Javier E Patrón Enrique M Stile November 18 2015 Impact of bonuses on severance payments Marval O'Farrell Mairal | Employment & Immigration - Argentina Javier E Patrón, Enrique M Stile Employment & Immigration Scope of influenceExisting legislationTulosai rulingCommon challengesPro-rated bonus for year of terminationCommentThe full session Tulosai ruling,(1) which the Labour Court of Appeals issued in 2009, attempted to reduce the number of disputes relating to the basis of calculation of severance payments. However, such disputes have instead increased continuously. Performance evaluations and individual objective targets have become the most decisive elements in dispute resolutions.Scope of influence According to the Labour Act, termination without just cause means that an employee automatically accrues the right to a severance payment, which includes multiple indemnifications. Further, additional penalties are usually demanded in the event of a dispute with an employee and this eventuality may result in a heavy financial burden for employers.The starting point for calculating these payments is the employee's length of service and monthly income. The latter constitutes the basis of calculation of severance payments, which may or may not match the employee's monthly salary.Determining the basis of calculation in this context is crucial and decisive to the outcome of a labour dispute.Existing legislationWhen defining the basis of calculation of severance payments, the Labour Contract Act refers to the highest and average monthly salaries that the employee accrued during his or her last year of service. The lack of accuracy in this regard has resulted in multiple interpretations.In contrast to common law, under the codified system, case law has no binding precedential effect. Each judge with jurisdiction over a dispute interprets the applicable law for the individual case and the interpretations of different judges differ. In this context, case law may be invoked as a parameter of reasonability rather than a source of law. The only exceptions are the full session rulings of the Labour Court of Appeals and rulings of the provincial supreme court, which may have a binding effect on lower courts, albeit limited to the corresponding district.Claimants previously contended that bonuses should be included in the basis of calculation of severance payments, as they constituted the highest salary payment received by an employee in a particular month. However, this type of petition was dismissed by the labour courts.Prior to the full session Tulosai ruling in 2009, relevant case law had determined that, in specific circumstances, annual bonuses should be assessed and included in the basis of calculation of severance payments. Decisions in this context triggered a large number of disputes helping to fuel the labour disputes industry. However, by mid-2009, case law tended to exclude non-monthly bonuses from the basis of calculation.Tulosai rulingBy the end of 2009, 19 of the 30 available positions in the Labour Court of Appeals' 10 chambers had been filled. Legal scholars, and even some judges who made up the court, argued that full session rulings should be avoided due to a lack of legitimacy. However, in an attempt to reduce the growing number of disputes and contradictory decisions, the Labour Court of Appeals issued a full session ruling in Tulosai on November 19 2009 which provided that in the absence of labour fraud, non-monthly bonuses based on a performance evaluation system should not be included in the basis of calculation of severance payments.(2) This ruling became mandatory in the city of Buenos Aires. However, the full session ruling did not set a general rule on the matter.Common challenges Following the Tulosai ruling, the number of challenges has grown. Claimants argue that the concept of 'labour fraud' should be interpreted flexibly. This includes cases in which a bonus represents a large portion of the employee's annual compensation. Claimants contend that sums allocated for bonus payments were accrued on a monthly basis, but that employers have arbitrarily delayed payment in an attempt to reduce the basis of calculation of severance payments. The courts have generally held that the burden of proving this alleged labour fraud rests with the claimants.Claimants have also argued that, without including a pro-rated bonus, the basis of calculation does not reflect the employee's real level of income. However, the labour courts have generally rejected this allegation, even in cases where a bonus payment has represented more than 80% of total annual compensation.(3) While many claimants have acknowledged that they were subject to a performance evaluation system, they have still demanded that the pro-rated bonus be included in the basis of calculation, arguing that performance evaluation is unconnected to the calculation of bonuses. Claimants have generally argued that the burden of proof rests with the employer in this regard, but labour courts have been reluctant to accept this position.In most cases in which an employer has successfully proved that an employee was subject to performance evaluation, the labour courts have tended to reject the petition to include pro-rated and non-monthly bonuses in the basis of calculation. Apart from some isolated cases, most labour courts have accepted the Tulosai ruling as legitimate and have dismissed challenges that are based on the argument of a lack of sufficient votes.In 2013 Congress passed an amendment to procedural law, which derogated the full session rulings system and implemented a Court of Cassation, which was meant to issue mandatory rulings for the city of Buenos Aires. However, due to tension between political and judicial powers, the court has not yet been established. This has resulted in multiple challenges to full session rulings being made, but the labour courts still tend to apply them as mandatory rulings or as virtually unavoidable indicators of reasonability.Pro-rated bonus for year of terminationIn labour disputes, employees tend to demand payment of pro-rated bonuses for the year of termination. The full session ruling in Piñol determined that employees who receive bonuses on a regular basis may demand them for subsequent periods, except where the employer proves that the bonuses were based on extraordinary services or that the relevant targets set were not met.(4) Further, relevant case law has determined that where an employee receives bonuses in two consecutive years, the subsequent periods requirement has been met.Consequently, in disputes regarding the basis of calculation of severance payments, the burden of proving the existence of individual objective targets on which non-monthly bonuses are conditional rests with the employer.CommentIn general, if an employer can prove the existence of performance evaluations and individual objective targets on which non-monthly bonuses are conditional, it has a greater chance of excluding them from severance payments.For further information on this topic please contact Javier E Patrón or Enrique M Stile at Marval O'Farrell & Mairal by telephone (+54 11 4310 0100) or email ([email protected] or [email protected]). The Marval O'Farrell & Mairal website can be accessed at www.marval.com.ar.Endnotes(1) For further details please see "Employment trends and hot topics in 2010: what does 2011 hold?".(2) Full Session Ruling 322 in re Tulosai Alberto Pascual v Banco Central de la República Argentina.(3) Ruling 103004, National Labour Court of Appeals, Room II, File 27,035/2009 (FI 19-08-2009) in re Schargorodsky, Federico Gustavo v Credit Suisse First Boston Argentina SRL on Dismissal.(4) Full Session Ruling 35 in re Piñol, Cristobal A v Genovesi SA, September 13 1956, LL 84-123, DT 1956-647, JA 1956-IV-45.