Labor Modernization Law in Argentina: Takeaways for Employers

On Friday, March 6, the Argentine Congress enacted the Labor Modernization Law, confirming nearly all of the terms we had predicted in last month’s publication and making us look marvelously prescient. You can find that publication here. While the Modernization Law will reduce certain employer costs and increase scheduling flexibility, it does not structurally alter Argentine labor law, but is a solid first step forward deregulating the workplace. For now at least, Argentina’s workplace rules will continue to reflect a competing tension between protectionism and the government’s desire to promote formal work without strangling the private sector.
In this installment, we summarize the law’s final form, adding context where useful to highlight not only what was enacted but also what was omitted.

The Modernization Law adopted the draft bill as written to clarify what goes into the compensation basket to calculate statutory severance. Importantly, this provision reverses a judicial trend that has expanded the definition for decades.

To be clear, the Modernization Law does not change the underlying legal framework governing termination of employment. Employers may still terminate employment without cause, and the obligation to pay statutory severance remains unchanged. The new law does, however, add greater certainty to the payouts and reduces them to a potentially significant degree.

While the Modernization Law does not change a terminated employee’s entitlement to severance, the new law does make it easier for employers to pay that severance in two ways.

First, the law introduces an Employment Assistance Fund or “FAL,” thereby introducing a mandatory funding mechanism to fund statutory termination payments. The Modernization Law maintains the structure described in the original bill with only a minor adjustment in the employer contribution rates: 1% of gross payroll for large companies  and 2.5% of gross payroll for small and medium-sized enterprises (PyMES). The implementation of the FAL is scheduled for June 1, though the Executive Branch may postpone its entry into force for up to six months.

The FAL does not alter an employer’s obligation to pay statutory severance, but it does redirect a portion of the employer’s social security contributions to fund those payments in the future. In addition, the FAL will boost local financial markets by placing those monies in the hands of institutional fund managers authorized to invest in securities.

Second, the Modernization Law allows employers to pay any adverse judgments related to severance and other employment liabilities in installments. In the case of a large business, this means payment over six months, while PyMES can extend payments for up to 12 months.

As predicted, the Modernization Law now allows employers to pay wages in foreign currency (read, US dollars) without limitation. Prior law constrained payment in foreign currency to 20% of the employee’s gross salary. With this change, Congress effectively formalized a practice that had already become widespread among multinationals and certain sectors of the economy.

The Modernization Law restricts the circumstances in which both the employer of record and the beneficiary of outsourced services are jointly and severally liable for employment claims.

The change should significantly reduce litigation brought by employees of third-party contractors who seek to hold the outsourcing company jointly liable for labor obligations.

The Modernization Law eliminates several traditional recordkeeping requirements, including the mandatory payroll journal and the overtime registry.  Employment records will be mostly streamlined through the online platforms maintained by the Federal Tax Authority (AFIP/ARCA).  By simplifying compliance, Congress aims to reduce employment claims based on formal defects.

The Modernization Law enables greater flexibility in vacation scheduling. Employers and employees may now agree on the timing of vacation leave (no longer constrained to the high season) and may freely allocate holiday time in blocks of seven (or more) days. The new law largely formalizes a practice by many employers to meet workforce demands.

Contrary to various declarations in the media, the Modernization Law does not introduce a new 12-hour workday. Labor laws have long allowed a 12-hour workday as long as the statutory weekly limit (48 hours) is not exceeded. Nor does the reform require employees to work beyond their regular schedule, which must still be agreed between employer and employee.

Instead, the Modernization Law changes the rules on compensating shifts extending beyond the statutory workday. Under prior law, anything over nine hours required the employer to pay overtime. The new law allows employers and employees to agree on compensating time with additional time off instead of automatic overtime.

The Modernization Law introduces a clearer regulatory framework governing medical leave not based on work-related illness or injury. The new law invalidates sick-leave certificates given by practitioners who are not licensed physicians. It also enhances the employer’s right to verify illness or injury underlying a claim for paid medical leave. Unlike prior iterations of the Modernization Law, Congress pulled back from reducing paid medical leave, and employees continue to qualify for 100% of wages during the statutory period for such leave.

Finally, the new law affords employers the right to deny reinstatement when an employee seeks to return to work with a partial disability. If the employee is reinstated with reduced hours or responsibilities, the employer may adjust wages proportionally.

This Modernization Law did little to undermine the power of the unions. Specifically, the government stepped back from its initial push for greater oversight.   But there were a couple of significant changes achieved.

• Union dues were historically withheld from the paycheck and paid to the relevant union regardless of whether an employee actually chose to affiliate.  The new law sunsets the contribution for non-affiliated employees after two years.
• Perhaps even more important, the Modernization Law enables employers to negotiate specific collective bargaining agreements with a union, which will prevail over a sector-wide CBA.  How this will play out in practice should be interesting, perhaps with unions competing to insinuate themselves in a business that was formerly the dominion of another.

The Modernization Law stands as a legislative achievement and a flex by the Milei administration of its political capital. Nonetheless, Argentina’s workplace remains highly regulated  and all employment claims continue to be adjudicated by a specialized judiciary, which remain partial toward employee protectionism.   These factors beg questions of how these legislative mandates will be applied and whether they will have any impact on existing litigation.

Several of the law’s provisions will require regulatory implementation, and the practical scope of the reform will ultimately depend on how Argentine courts interpret the new rules and their applicability to former and existing employment relationships. In a nation where employment litigation has historically played a central role in shaping rules of the workplace, the courts will remain the arena in which the true reach of reform is tested.

Paradoxically, a law intended to reduce employment litigation will likely spawn an increase of claims to settle questions on constitutionality, the effect on claims preceding the Modernization Law, and reconciliation of the new law with existing case law. Thus, the role of the judiciary will likely rove as critical as that of the other two branches that pushed for labor reform.