WHICH IS THE BEST TIME TO CLOSE LABOR DISPUTES

Everybody knows the motto that says that “a bad deal is better than a good trial”, especially in the legal and corporate fields. However, in many cases, a good or bad deal depends not only on the amount or on the financing but on the real charge to be borne by employers. This article is focused on some aspects aiming to help employers to make more attractive offers to workers and employees saving extra costs.

KNOWING MY SOURCE OF INCOME AND THE CLAIM UPDATE
Upon considering an offer or a counteroffer, it is important to be aware of the currency of the company’s earnings, the exchange rate with the peso and the rate of judicial update at the employer’s jurisdiction. Even though the applicable interest rate is high (Annual Nominal Rate for Personal Loans of the Banco Nación for a term of 49 to 60 days, 60% approximately to date, according to the Minutes of the National Labor Chamber), settlements may be more beneficial depending on the proper execution time and on the origin of the funds addressed for payment.

Whilst Argentinean currency’s depreciation is a constant and uniform process, exchange rate tends to be totally unstable due to tight control policies. If the business turnover is represented only in pesos, then, in such case, a quick settlement would be the best option. The applicable rate is likely to be higher than the company’s possibility of increasing its prices.

However, in the event of an exporter company or any other business generating earnings in dollars, in both cases projections on the exchange rate should be considered upon evaluating the proper time to settle a dispute. Closing a quick deal with a delayed exchange rate may be more expensive than waiting for a correction (if unavoidable).

If a contingency fund is available to cover these expenditures (generally in hard currency), then, in such case, employers should seek the proper time to settle disputes between the accumulated applicable interest rate (leading workers to demand larger amounts as time goes by) and the exchange rate applicable to the fund reserve upon payment.

Finally, another important item to be analyzed, even when all amounts involved are in pesos, is the question “what I can do with that money”. If the productivity of reinvesting these amounts in the company exceeds the applicable interest rate (this seldom happens), it would be convenient to keep such funds “working” at the company. Anyway, this is a risky option because the recovery of reinvested funds is an uncertain employer’s expectation whilst the interest rate is a certain fact.

Annual budgets
Medium and big sized companies generally include in their budgets an estimated amount for labor litigation in each financial year. Lack of closing may result in an unavailability of such amounts on the next year. So, we strongly recommend a good forecast aiming to close as deals as possible (contingencies) with the available budget. Should the company fail in complying with the budgeting process, this fact is likely to generate a “cascade effect” with a growing number of unresolved cases and the subsequent lack of funds addressed to that end.

Compensations’ tax treatment
A relevant aspect to be considered is that compensations due in concept of judicial settlements are considered a direct expense computable to the company. To arrange a settlement in the first month of the fiscal year instead in the last month with an annual inflation of 50% will result in a 20% more expensive settlement in real terms for the employer.

Considering that companies pay taxes (mainly Income Tax) over accrued amounts (not received), the celebration of compensation agreements in the last month of the financial year implies a reduction in the pending balance to be paid for this concept (and, consequently, in the advance tax payments payable in the following financial year).

Assuming that the company closes the fiscal year on 31/12/21 and reaches a settlement agreement for $ 1.000.000.- on 28/12/21, then, in such case, $ 350.000.- could be deducted from the Income Tax payable on April 2022. Besides, if profits are estimated in $ 10.000.000.- excluding this agreement ($ 9.000.000.- after paying the compensation amount), the company would be granted a 10% deduction from the advance tax amounts payable in 2022. This percentage may vary according to the impact of the settlement agreement over the company’s profits.

Going back to the concept of payment over accrued amounts, it is irrelevant if the settlement reached with the employee is payable in 12 installments. As long as the settlement is signed within the last month of the fiscal year, the amount involved can be deducted totally as from the signature thereof (irrespective of payment time). In this way, the company can partially finance the deal with the amount intended for payment of the Income Tax. Based on the above case, the company signs the settlement on 28/12/2021 for the sum of $ 1.000.000.- payable in 10 installments starting January 2022. The inflation accumulated in such 10 months’ period (assuming 50% annually) would be 40% to be distributed among the agreed installments but considered as a whole in April 2022.

If such agreement were signed in January 2022, the company would have to wait 16 months to subtract the available tax credit (accumulating 70% of currency depreciation). Besides, the 10 installments would be totally cancelled six months before such tax credit is available.

Conclusion
Our recommendation is to consider the above facts and to develop strategic actions together with your accounting and legal staff based on your financial forecasts. Proper time is a key factor when making an offer and/or accepting an increase in the original proposal, helping your company to resolve labor contingencies. We will continue taking further steps and sharing our commitment in the areas of labor law and disputes resolution.