When conducting a Due Diligence to take interests in the share capital of an Argentine company, potential hidden labor liabilities are a key issue that - if not properly detected and dealt with in the stock purchase agreements – may have devastating effects on the outcome of the transaction.
The target company may keep relationships with allegedly independent providers of services, consultants or contractors, the latter invoicing their services as if they had no labor relationship with the company. However, one of the basic tenets of labor law is the reality principle, in so far as that what effectively happens prevails over the formalities the parties chose to frame the relationship. Consequently, the company may engage a reputedly independent contractor from the formal point of view, and such contractor be deemed as an unregistered employee according to the proof rendered in a judicial procedure.
In a recent landmark decision dated 24 April 2018, the Argentine Supreme Court of Justice (Corte Suprema de Justicia de la Nación, or CSJN), in re Rica, Carlos Martín c. Hospital Alemán y otros s/ Despido, addressed the issue of formally independent service providers, setting out relevant criteria to decide when those relationships should not be considered of a labor nature.
The plaintiff was a physician who had been working for more than seven years, invoicing his services as if he were an independent contractor. In its ruling, the CSJN found that the plaintiff had not kept a labor relationship with the defendants, supporting its verdict with the following main arguments:
a. The existence of an organization of its own on the part of the service provider
In the case, the plaintiff has organized itself and freely agreed with the defendants the conditions of his services, setting his hours of medical practice – including reducing the same -, not taking holidays, etc. Further, the plaintiff assumed the risk of his activity in as much as his service hours fluctuated, and he charged and collected his fees if and only if the beneficiaries paid them and after the payment had taken place.
Finally, the CSJN evaluated that the plaintiff´s invoicing was not consecutively numbered, and differed in their amount from month to month based on the practices he effectively performed. The highest Court of Justice in the land also considered that the service provider had never effected a labor complaint of any kind throughout the whole relationship.
b. The contract of services in the Civil and Commercial Code of the Nation
The CSJN remarked that the new Civil and Commercial Code of the Nation, effective as of 1 August 2015, regulated the contract of services, as a contract type to give a legal framework to services rendered without labor relationship between the parties;
c. The lack of risk assumption in the labor relationship
One of the key features of a labor relationship is just the workers´ absence of risk assumption: the employees immerse themselves in the employer´s organization, not running any business-related risk. The workers´ salaries must by mandatorily and timely paid by the employer, regardless the outcomes of the company. No unfavorable business event (such as a turnover decrease, or the loss of a significant client) may be alleged not to pay the salary, nor for grounding any layoff decision.
Failing to properly identify hidden labor relationships disguised under the formalities of service providers may produce significant losses on the carried out transaction since liabilities for having unregistered employees are huge. Unregistered employees are granted - additionally to the regular severance compensations1 -, two tough special compensations: one of them amounting to 25 per cent of all salaries not registered, and the other doubling up the regular compensation due for seniority and lack of notice. Plus another 50 per cent of the seniority compensation for the employee because he/she had to resort to the judiciary to be acknowledged as such. Finally, the conflict will also trigger a social security contingency and contributions will also be due over all the payments made to the employee.
1 For a summary of labor costs in Argentina, please, review the following article on our Legal Blog: For a brief on Labor Costs in Argentina, please review the following article on our Legal Blog: http://cspabogados.com.ar/en/labor-costs-in-argentina/.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.