Unconstitutionality of the cap on severance pay

Article 245 of the Law of Employment Contract restricts the amount of compensation for settlement of severance pay. Specifically the article rules that in the case of a dismissal without cause, the employer must pay the worker an indemnity equivalent to one month's salary for each year of service or fraction thereof that is longer than three months. In order to complete this calculation, it is necessary to take as a base the highest monthly, normal and customary remuneration, paid during the last year of services rendered. This base, according to the provisions of the second paragraph of article 245 of the Law of Employment Contract, "cannot exceed the equivalent of three times the monthly pay of the amount resulting from the average of all remunerations provided for in the Collective Bargaining Agreement applicable to the worker at the time of dismissal ...".

In re: "Vizzoti, Carlos A. vs. AMSA S.A. in re: Dismissal", the Supreme Court found that this last postulate denaturalizes the purpose of indemnity and is a violation of the guarantee against arbitrary dismissal as stated in article 14bis of the Constitution, as it reduces the amount of indemnity that the fired worker is to collect.

In this case, the claimant had worked as Medical Director at the defendant's company for a period of 26 years. His highest monthly remuneration was A$ 11,000. Nevertheless, on being fired he was paid the amount of A$ 27,048.06 as indemnity, amount that was arrived at by the application of the cap on the corresponding collective bargaining agreement, i.e., the sum of A$ 1,040.31.

Faced by these circumstances, the claimant filed a suit seeking payment of the difference between the salary actually received and the years worked for the company, claiming that indemnity had been reduced by 90.55% as a consequence of the application of the cap.

The Judge in First Instance heard the worker's case and found for the unconstitutionality of article 245 of the Law of Employment Contract. In his decision the judge mentioned that perceiving only 9.45% of the indemnity that would be applicable in the event of taking his salary as the base, did not constitute protection against arbitrary dismissal, as is provided for by the Constitution.

The defendant appealed the decision and Tribunal II of the Court of Appeals in Labor Matters revoked the previous decision and rejected the claim.

As a result of the extraordinary appeal filed by the claimant, the Supreme Court interpreted that it does not prove reasonable, just nor equitable for the salary base provided for in article 245 of the Law of Employment Contract (the highest monthly, normal and customary remuneration received during the last year or during the time of rendering of services if said period were shorter), to prove reduced by more than 33%. In consequence, the Court decided that "in view of the circumstances alluded to in the cause, the salary base for calculation of indemnity for the plaintiff amounts to A$ 7,370."

In the ruling, the Supreme Court cited as grounds for the decision, treaties in the matter of Human Rights included in the Constitution and the International Treaty on Economic, Social and Cultural Rights.

In short, it would appear that the Court has established a new cap on indemnity, equivalent to 67% of the highest salary accrued by workers, thereby causing a strong increase in the cost of worker dismissal.

The decision of the Supreme Court was signed by seven of the present members of the Court with no vote in dissidence.