduct purposely to violate the law and that, abusing of its condition as a separate legal entity, it affected labor public policy or infringed labor law. However, these cases were decided by a CSJN composed by Justices with a tendency to hold criteria of higher labor flexibility, which are now being abandoned in recent labor cases decided by the newly appointed justices of the CSJN.
Chambers IV and VIII of the Labor Court of Appeals ("CNAT") also adhere to the strict criteria. Thus, it was established that "to hold that the acts performed by the company represent a mere means to violate the law, labor public order and good faith or to infringe third party rights as set forth in Section 54 of the LSC by reason of failure to register —already punishable by application of the Employment Law— seems excessive and, being exceptional, has to be construed restrictively " (CNAT, Chamber IV, 4/30/04, "González, Julián T. vs. Weland S.A. et al"). In the same sense, it was decided that "even admitting the existence of registration failures and unregistered payments in the course of the labor relationship, this does not lead to conclude that the activity of the company was alien to the stated purposes, or that it only consisted in a means to violate the law, labor public policy and good faith or to infringe third party rights" (CNAT, Chamber VIII, 4/30/04, "Maciel Ferreira, Gustavo vs. Tritton S.A. et al")4
The "broad" criterion extends liability jointly and severally to members and parent companies when the existing relationship is totally or partially irregular, or if social security payments are withheld from employees and not entered into the system.
This thesis is sustained, among others, by Chamber III of the CNAT, which established: "In the case of an illegal relationship or of unregistered payments, there is not only a mere legal infringement, such as the lack of payments of credits to the employees, but also a conduct aimed at violating the law (labor, tax, commercial, etc.), and an actual fraud with the purpose of hiding facts and conducts in order to avoid compliance with legal duties. Thus, the member’s joint and several liability derives from the undue profit obtained, since the contrary conclusion would imply an undue enrichment"5.
As to the extension of liability to managers, the same Chamber III stated: "the president of a corporation is in charge of the management, representation and use of the corporate seal, so the necessary conclusion is that he cannot ignore the performance of acts aimed at denying the employees’ rights and also detrimental to the social security system and the community as a whole. The joint and several liability of the member is a consequence of the income he obtained as a result of the tax evasion and the reduced effect of compensations and complementary benefits in relation to the salary "6
This broad criterion is supported by some CNAT’s divisions, even after "Palomeque" and "Carballo", considering that lower courts need not adhere to these judgments. Although there are two prevailing positions, a new tendency is becoming noticeable in judicial precedents, which extends joint and several liability to directors and shareholders of delinquent companies. The Federal Executive Branch has launched a large campaign to combat unregistered employment. This doctrine is followed by many labor courts and it is possible that, should any of these cases come to the CSJN, this tribunal, in view of the opinions of its new members, may adhere to the broad criterion described above, in line with the positions recently adopted by the CSJN in matters such as the constitutionality of the Labor Accidents Regime and severance payments caps.
1: Source: article published in La Razón newspaper, 9/28/2005.
2: "Palomeque, Aldo R. vs. Benemeth S.A. et al", 4/03/03.
3: "Carballo, Atilano c/ Kanmar S.A. (in liquidation) et al", 1/31/02.
4: Liability of members, parent companies, directors and managers of companies, Ricardo Diego Hierrezuelo and Pedro Fernando Nuñez, elDial.Express, special edition 9/23/2005.
5: CNAT, Division III, File No. 12291/00, S 83640, 5/31/02, Rosengurten, Ludmila vs. Cabildo 1168 S.R.L. (dismissal).
6: CNAT, Division III, File No. 12406/00, S 83223, 19/2/02, Anarella, Adrián et al vs. Visor Enciclopedias Audiovisuales S.A. et al (dismissal).
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