Salary base to calculate the severance payment, the mandatory annual bonus and additional payments

1. Background information

Section 245 of the Employment Contract Law (“ECL”) sets forth that in case of dismissal without cause, the employer shall pay to the worker a severance payment equal to 1 month of salary per year of employment or fraction exceeding 3 months, calculated based on the best regular monthly salary accrued during the last year of employment or the whole term of employment if less than a year.

2. Questions

On November 19, 2009, all the members of the Court of Appeals in Labor Matters of the City of Buenos Aires met to unify precedents[1] on the following matters:

(i)   Should the salary base considered to calculate the severance payment established in the first paragraph of section 245 of the ECL include the pro rata share of the mandatory annual bonus payment?

(ii)  After verifying that there has been no fraud, should any additional payment made by the employer other than on a monthly basis and based on the performance of the employee be considered to determine the salary base provided for in  the first paragraph of section 245 of the ECL?.

3. The plenary ruling

3.1  The mandatory annual bonus payment should not be included in the calculation of the severance payment

The Court of Appeals decided, by majority, that the pro rata share of the mandatory annual bonus payment should not be included in the salary base in order to calculate the severance payment established in the first paragraph of section 245 of the ECL.

Attorney General Eduardo Álvarez and the Court of Appeals consider that the law makers, exercising the powers conferred to them and in compliance with their constitutional duty to protect workers against arbitrary dismissal, have designed a compensation payable in case of dismissal and decided that it would be calculated by multiplying the best regular monthly salary times the number of years of employment, plus any fraction exceeding three months. In addition, since the monthly salary was chosen as an element for calculation, the mandatory annual bonus payment should not be included.

Moreover, they say that the mandatory annual bonus payment accrues with the day to day work but is payable on specific dates established by the Employment Contract Law; this is why it is “annual”. Therefore, the answer to the first question should be ‘no’.

The majority of the judges of the Court of Appeals voted in agreement with the opinion of the Attorney General and maintained that, since the mandatory annual bonus payment is paid on a semiannual basis, it should not be included in the calculation of the severance payment established in section 245 of the Employment Contract Law that contemplates the best monthly salary.

3.2  No additional payment should be included in the calculation of the severance payment

As regards the second question, the Court of Appeals resolved, by majority vote, that after verifying that there has been no fraud, no additional payment made by the employer other than on a monthly basis and based on the performance of the employee should be considered to determine the salary base provided for in the first paragraph of section 245 of the ECL in order to calculate the applicable severance payment.

In this regard, the Attorney General and the Court of Appeals ratify the arguments made in connection with the mandatory annual bonus payment but consider that certain explanations are required because, if the collection right arises from the applicable law (as is the case of the mandatory annual bonus payment) or a collective bargaining agreement, the person responsible for interpreting this shall be certain that the decision to remunerate the worker for periods exceeding one month does not imply an attempt to “reduce” the basis for the calculation of the severance payment in order to eliminate the protection against arbitrary dismissal and “reduce the costs” of termination of employment.

On the contrary, if the payment made other than on a monthly basis is established in the individual employment contract or unilaterally determined by the employer, the legality thereof should be carefully analyzed both as regards the collection right and the amount of the payment in order to prevent the action described above that would imply the creation of a significant quarterly, semiannual or even annual “additional payment” together with a low monthly salary in order to reduce the costs of termination.

Therefore, they say that the answer to this question is, in principle, negative, notwithstanding the fact that in certain specific cases, the pro rata share of said payment may be included in the basis of the calculation, especially if the payment is not subject to objective requirements such as productivity, profitability or performance of the worker, as mentioned above.

In this regard, they indicated that it should be determined, on a case by case basis, whether the additional payments arise from objective criteria or were made in order to reduce the costs of termination of employment by making significant additional payments complementing a low monthly salary, in which case they should be considered in the calculation of the severance payment; otherwise, the calculation would not be based on the actual income of the worker.

As regards the objective criteria for the payment of these additional amounts paid other than on a monthly basis and therefore not included in the calculation under section 245 of the ECL, it may be concluded from the votes that performance evaluations should relate, for example, to the balance sheet of the company or to other specific, rational and documented circumstances. The foregoing should be subject to the production of evidence and the prudent assessment by the judges hearing each individual case.

It should be noted that this plenary ruling is mandatorily applicable to the Court of Appeals in Labor Matters and first instance courts.

4. Conclusion